IB Economics/Macroeconomics/Macroeconomic Models

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Macroeconomic models[edit]

  • Aggregate demand- components: Aggregate demand is composed of four parts.
  • Consumption: How much households demand.
  • Investment: How much firms demand.
  • Government: How much Governments demand.
  • [Exports- Imports]: How many exports are demanded from a country minus the number of imports said country demands.
  • This all makes for a very elegant equation: Aggregate demand= C+I+G+[X-M]
  • Aggregate supply: Aggregate supply is national output which is equal to national income.
  • Short run: In the short run demand and supply are the same.
  • Long-run (Keynesian versus neo-classical approach): There are two different examples of long-run supply curves. Keynesians believe that the long-run supply curve is a flipped L shaped. That we are never reaching an economy's full capacity and working towards it. Neo-classicals believe that this is not the case, and the supply curve is in fact- perfectly inelastic.
  • Full employment level of national income:means the level of total output

attained when unemployment is at a socially acceptable level. In most cases this is around 5%, however it does tend to vary.

  • Equilibrium level of national income : injections(j)= leakages (w). Therefore, j-w=0. (Government expenditure - taxes) + (export - imports) + (investment - savings)=0.
  • Inflationary gap: the gap between actual output and full employment output (+) OR the excess of Agg demand at the full employment level of real GDP
  • Deflationary gap: the gap between full employment output and actual output (-) OR the shortfall in Agg demand at the full employment level of real GDP
  • Diagram illustrating trade/business cycle:
A business cycle is composed of four parts.
  • Boom
  • Recession
  • Slump
  • Expansion