Lecture3:BasicAggregateDemand

Model
Goal:Determineequilibriumoutput
Short-run
Abitmorecomplexthanstandardmicro
demandandsupply
Feedback
Shortcuts(isolateoneeffect)
FirstModel:TheGoodsMarket
Production Income
Demand
DemandDeterminedOutput
Aggregatedemand(Z):
Z=C+I+G+(X-Q)
Aggregatesupply:
fixedP
asmuchasneededtosatisfydemand
Model:
behavioralequations
equilibriumconditions
BehavioralEquations
X-Q=0 (fornow)
GandI:constant
C=c0+c1*YD; c0>0; 0<c1<1
YD= Y- T, T constant
Z=(c0- c1*T+I+G)+c1*Y
Equilibrium
Z(Y) = Y
$
c0+I+G-c1*T
45
c1
Y*
Y
Y*=(1/(1-c1))*(c0-c1*T+I+G)
multiplier
autonomous spending
ComparativeStatics
Fiscalcontraction;consumptionboom(stockmarket)
$
c0+I+G-c1*T
45
c1
Y*
Y
Y*=(1/(1-c1))*(c0-c1*T+I+G)
ConsumerConfidence
$
c0+I+G-c1*T
c0+I+G-c1*T
45
c0<c0
Y1
Y0
Y(t+1)=Z(t) => (inventories)
Other:C(t)=c0+0.5*c1*(Y(t)+Y(t-1))
Macroeconomic policy is tricky lags and leads