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KEYNESIAN MODEL: A macroeconomic model based on the principles of Keynesian economics that is used to identify the equilibrium level of, and analyze disruptions to, aggregate production and income. This model identifies equilibrium aggregate production and income as the intersection of the aggregate expenditures line and the 45-degree line. The Keynesian model comes in three basic variations designated by the number of macroeconomic sectors included--two-sector, three-sector, and four sector. The Keynesian model is also commonly presented in the form of injections and leakages in addition to the standard aggregate expenditures format. This model is used to analyze several important topics and issues, including multipliers, business cycles, fiscal policy, and monetary policy.

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Lesson Contents
Unit 1: The Concept
  • What It Is
  • Two Sides: SRAS
  • Two Sides: LRAS
  • Two Sides: AD
  • Two Traits
  • Unit 1 Summary
  • Unit 2: Equilibrium
  • Concept
  • Three Markets
  • Moving Target
  • Unit 2 Summary
  • Unit 3: Doing Curves
  • Long-Run Equilibrium
  • Long-Run Disequilibrium: Too High
  • Long-Run Disequilibrium: Too Low
  • Short-Run Equilibrium
  • Unit 3 Summary
  • Unit 4: Self Correction
  • Short Run
  • Recessionary Gap
  • Inflationary Gap
  • Unit 4 Summary
  • Unit 5: Policy Preview
  • Time
  • Time of Adjustment
  • Unit 5 Summary
  • Course Home
    Aggregate Market

    This lesson is devoted to the exposition of the aggregate market, which combines the aggregate demand curve and the two aggregate supply curves into two related models used to analyze the macroeconomy. The main focus of this lesson is on how each of the two models, one for the short run and one for the long run, achieve equilibrium. A key conclusion is that the short-run equilibrium does not necessarily correspond to the full-employment production achieved by the long-run equilibrium. This creates recessionary and inflation gaps, which correspond to the macroeconomic problems of unemployment and inflation.

    • In the first unit of this lesson we ponder the basics of the aggregate market, including the importance of aggregate demand, aggregate supply, the price level, real production, unemployment, and inflation.
    • Moving into the second unit, we review the concept of equilibrium and see how it relates to the aggregate market in both the short run and the long run.
    • The third unit analyzes short and long-run equilibrium by combining the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves.
    • The topic of self-correction is examined in the fourth unit, especially how automatic shifts of the short-run aggregate supply curve can eliminate recessionary and inflationary gaps.
    • The fifth and final unit of this lesson previews the use of the aggregate market to analyze business cycle stabilization policies, with particular emphasis on the time period of adjustment.

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    TWO-SECTOR KEYNESIAN MODEL

    A Keynesian model of the macroeconomy that includes the two private sectors, the household sector and the business sector. This Keynesian model variation, often termed the basic Keynesian model or the private sector Keynesian model, captures the interaction between induced consumption expenditures and autonomous investment expenditures. This model is commonly used to illustrate the basic workings of Keynesian economics, including equilibrium, disequilibrium, and the multiplier. Equilibrium is identified as the intersection between the C + I line and the 45-degree line. Two related variations are the three-sector Keynesian model and the four-sector Keynesian model.

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