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PSU ECON 104 - Aggregate Expenditure and Economic Theories

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Econ 104 1st Edition Lecture 15Outline of Last Lecture II. RGDP Business CycleIII. Loanable Funds: Supply and Demand Outline of Current Lecture IV. Aggregate Expenditure V. Classic Theory and Keynesian Theory Current LectureI. Aggregate Expenditure (AE) and Output in the Short Run (SR)a. AE = C + I + G + NX = ADb. Macroeconomic equilibrium: occurs when AD = Aggregate supply i. AD= RGDP (Y)1. Y = Total output/production/incomeII. Great Depression (1929-1938)a. Real GDP fell 30% (G. Recession was 4.5%)b. Unemployment rose to 25% (G. Recession was 10%)c. Stock prices fell dramaticallyi. HH wealth plummeted or disappeared d. Businesses closed e. Banks Failed III. Classical Theory (By Adam Smith) prior to the Great Depressiona. Primarily based on micro theory b. Laissez-Faire: Economy would correct itself; recessions are only temporaryIV. Keynesian Theory (1936)a. The economoy is not self correctingb. If total spending is inadequate, the economy will not reach full employment on its own c. Policy makers should step in to help restore full employment d. John Maynard Keynes and A Theory of Consumption i. Yd = C + Sii. C = a + bYd (C Function)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.iii. Where:1. Yd = (Y – T + Tr) = disposable income; T = Taxes, Tr = transfers (e.g, social security benefits) 2. a = intercept; autonomous consumption3. b = slope (0<b<1) ; Marginal Propensity to Consume (MPC)a. MPC = Change in C / Change in Yd4. S = saving; what we do not consume out of Yd we


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PSU ECON 104 - Aggregate Expenditure and Economic Theories

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