The Citadel ECON 202 - Classical and Keynesian Macro Analyses

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Chapter 11IntroductionLearning ObjectivesLearning Objectives (cont'd)Chapter OutlineChapter Outline (cont'd)Did You Know That...The Classical ModelThe Classical Model (cont'd)Slide 10Figure 11-1 Say’s Law and the Circular FlowSlide 12Slide 13Slide 14Slide 15Slide 16Figure 11-2 Equating Desired Saving and Investment in the Classical ModelEquating Desired Saving and Investment in the Classical ModelInternational Example: A Global Credit Market Awash in SavingSlide 20Figure 11-3 Equilibrium in the Labor MarketTable 11-1 The Relationship Between Employment and Real GDPClassical Theory, Vertical Aggregate Supply, and the Price LevelFigure 11-4 Classical Theory and Increases in Aggregate DemandFigure 11-5 Effect of a Decrease in Aggregate Demand in the Classical ModelKeynesian Economics and the Keynesian Short-Run Aggregate Supply CurveKeynesian Economics and the Keynesian Short-Run Aggregate Supply Curve (cont'd)Slide 28Figure 11-6 Demand-Determined Equilibrium Real GDP at Less Than Full EmploymentSlide 30Figure 11-7 Real GDP and the Price Level, 1934–1940Slide 32Example: Bringing Keynesian Short-Run Aggregate Supply Back to LifeOutput Determination Using Aggregate Demand and Aggregate Supply: Fixed versus Changing Price Levels in the Short RunOutput Determination Using Aggregate Demand and Aggregate Supply: Fixed versus Changing Price Levels in the Short Run (cont'd)Slide 36Figure 11-8 Real GDP Determination with Fixed versus Flexible PricesSlide 38Slide 39Shifts in the Aggregate Supply CurveShifts in the Aggregate Supply Curve (cont'd)Figure 11-9 Shifts in Both Short- and Long-Run Aggregate SupplyFigure 11-10 Shifts in SRAS OnlyTable 11-2 Determinants of Aggregate SupplyConsequences of Changes in Aggregate DemandFigure 11-11 The Short-Run Effects of Stable Aggregate Supply and a Decrease in Aggregate Demand: The Recessionary GapConsequences of Changes in Aggregate Demand (cont'd)Slide 48Figure 11-12 The Effects of Stable Aggregate Supply with an Increase in Aggregate Demand: The Inflationary GapExplaining Short-Run Variations in InflationExplaining Short-Run Variations in Inflation (cont'd)Figure 11-13 Cost-Push InflationInternational Policy Example: Can Iran’s Vicious Cycle of Supply Shocks be Smoothed?International Policy Example: Can Iran’s Vicious Cycle of Supply Shocks be Smoothed? (cont'd)Aggregate Demand and Supply in an Open EconomyAggregate Demand and Supply in an Open Economy (cont'd)Figure 11-14 The Two Effects of a Weaker Dollar, Panel (a)Figure 11-14 The Two Effects of a Weaker Dollar, Panel (b)Issues and Applications: Oil Prices Still Matter, But Not As Much As BeforeFigure 11-15 Inflation-Adjusted Oil Prices and Oil’s Role in Producing Real GDP, Panel (a)Figure 11-15 Inflation-Adjusted Oil Prices and Oil’s Role in Producing Real GDP, Panel (b)Summary Discussion of Learning ObjectivesSummary Discussion of Learning Objectives (cont'd)Slide 64Slide 65Slide 66Slide 67Slide 68End of Chapter 11Chapter 11Classical and KeynesianMacro AnalysesCopyright © 2008 Pearson Addison Wesley. All rights reserved.11-2IntroductionOil price increases during the 2000s could not be compared directly to previous jumps without making adjustments for inflation.If these adjustments were not made, the effects of oil price increases on U.S. price levels and real GDP would be overestimated.Copyright © 2008 Pearson Addison Wesley. All rights reserved.11-3Learning Objectives•Discuss the central assumptions of the classical model•Describe the short-run determination of equilibrium GDP and the price level in the classical model•Explain the circumstances under which the short-run aggregate supply curve may be either horizontal or upward slopingCopyright © 2008 Pearson Addison Wesley. All rights reserved.11-4Learning Objectives (cont'd)•Understand what factors cause shifts in the short-run and long-run aggregate supply curves•Evaluate the effects of aggregate demand and supply shocks on equilibrium real output in the short run•Determine the causes of short-run variations in the inflation rateCopyright © 2008 Pearson Addison Wesley. All rights reserved.11-5Chapter Outline•The Classical Model•Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve•Output Determination Using Aggregate Demand and Aggregate Supply: Fixed versus Changing Price Levels in the Short RunCopyright © 2008 Pearson Addison Wesley. All rights reserved.11-6Chapter Outline (cont'd)•Shifts in the Aggregate Supply Curve•Consequences of Changes in Aggregate Short-Run Demand•Explaining Short-Run Variations in InflationCopyright © 2008 Pearson Addison Wesley. All rights reserved.11-7Did You Know That...•The price of a bottle of Coca-Cola remained unchanged at 5 cents from 1886–1959?•Prices of final goods and services have not always adjusted immediately in response to changes in aggregate demand?•The classical model and the Keynesian approach help in understanding variations in real GDP and the price level?Copyright © 2008 Pearson Addison Wesley. All rights reserved.11-8The Classical Model•The classical model was the first attempt to explain Determinants of the price levelNational levels of real GDPEmploymentConsumptionSavingInvestmentCopyright © 2008 Pearson Addison Wesley. All rights reserved.11-9The Classical Model (cont'd)•Classical economists—Adam Smith, J.B. Say, David Ricardo, John Stuart Mill, Thomas Malthus, A.C. Pigou, and others—wrote from the 1770s to the 1930s.•They assumed wages and prices were flexible, and that competitive markets existed throughout the economy.Copyright © 2008 Pearson Addison Wesley. All rights reserved.11-10The Classical Model (cont'd)•Say’s LawA dictum of economist J.B. Say that supply creates its own demandProducing goods and services generates the means and the willingness to purchase other goods and services.Supply creates its own demand; hence it follows that desired expenditures will equal actual expenditures.Copyright © 2008 Pearson Addison Wesley. All rights reserved.11-11Figure 11-1 Say’s Law and the Circular FlowCopyright © 2008 Pearson Addison Wesley. All rights reserved.11-12The Classical Model (cont'd)•Assumptions of the classical modelPure competition exists.Wages and prices are flexible.People are motivated by self-interest.People cannot be fooled by money illusion.Copyright © 2008 Pearson Addison Wesley. All rights reserved.11-13The Classical Model


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