Equilibrium.. AE: C+I+G+Xn

Equilibrium.

The intersection of the AD and AS curves determines the economy's equilibrium price level and equilibrium real domestic output.

· Beyond full-employment (Y3)

inflation, low unemployment

· Below full-employment (Y1)

negative growth, negative inflation

· At full employment (Y2)

stable prices, low inflation, low unemployment steady,

economic growth

Ratchet effect.

· is commonly observed phenomenom that some processes cannot go backwards once certain things have happened.

· the producers observe that shifting-down AD leads to changes in equilibrium, but not in the price level. Prices are stable.

Рост совокупного спроса вызывает рост цен на товары, но сокращение совокупного спроса не приводит к снижению совокупного уровня цен.

The Keynes' equilibrium model.

The condition of equilibrium is the equal quantity of aggregate expendditures (AE) and aggregate output (AV).

AE: C+I+G+Xn

AV: GDP

Simplifications.

1. A " closed economy" - there are no internaonal transactions.

2. A " private" economy- we ignore government

3. All saving are personal

4. GDP, NI, DI are equal-to each other

The Keynes' equilibrium model.

· Assume, the private economy is closed.

· the equilibrium GDP will change in response to change in response to changes in the investment or consumption scedules.

· suppose, the expected rate of return on I rises, shifting the investment demand curve to the right.

Consumption Savings.

· DI is the basic determinant of consumption and personal savings

· Household, can consume more than their incomes by liquidating (selling for cash) accumalated wealth or by borrowing-C0.

· the 45 degree line represents DI=C, if households were to consumer 100% of their DI at every level of DI.

Average propensities.

· the fraction, or percentage, of any total income which is consumed is called the average propensity to consume.