ECON-E 202 Lecture Notes - Lecture 12: Aggregate Demand, Keynesian Economics, Menu Cost
First Day of Unit 2
● Keynesian Model Short Run Supply
○ Classical economic school of thought (give the market time and it will naturally
bounce back!) was working until Great Depression thats when keynesian was
popularized
○ Keynesian Model:
■ short run approach
■ Real GDP focused
■ prices are not flexible
■ Aggregate demand has more control over our GDP
○ Sources of Price rigidity
■ unions/long term contracts
■ Menu costs
■ Businesses being slow to adjust for inflation
● Keynesian vs Classical
○ What is role of government
■ Classical: minimize govt involvement
● Issue: capitalism is not self regulating
■ Keynesian: government should be key regulators to minimise
contractions business cycle
○ MAIN DIFFERENCE: assumptions on prices
■ Keynes: prices are fixed
■ Classic: prices are flexible
○ Keynes: Spending Focused, short run, aggregate demand determines output
○ Classical: Supply focused, long run, LRAS determines output
● Static Aggregate Demand and Aggregate Supply Model (Hayek Model)
○ Level of price flexibility determines shape of Short Run Aggregate Supply (SRAS)
and Long Run Aggregate Supply (LRAS)
Document Summary
Classical economic school of thought (give the market time and it will naturally bounce back!) was working until great depression thats when keynesian was popularized. Real gdp focused prices are not flexible. Aggregate demand has more control over our gdp. Businesses being slow to adjust for inflation. Keynesian: government should be key regulators to minimise contractions business cycle. Keynes: spending focused, short run, aggregate demand determines output. Classical: supply focused, long run, lras determines output. Static aggregate demand and aggregate supply model (hayek model) Level of price flexibility determines shape of short run aggregate supply (sras) and long run aggregate supply (lras) Traditional keynes you see the multiplier in full effect. Hayek says short run isnt flat so the movement of ad is different. As the price level increases the quantity of goods and services firms are willing to supply increases. Prices of inputs rise slower than output so the higher price level means more profit.
