The decisive role is played by the stimulation of aggregate demand direction. Why is Keynes's theory called the theory of aggregate demand? Keynesian model for determining the equilibrium volume of production, income and employment

According to Keynes: when the aggregate effective demand falls, the government must increase its spending to stimulate production and restore full employment. The main disadvantage of the classical school consists in the fact that she could not explain in what ways to reduce unemployment, which, becoming massive, requires more and more state funds and creates an unfavorable situation.

A periodic decline in aggregate effective demand, which forces the government to intervene, can be caused by a decline in both consumer demand and investment. Keynes believed that investments are more mobile than consumption, and therefore in crises, in his opinion, insufficient aggregate investment demand was to blame.

Keynesian theory considers monetary policy primarily from the point of view of its impact on general spending, effective demand and employment, from this point of view, it directs attention to relationship between rate of interest and investment.

Central banks have three instruments at their disposal through which they can influence the amount of money and the terms of the loan: the discount rate, control of bank reserves, and so-called free market operations. By changing the required reserve ratio, the central bank influences mainly bank deposits in current accounts; commercial banks have, however, various options for evading this. Therefore, from the end of the 30s, especially in connection with the expansion of attempts to regulate monetary circulation, operations began on the free market, which assumed a wide demand for government securities. If the central bank buys government bonds and thereby increases their rate, it increases liquidity, and vice versa, if it sells government bonds, then it reduces the amount of cash in circulation. With the colossal government debt, which is now typical for all countries, operations on the free market become a manifestation of concern for the stability of the government securities market.

Let us recall Keynesian ideas about the influence of monetary policy on effective demand. If the amount of money increases, this makes it possible to more fully satisfy the need for liquid reserves. Finally, some of them become excessive, the propensity for liquidity and the rate of interest decrease. The surplus savings are partly used to buy consumer goods and thereby increase consumer demand, partly for the purchase of securities, which again expands investment demand. An increase in income means an increase in savings, but even more - investment, because the rate of interest has dropped.

True, monetary policy would become completely inactive if the economy reached the so-called liquidity belts... In this hypothetical situation, the "level of confidence" is so low that the entire surplus of money disappears into the cash reserves, and even the lowest rate of interest is unable to revive investment activity. The demand for money is virtually endless. This case has a "rational" grain at least in the fact that even the most favorable general conditions of interest will yield nothing if the general state of affairs and the resulting opportunities for debtors do not provide a real basis for credit.

Monetary policy should, therefore, influence economic activity primarily by its own impact on the rate of interest, since the volume of investments depends on it. But the experience of recent decades shows that the effectiveness of monetary policy is very limited. Keynes himself openly admitted this: “The state will have to exercise its governing influence on the propensity to consume partly through an appropriate system of taxes, partly by fixing the rate of interest, and partly, perhaps also in other ways. Moreover, it seems unlikely that the impact of banking policy on the rate of interest alone would be sufficient to ensure the optimal investment size. I imagine, therefore, that a sufficiently broad socialization of investment will be the only means to ensure the approximation of full employment ... ".

After the Second World War, financial policy based on the use of the state budget became the main instrument of state monopoly regulation. Its main task is to control aggregate demand on the basis of macroeconomic linkages discovered by Keynesian analysis, and to fill the gaps caused by excess savings, in this case insufficient investment in the private sector of the economy. This change is designated as a transition to an “active” government policy; this means that the role of the state budget is no longer limited to covering the inevitable expenditures of the state. The budget should influence the entire social reproduction process and thereby provide general conditions for the functioning of the economic system. The state budget acts as the most vivid personification of all socialization processes that take place in the modern world and make it necessary to centralized regulation, which in these conditions can be carried out only through the state budget.

Issues for discussion

What is the revolutionary nature of Keynes's theory? How do you think, what are the reasons why Keynesian theory emerged in the historical period under consideration? Why is Keynes's theory called the theory of aggregate demand? Why did Keynes criticize Say's law? Why, according to Keynesian theory, is government intervention in the economy necessary? according to Keynes, is the reason for macro-imbalance in the economy not matching savings with investment? Do you agree with this statement? According to Keynesian theory, aggregate demand lags behind income - why? Do you agree with Keynes's arguments? What specific instruments did Keynes suggest to stimulate aggregate demand? What specific instruments did Keynes offer to stimulate investment? What is a multiplier? How does it work? Give an example. What reasons can inhibit the multiplier action? What is the main disadvantage of the classical school? What did Keynes suggest in this regard? Do you agree with his views on this problem? Do you agree with Keynes's opinion that insufficient investment demand is the main cause of economic crises? As you know, Keynes considered monetary policy only in the context of effective demand regulation. How, according to Keynes, monetary policy affects effective demand? What does Keynesian liquidity belt mean? What are the functions of the state in the economy according to the Keynesian concept?

Guidelines. Preparation for seminars should begin with the study of lecture notes and recommended literature. As you study this topic, pay particular attention to considering equilibrium issues in the AD-AS model and macroeconomic stabilization policies. It is advisable to conduct one of the classroom sessions of the SRSP in the form of a case discussion.

In The General Theory of Employment, Interest, and Money, John Maynard Keynes (1883-1946) focuses on the lack of efficiency in consumer demand. It is the demand, in his opinion, that plays a decisive role in stimulating and developing production.

What can be done to improve the efficiency of demand?

