by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How does Potential GDP affect the Aggregate Demand Aggregate Supply Model? In the aggregate demand/aggregate supply model, we show potential GDP as a vertical line. Neoclassical economists who focus on potential GDP as the primary determinant of real GDP argue that...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How are Net Exports a Part of Aggregate Demand? Recall that exports are domestically produced products that sell abroad while imports are foreign produced products that consumers purchase domestically. Since we define aggregate demand as spending on domestic goods and...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is the Coordination Argument of Wage Stickiness?Keynes emphasized one particular reason why wages were sticky: the coordination argument. This argument points out that, even if most people would be willing—at least hypothetically—to see a decline in their own...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What are Menu Costs? These costs of changing prices are called menu costs—like the costs of printing a new set of menus with different prices in a restaurant. Prices do respond to forces of supply and demand, but from a macroeconomic perspective, the process of...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What are the Keynesian Assumptions in the Aggregate Demand and Aggregate Supply Model? The AD/AS diagram illustrates two Keynesian assumptions—the importance of aggregate demand in causing recession and the stickiness of wages and prices. Note that because of the...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is a Macroeconomic Externality? A macroeconomic externality is where what happens at the macro level is different from and inferior to what happens at the micro level. For example, a firm should respond to a decrease in demand for its product by cutting its...
