ECON 1951 • PRINCIPLES OF MACROECONOMICS. Coursework

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Principles of Economics
* Keynesian Model
The Keynesian Model is a commonly used mode in the economics to evaluate the financial situation of a conventional demand-driven market. The model is designed on a simple principle which is, “Demander always get what they want” (Kennedy and Prag, chapter 8). Even the sum of stakeholders like governments, consumers, and organizations’ demands increase from the conventional product capability the organizations can always meet the demand using “going to the back room” approach (Kennedy and Prag, chapter 8). The organizations have the capability to meet the production challenges observed in the previous high demand periods and using inventories. Furthermore, the production is also assumed to grow or expand according to if the aggregated demand increases the current output levels.
There is an important relationship being observed amount the supply and demand features of the products. The relationship is the major driving factor behind the modeling of equilibrium in the markets. In this simple model, the demand of the consumers is mainly governed by the purchasing capability of the consumers. Most of the times it has been observed that the demand remains the same regardless of income level, however, it is always a function of disposal income (Kennedy and Prag, chapter 8). The disposal income has also been subjected to change according to the demand and output of the organization. For instance, if the AD is greater than the output, more output is required to be produced during the next production cycle. However, the increase in demand is always under the output capability of the production as the consumer tend to save their extra income.
* Utilization of Graphs
The entire supply and demand process in a demand-driven market is confusing for some people and therefore the economist always seeks the use of graphical methods to explain the processes. One of the commonly used graphical approaches is known as “Keynesian Cross”; owing to the upward sloping of the AD and the 45° lines. The intersection of the lines gives the equilibrium level of the national income. The Keynesian Cross model is represented in the following figure:
Figure 1: Keynesian Cross (Kennedy and Prag, chapter 8).
The slope line ‘C’ in the figure ‘1’ is known as the consumption function which is always less than ‘1’ reflecting the assumed properties of MPC and taxation rates. The lines ‘I’ and ‘G’ reflecting exogenously-determined private and government investments and their demand values for the output (Kennedy and Prag, chapter 8). Therefore, the line AD just represents a simple sum of the demands (three) f...