Thursday, October 11, 2007

Topic 5 - Aggregate Supply/Demand and fiscal policy

Parts of Chapters 10-12

I) Output in the long run
a) long run aggregate supply curve
b) why it is vertical - read this
c) shifts in the long run supply curve

II) Aggregate Demand Curve
a) The total of all planned expenditures in the economy
b) why it is downward sloping
i) real money balance effect
ii) interest rate effect
iii) exchange rate effect - note: for more on these three, read here.

(This takes us to page 246 in the book). Now we will go to Chapter 11

III) Classicals vs Keynesians
a) Say's law and the vertical long run supply curve - read here
b) Why do the classicals believe this?
c) Keyes and the horizontal supply curve
d) Keynes arguments against the classicals

(This ends at page 270 in Chapter 11)

(Chapter 12)

IV) The Keynesian Cross.
a) Read here for more . I personally believe the books explanation is long winded. You may agree or disagree with me. However, I do recommend taking a look at the web page I provided as an alternative way of understanding this graph
b) The keynesian cross works if we assume that the price level is fixed (the supply curve is horizontal).
c) consumption function y = c0 + mpc(y-t)
co = autonomous consumption
mpc = marginal propensity to consumer
y = income
t = taxes
d) the multiplier effect (page 305) 1/(1-MPC)
e) The multiplier effect argues that spending more money via either tax cuts or government spending increases spending by more than the actual amount spent. The argument is like dropping a pebble in water and having the ripple effect be bigger than the actual pebble. If you give someone a $100 and he spends it, the money goes to someone else who spends it, and then that person spends it, etc. etc.

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