1. Macro Model with Fixed Prices
○ Determinants of AE (planned)
■ How do they impact equilibrium level of national income?
○ Autonomous vs induced expenditure
■ irrespective of the national income vs respective
○ The multiplier
■ direct relationship between autonomous expenditure and the equilibrium
■ Small amount of expenditure changing equilibrium
○ Changes in real GDP were determined by changes in AE
○ Equivalently, changes in in Y are “demand determined”
■ What demand is when prices are fixed
○ How demand is impacting our equilibrium
○ In recession, policy should work to increase demand
■ When Y does not equal to Y*
○ There are supply concerns as well
● What if there are resource constraints? (Supply concerns)
○ Not enough capital to achieve Y*
○ What if it is not physically for Y to increase to AE?
○ Must consider the “supply” side of the economy
■ Allow price level to change as well
2. Micro vs. Macro Economics
○ How are equilibrium price and output determined?
○ What causes the DD or SS to shift?
○ If DD or SS shifts, what happens?
● Macro ○ How are equilibrium price level and national output determined?
○ What causes the AD or AS to shift?
○ If AD or AS shifts, what happens?
● AD schedule:
○ Shows how desired aggregate expenditures change as the price level changes
○ Represents every point where AE intersects the 45 degree line
● AS schedule:
○ shows how, in the short run, the supply of output changes as the price level
■ Assumptions: change in the price aren’t about input prices but output
3.Aggregate Demand (AD) &AE
1) ... & the Price level
● AE and AD curves contain the same information, plotted in different spaces
○ People’s different prices and plans:
■ 1) people who have a plan
■ 2) plan given the price level
■ 3) equilibrium level, Y*
● AE: hold fix the price and plot the plan vs equilibrium
● AD: hold fix the the plan and plot prices vs equilibrium
● Changes in the price level shift the AE schedule
○ AE shifts down as P increases
○ AE shifts up as P decreases
○ Purchasing power
● Changes in the price level are movements along the AD schedule
○ AD goes down as P increases
○ AD goes up as P decreases
● Motivation behind the inverse relationship between AD & P (or AE & P), Two channels ○ 1) Relationship between price level and consumption
■ Price level up => wealth(purchasing power) down => Consumption down
■ Household holdings of money [liquid assets] (cash, bank deposits)
decline in real terms as price level rises, making households less wealthy
● Money that isn’t earning interests are greatly impacted by inflation
○ 2) Price up => Exports dow