Table of Contents

Famous Figures and Diagrams in Economics

Famous Figures and Diagrams in Economics

Edited by Mark Blaug and Peter Lloyd

This is a unique account of the role played by 58 figures and diagrams commonly used in economic theory. These cover a large part of mainstream economic analysis, both microeconomics and macroeconomics and also general equilibrium theory.

Chapter 49: The Aggregate Demand Aggregate Supply Diagram

Richard G. Lipsey

Subjects: economics and finance, economic psychology, history of economic thought

Extract

Richard G. Lipsey The aggregate demand and aggregate supply curves are designed to apply simple Keynesian income-flow models to situations in which the price level and national income are endogenous variables, affected by both supplyside and demand-side shocks. THE DERIVATION OF THE AGGREGATE DEMAND CURVE A simple Keynesian model can be laid out in five equations: (49.1) the division of real expenditure, E, into three parts, one that is positively related to real income, Y, one that is negatively related to the interest rate1, R, and one that is autonomous, a; (49.2) an equilibrium condition of the goods market that desired expenditure should equal actual income;2 (49.3) the real demand for money, Md, which varies positively with real income and negatively with the interest rate, R; (49.4) the assumption that the central bank holds the nominal supply of money, Ms constant at some value M*; (49.5) the equilibrium condition that the real demand for money equals the real supply Ms/P, where P is the price level.3 Stated in linear form, these relations are: E = a + zY+ bR (b<0

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