Note: Points on a 45-degree line equate values on  the x and y axes. Note: Points on a 45-degree line equate values on  the x and y axes.
II. Aggregate Demand and Equilibrium
A. Equilibrium (E) is where planned and actual AD and AS are equal.
1. Equilibrium is where all goods produced for sale are sold.
2. At points below equilibrium, AD < AS, inventories are building and
business activity is contracting. This level of economic activity was
depicted by the horizontal (Keynesian) range of AS explained in the
previous model.
3. At points above equilibrium AD > AS, inventories are decreasing and
as depicted by the intermediate range and eventually the classical
range of AS.
4. Economic activity (Real GDP) will be wherever AD intersects AS.
Equilibrium seldom exists as
economic activity is usually in one stage or another of the business
cycle.
B. If economic activity is not in balance, a dynamic situation exists and
will continue until equilibrium is reached.
C. Keynes believed that E could settle at a level of economic activity with
large amounts of unemployment.
1. If potential Real GDP is greater than what actual AD yields, a reces-
sionary gap exists and may persist indefinitely. The solution to this
unacceptable equilibrium is to increase AD.
2. If potential Real GDP is less than what actual AD yields, an inflationary
gap exists and the inflation may persist indefinitely. The solution to this
unacceptable level of economic activity is to decrease AD.
3. Inflationary and Recessionary Gaps- ACDC Economics in 60 Seconds
D. Multiplier Affect (K) is important to determining the change in AD needed
to reach equilibrium E.
1. Changes in AD will result in larger changes in NNP as increases are not
spent and respent.
2. Decreases in AD have a similar but opposite affect.
3. K = 1/MPS = 1?(1-MPC) Note: As MPS increases, K decreases.
4. A MPS is 20%, Multiplier is 5 as 1/20% = 1/(1/5) = 1X 5 = 5
5. Fiscal policy and the multiplier... is an 9 minute video from YouTube

III. Fine Tuning Economic Activity
A. In chapter 14 we investigate how government taxing and spending
is used to affect AD and AS and affect the business cycle.
B. In chapter 15 we investigate how  the Federal Reserve uses
monetary policy to affect interest rates, AD and AS.
C. The goal is to maximize growth while minimizing the inflationary
and deflationary gaps.
D. Fine Tuning is the frequent adjustments to monetary and or
fiscal policy to alter the level of AD to keep the economy
E. Seeking Alpha blog on Paul Volcker and recent attempt to
fine tuning U.S. Economy

IV. Multiplier
A. When determining the required change in AD needed to achieve E,
the Multiplier (K) concept must be considered.
B. This concept states that a change in AD will result in a larger change
in Real GDP as these changes multiply (are spent and re-spent or
not spent and re-not spent) throughout the economy.
C. Saving will act as a leakage eventually stopping the change.
D. Suppose more is spent on investment and people receive this as income.
1. People receiving the income spend some (MPC) and save some (MPS)
2. A second group receives  the  spending of the first group as income and
they also spend some (MPC) and save some (MPS).
3. The process continues until savings eventually stops the progression.
E. Calculating multiplier (K), the multiple by which GDP will increase given
1. K = 1 / MPS = 1 /(1 - MPC)
2. As MPS increases,  K decreases
3. If MPS = 20% then 1/MPS = 1/.2 = 5
4. An increase of \$100 billion in investment will result in 5(\$100) =
\$500 billion in new national income.
5.  K = change in Real GDP / change in AD = 500/100 = 5
6. Some unpleasant Keynesian arithmetic Dank Rodrik
7. Multiplier Interactive practice problems from reff economics

F. Fed infrastructure spending has big multiplier 12/1/12

G. View Think Modeling

A. Maynard's Revenge: Keynesianism and the Crisis 1.05 hrs video, 2/16/10
B. Keynesian economics - Wikipedia
C. Review with information from the Institute for Economic Analysis
D. Are you a Keynesians Quiz begins with a review.  2/24/14
E. Are We All Keynesian Again 6/10
F. Keynesian Economics Is Hot Again 4/10/17
G. John Maynard Keynes

 Discussion Questions Next Chapter  Other Macro Chapters 8) Measuring Total Economic Activity  9) The Business Cycle 10) Macro Equilibrium  11) Competing Macro Theories and Issues 10) Macro Equilibrium  11) Competing Macro Theories, Issues 12 Keynesian Economics: Expanded View 13 Money, Banking, Creation of Money See Financial Crisis and The Great Recession 14) Fiscal Policy 15) Monetary Policy   16) Stagflation & Supply-Side Economics 17) Budget Deficits See Democratic Capitalism vs. Capitalistic Democracy

wikipedia on
/John Maynard Keynes