Lecture 3: Basic Aggregate Demand ModelFirst Model: The Goods MarketDemand Determined OutputBehavioral EquationsEquilibriumComparative StaticsSlide 7Lecture 3: Basic Aggregate Demand Model •Goal: Determine equilibrium output •Short-run•A bit more complex than standard micro demand and supply– Feedback •Shortcuts (isolate one effect)First Model: The Goods MarketProduction IncomeDemandDemand Determined Output•Aggregate demand (Z):– Z = C + I + G + (X-Q)•Aggregate supply:– fixed P – as much as needed to satisfy demand•Model: –behavioral equations–equilibrium conditionsBehavioral Equations•X-Q = 0 (for now)•G and I: constant•C = c0 + c1*YD; c0>0 ; 0<c1<1•YD = Y - T, T constant Z = (c0 - c1*T + I + G) + c1*YEquilibriumZ(Y) = Y$Y45c0+I+G-c1*Tc1Y*Y* = (1/ (1-c1)) * (c0-c1*T+I+G)multiplierautonomous spendingComparative Statics$Y45c0+I+G-c1*Tc1Y*Y* = (1/ (1-c1)) * (c0-c1*T+I+G)Fiscal contraction; consumption boom (stock market)Consumer Confidence$Y045c0’+I+G-c1*TY1 Y(t+1) = Z(t) => (inventories)c0+I+G-c1*TOther: C(t) = c0+0.5*c1* (Y(t)+Y(t-1))Macroeconomic policy is tricky… lags and
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