Part 14

The Keynesian Revolution:
- Classical economists' beliefs:
  - Supply and demand reach full employment through flexible prices bringing markets into equilibrium.
  - Markets are always clear, enabling firms to sell all goods/services.
- John Maynard Keynes:
  - Highlighted persistent unemployment during the Great Depression.
  - In The General Theory of Employment, Interest and Money (1936), focused on demand-side factors over supply-side.

The Four Key Expenditure Components of Aggregate Demand:
- Consumption Demand (C)
- Investment Demand (I)
- Government Demand (G)
- Net Export Demand (X - M)

Consumption Demand (C):
- Most significant component of aggregate expenditure.
- Key determinant: Disposable Income.
- Consumption function (C): Shows household spending at varying levels of disposable income.

Marginal Propensities:
- Marginal Propensity to Consume (MPC): Change in consumption from a change in disposable income.
- Marginal Propensity to Save (MPS): Change in savings from a change in disposable income.

Factors Affecting Consumption Behavior:
- Expectations (optimistic/pessimistic views).
- Wealth in real/financial assets.
- Price level influences.
- Interest rate impacts: Lower rates encourage borrowing for consumer spending (C).

Investment Demand (I):
- Most volatile component of aggregate expenditure, driven by future expectations and risk.
- Key influencing factors include firms' expectations and interest rates.

Investment Behavior Influencers:
- Technological progress.
- Capacity utilization.
- Business taxes.

Government Demand (G):
- Government expenditure is autonomous, not varying with disposable income or interest rates.
- Driven primarily by political decisions rather than national output levels.

Net Export Demand (X - M):
- Economic conditions abroad affect exports; domestic conditions affect imports.
- Exchange rates and terms of trade influence net export demand.

Aggregate Demand-Output Model:
- Also known as the Keynesian model.
- Determines the equilibrium level of real GDP by balancing output produced and aggregate demand.
- Firms set output levels based on price expectations and required rates of return.

Spending Multiplier Effect:
- Refers to induced spending occurring after an initial stimulus to aggregate demand.
- One change to aggregate demand triggers a series of further changes, amplifying shifts in real GDP.

AD-AS Model Adjustments:
- The Keynesian framework must emphasize aggregate supply for modern business cycle analysis.
- Links aggregate demand with the economy's aggregate supply.

Aggregate Demand Curve:
- Shows total real GDP that sectors would purchase at various average price levels (ceteris paribus).
- Downward-sloping curve indicates that lower price levels increase quantity demanded.

Non-Price-Level Determinants of Aggregate Demand:
- Components include Consumption (C), Investment (I), Government (G), and Net Exports (X and M).
- These factors can shift the aggregate demand curve.

Aggregate Supply Curve (AS):
- Illustrates the level of real GDP firms would produce at different price levels.
- Upward-sloping due to increased production with rising price levels.

Three Ranges of the Aggregate Supply Curve:
- Horizontal Segment (Keynesian Range): Economy in severe recession.
- Upward-Sloping Segment (Intermediate Range): Economy approaching full-employment output.
- Vertical Segment (Classical Range): Economy at full-employment output.

Macroeconomic Equilibrium:
- Occurs when aggregate demand and supply curves intersect.
- At this intersection, sellers accurately predict real GDP demand, preventing inventory mismatches.

Changes in AD-AS Equilibrium:
- The model helps analyze business cycles and macroeconomic policies' impacts on prices, GDP, and employment.
- Influences of changes in aggregate demand on output and price levels depend on the aggregate supply curve's range.

Range Types:
- Horizontal Range: Behavior during significant economic downturns.
- Intermediate Range: Behavior as the economy approaches full employment.
- Vertical Range: Behavior at full employment levels.

Equilibrium Shifts from AS Changes:
- Shifts in aggregate supply can arise from resource price changes, technology shifts, taxes, subsidies, and regulations.

Cost-Push and Demand-Pull Inflation:
- Cost-Push Inflation: Price level rises from a leftward shift in the aggregate supply curve, maintaining demand.
- Demand-Pull Inflation: Price level rises from a leftward shift in the aggregate demand curve, maintaining supply.

Shift Factors for Aggregate Demand and Supply:
- Details on factors influencing shifts in aggregate demand and aggregate supply.