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Chapter Nine:

Chapter Nine:. Aggregate Demand and Economic Fluctuations. The Business Cycle. Figure 9.1: U.S. Real GDP and Recessions. Source: BEA quarterly data 1985–2012, and NBER. Figure 9.2: U.S. Unemployment Rate and Recessions. Figure 9.3: U.S. Inflation Rate and Recessions.

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Chapter Nine:

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  1. Chapter Nine: Aggregate Demand and Economic Fluctuations

  2. The Business Cycle

  3. Figure 9.1: U.S. Real GDP and Recessions Source: BEA quarterly data 1985–2012, and NBER

  4. Figure 9.2: U.S. Unemployment Rate and Recessions

  5. Figure 9.3: U.S. Inflation Rate and Recessions Source: “Economic Report of the President” 1985–2005; rate is calculated as a three-month moving average of the CPI; NBER.

  6. Figure 9.4: A Stylized Business Cycle Contraction Expansion GDP Peak Peak Y* Trough Year

  7. Table 9.1: The Early Years of the Great Depression in the United States Sources: (a) from Historical Statistics of the United States, p. 1004, series X495.; (b)-(c) from Dornbusch, Fischer, & Startz (2001);( d)-(f) from http://www.bea.doc.gov/bea/dn/nipaweb/TableView.asp#Mid; (g) from Historical Statistics of the United States, p. 989, series X399.; (h) from Bradley Hansen and Mary Eschenbach Hansen, The Transformation of Bankruptcy in the United States (http://academic2.american.edu/~mhansen/transform.pdf ); (i) from Historical Statistics of the United States, p. 651, series N301; (j) from Ibid., p. 328, series 851; (d) and (e) are inflation-corrected using (b)

  8. Macroeconomic Modeling and Aggregate Demand

  9. Figure 9.5: The Output-Income-Spending Flow of an Economy in Equilibrium Production generates incomes Output (Y ) Income (Y ) Incomes give actors the ability to spend Spending stimulates firms to produce Spending (Aggregate Demand or AD )

  10. Figure 9.6: The Output-Income-Spending Flow with Leakages and Injections Production generates income to households Income (Y ) Output (Y ) leakage Sufficient to sustain output at a steady level ? Consumption (C ) Saving (S ) households decide how much to consume and save firms decide how much to invest Spending (AD ) injection Intended Investment ( II)

  11. Figure 9.7: The Classical Model of the Market for Loanable Funds Supply of Loanable Funds Interest rate E1 5% Demand for Loanable Funds 140 Quantity of funds borrowed and lent

  12. Figure 9.8: Adjustment to a Reduction in Intended Investment in the Classical Model Supply of Loanable Funds Interest rate E0 5% 3% E1 Original Demand New Demand 60 140 Quantity of funds borrowed and lent

  13. Figure 9.9: Macroeconomic Equilibrium at Full Employment in the Classical Model Production generates income Income (Y* ) Output (Y* ) leakage Consumption (C ) Saving (S ) Spending stimulates firms to produce Equilibrium in the market for loanable funds Spending sufficient to sustain full employment AD = Y* injection Intended Investment (II) is equal to S

  14. The Keynesian Model

  15. Table 9.2: The Consumption Schedule (and Saving)

  16. Figure 9.10: The Keynesian Consumption Function Consumption = Income Line 500 400 300 200 100 0 Consumption (C ) (= + mpc Y) Consumption (C ) 340 Saving (S) Slope = mpc = 20 45 100 400 Income (Y )

  17. Figure 9.11: The Keynesian Investment Function Intended Investment (= II ) Intended Investment (II) (= II ) II= 60 Income (Y )

  18. Figure 9.12: Aggregate Demand Aggregate Demand (AD ) = C + II Consumption, Investment, and Aggregate Demand Consumption (C ) 400 Intended Investment (II) 340 C +II = 80 400 Income (Y )

  19. Table 9.3: Deriving Aggregate Demand from the Consumption Function and Investment

  20. Table 9.4: Aggregate Demand with Higher Intended Investment

  21. Figure 9.13: Aggregate Demand with a Higher Level of Intended Investment 1000 800 700 600 500 400 300 200 100 0 AD (II = 140) AD (II = 60) Aggregate Demand 480 = 160 80 = 100 400 800 Income (Y )

  22. Table 9.5: The Possibility of Excess Inventory Accumulation or Depletion

  23. Figure 9.14: Unintended Investment in the Keynesian Model Output = Income Line Aggregate Demand (AD ) 1000 800 700 600 500 400 300 200 100 0 unintended investment (build up of inventories) 720 Aggregate Demand and Output E 80 45 100 400 800 Income (Y )

  24. Figure 9.15: Full Employment Equilibrium with High Intended Investment Full Employment 1000 800 700 600 500 400 300 200 100 0 AD0 (II = 140) E0 Aggregate Demand and Output 160 45 100 400 800 Income (Y ) Y*

  25. Figure 9.16: A Keynesian Unemployment Equilibrium Full Employment 1000 800 700 600 500 400 300 200 100 0 AD0 (II = 140) E0 AD1 (II = 60) Aggregate Demand and Output E1 Persistent unemployment equilibrium 160 80 45 100 400 800 Income (Y ) Y*

  26. Figure 9.17: Movement to an Unemployment Equilibrium Output (Y* ) Production generates income Income goes to households Income (Y* ) Lower Income If leakages are larger than injections… Lower Spending AD = lower Y Lower Output Insufficient Spending AD < Y*

  27. Table 9.6: The Multiplier at Work

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