Aggregate activity and demand

SECTION 4
The macroeconomic model and competing theories

In studying macroeconomics, the focal point is the whole economy versus markets for goods and services. This approach entails looking at the forces affecting growth, inflation, and unemployment at the aggregate level whether it is output, income, or the set of components within GDP.

In essence, macroeconomics involves studying demand and supply for all goods and services in a nation's economy.

Aggregate demand is the total amount of goods and services people want to buy; in other words, it measures what people wish to purchase rather than what is actually produced.

Objectives

Upon successful completion of this unit, you will be able to:

• graphically represent and interpret a short-run aggregate supply curve, and explain why it slopes upward and factors leading to its shift outward or inward;
• define aggregate demand, and identify the reasons for its negative slope;
• describe the four phases of a business cycle, including references to income and real output.

4.1 The business cycle

4.2 The macroeconomic model

4.3 A model of the macro economy

4.4 Competing theories about short-run instability

4.5 Long-run self adjustment

SECTION 5
Aggregate demand

The aggregate demand is the sum of consumption, investment, government expenses, and net exports. Aggregate supply is the total output an economy produces at a given price level. As you learned in microeconomics, firms achieve equilibrium when they produce the quantity of goods and services consumers want to buy - that is, when aggregate supply equals aggregate demand. This unit will examine shifts in aggregate supply and aggregate demand and their short-term and long-term effects for the whole economy.

Objectives

Upon successful completion of this unit, you will be able to:

• explain the factors leading to a shift in the consumption function;
• define short-run equilibrium and long-run equilibrium, and discuss how they differ;
• graphically represent and interpret a long-run aggregate supply curve, and explain its connection to natural level of unemployment; and
• describe how short-run equilibriums occur above and below the output level associated with the natural rate of unemployment.

5.1 Four components of aggregate demand: Consumption, investment, government spending, net exports

5.2 Full employment GDP versus equilibrium GDP

5.3 Economic indicators

5.4 Aggregate demand issues

SECTION 6
Fiscal policy

Using various policies and tools, a government attempts to steer the macroeconomy toward three main goals: full employment, price stability, and economic growth. The remaining units in the course will cover conflicts and complexities in relation to those policies and tools. This unit will focus on fiscal policy, which consists of taxing and spending, usually done through acts involving Congress or comparable legislative bodies.

Objectives

Upon successful completion of this unit, you will be able to:

• explain the effect of government spending, taxation, and budget deficits and surpluses on GDP;
• explain how the various kinds of lags influence the effectiveness of discretionary fiscal policy;
• explain how discretionary fiscal policy works and influences aggregate demand;
• identify the major components of US government spending and their sources;
• define the terms budget surplus, budget deficit, and balanced budget; and
• explain the difference between a budget deficit and the national debt.

6.1 Fiscal policy

6.2 National debt