Lecture 2

INTRODUCTION TO MACROECONOMICS
 Recap
Measuring GDP (Income Approach, Expenditure
Approach and Value-added Approach)

 Key Assumptions of the Keynesian

Model

The flow of output produced by an economy (GDP)

in a given time period is identically equal to income
(Y) generated.

Output is demanded by three types of agents:

consumers, firms, and the government.
 Key Assumptions of the Keynesian
Model
Individual consumers' demands for products can be
aggregated and represented by a consumption
function.

Individual firms' demands for capital goods can be

aggregated and represented by a planned investment
function.
 Key Assumptions of the Keynesian
Model
Government demand for output is exogenously
determined and can be represented by the
government spending function:

The price level is constant, i.e., there is no inflation.

Therefore, the nominal values of Y, C, I, and G are
also their real values.
 Equilibrium in Keynesian Model
Equilibrium, defined as a state in which there is no
tendency to change or a position of rest
when the desired amount of output demanded by all
the agents in the economy exactly equals the amount
produced in a given time period
 Equilibrium in Keynesian Model

Aggregate Demand (AD): the total desired amount

of output demanded in the economy
At any given level of income, AD may be 1) Greater
than, 2) less than or 3) equal to actual amount of
goods and services produced by the economy
 Equilibrium in Keynesian Model
1) AD > Y

2) AD < Y

3) AD = Y (Equilibrium Condition)

Demand-driven model
Recap
 Equilibrium in Keynesian Model
C= 300 + 0.8 (Y- .05Y)
I= 200
G=100

Equilibrium Condition: AD= Y

Keynesian Multiplier