Macroeconomic models

• 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: It 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.

• Peak
• Recession
• Trough
• Expansion