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Lecture 6

Lecture 6 Spring 2014.pdf

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ECON 1132
Andrew Petersen

Ec 132Harold Petersen Principles of EconomicsMacro January 30 2014Lecture 6Fiscal Policy in The Keynesian Multiplier Model Lets begin by reviewing the diagrams we used last timeWe had a simple model with just two components of spending Consumption and InvestmentOutput is determined by total spending subject to an upper limit of QWe show the equilibriumwith the 45degree line diagram and also with the ASAD diagramASQCIQPCIEEPoAD900 Q 900QQ The first is sometimes called the Keynesian cross it shows equilibrium as an intersection of CI with QThe second is the ASAD diagramThis one shows equilibrium as the intersection of AD with ASIn both cases we show equilibrium at Q900We also looked at the system in terms of the circular flow diagram On the circular flow diagram we see firms producing the goods in response to AD CIThe income from production flows to households as DI and in turn is spent C or is saved SThe C spending flows right back to the firmsThe Savings go through the financial market to business firms
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