Lecture 3: Basic Aggregate Demand Model• From Lecture 2–GDP – Inflation Rate – Unemployment Rate – Trade and Budget Deficits [*]Deficits• Expenditure > Income• Trade Deficit :– Imports > Exports– U.S. today (FED, Treasury, Japan)• Budget deficit– Gov. Expenditure > Gov. Revenue• Why do we care? Smoothing; Argentina… the USBasic 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
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