It is necessary to find levers for the development of the entire social (aggregate) demand - the demand for consumer goods and the demand for investment goods, because the aggregate demand is the sum of consumer spending and investment.

If the aggregate demand is greater than the supply, then the incentives for production growth "work". In this case, the aggregate demand is really effective, contributes to the provision of high employment, more complete use of production capacities.

The main components of aggregate demand: consumption, investment and government spending. The main factors affecting aggregate demand: propensity to consume, expected return on investment, liquidity preference.

In Keynes's theory, national income Y and employment level N are dependent variables (Fig. 11). The size of the national income determines the level of employment. The national income itself, on the one hand, acts as a factor influencing the growth of consumer demand (consumer demand is growing, but not to the extent that income), on the other hand, the growth of national income depends on investment.

Consumption costs are determined by the propensity to consume C / S. There is a psychological law that expresses the relationship between consumption and income. With an increase in income, the average propensity to consume falls under the influence of a decrease in the marginal propensity to consume (ΔС / ΔY).

Investment demand level / depends on the expected capital efficiency R" and interest rate r... The interest rate, or rate of interest, is the payment for parting with liquidity. The preference for liquidity is the desire to own money, to keep savings in cash.

Percent r- the function of demand for money (liquidity preference) and the amount of money in circulation (money supply).

Keynes's theory is called the theory of effective demand, thus highlighting the main idea. And it consists in influencing the production and supply of goods and services through the activation and stimulation of aggregate demand (total purchasing power), and increasing the level of employment.

The significance of J.M. Keynes's theory is not simply a revision of traditional approaches to the analysis of economic development processes. Keynes laid the general theoretical foundations for the study of functional dependencies and interconnections of real economic values ​​as aggregated categories, showed their influence on the course and trends of economic development.

Keynesian revolution involves the use of an active economic policy, taking into account social, psychological, organizational factors.

Modern economic theory is in one way or another related to the theory and methodology of Keynes. She cannot ignore the broad interpretation of the subject of economic science, the influence of various conditions and factors on the processes of economic development.

Literature

Agapova I.I. History of Economic Thought. - M .: ViM, 1997. - Lecture XIII. Bartenev S.A. Economic theories and schools (history and modernity): A course of lectures. - M .: BEK, 1996. - Ch. nine.

Guseinov R.A., Gorbacheva Yu.V., Ryabtseva V.M. History of economic doctrines: Texts of lectures. - Novosibirsk: NGAEiU, 1994. - Ch. 7.

History of Economic Doctrines: Textbook / Ed. A.G. Khudokormova.- M .: Publishing house of Moscow State University, 1994. - Part II, Ch. ten.

Keyins J... M. General theory of employment, interest and money // Selected works. - M .: Economics, 1993.

V. N. Kostyuk History of Economic Doctrines: Textbook. - M .: Center, 1997. - Themes 13, 14.

G. Paida, O. Mamedov, J. Adilova et al. Architect of macroeconomics (J.M. Keynes and his macroeconomic theory) / Rostov-on-Don: Phoenix, 1997.

Pesenti A. Essays on the Political Economy of Capitalism). In 2 volumes - M .: Progress, 1976. - Vol. II, ch. 12, 16; Adj. II, part 1.

See also:

2. Equilibrium of aggregate demand and aggregate supply. The need for government intervention in the economy

The intersection of the curves of aggregate demand and aggregate supply determines the equilibrium level of prices and the equilibrium real volume of production. At the point of intersection, the quantities required and produced are the same at the given prices.

We also see that any of the non-price factors affecting supply and demand can shift the curves to the left and right, as a result of which a new equilibrium point will be established, corresponding to the new conditions.

The model of aggregate demand and aggregate supply shows that the consequences of an increase in aggregate demand depend on where on the aggregate supply curve it occurs:

a) an increase in aggregate demand in the horizontal segment leads to an increase in the real volume of national production, but does not affect the price level.

b) in the vertical segment, an increase in aggregate demand leads to an increase in the price level, and the real volume of production cannot go beyond the reached potential level.

c) an increase in aggregate demand in the intermediate segment leads to an increase in both the real volume of national production and the level of prices.

In addition, we see that the economy can be in equilibrium with underemployment, low prices and significant reserves of productive capacity (segment I).

How long can the economy stay in this state?

Before the "Great Depression" that swept the United States and several other countries, many prominent economists of the late 19th - early 20th centuries, now called classics, believed that the market system, without outside interference, could ensure the full use of resources in the economy. Self-regulation leading to full-time production is automatic.

The "Great Depression" of the 1930s refuted such notions. For four years in a row, starting in 1930, the volume of production and real income in the United States decreased: by 9% in 1930, by 8% in 1931, by 14% in 1932, by 2% in 1933 year. Moreover, in the 1930s, the US economy was never able to recover from the severe blow. Six years after reaching its lowest point in 1933, total production was only 1.5% higher than the 1929 level.Income per capita in the United States from 1929 to 1933 fell by almost 30%. But the Americans especially remembered the long-term mass unemployment. The average share of the unemployed in the 1930s was over 19%. This means that almost every fifth person able to work and willing to work was out of work. In 1933, at the lowest point of the recession, 25% of the working population were officially unemployed.

The experience of the 30s raised serious doubts about the correctness of the ideas of the classics. The view that the economy can develop without shocks, with full employment and moderate price increases only under the condition of government regulation has become increasingly widespread.

4. Keynesian theory of the need for investment and the investment multiplier.

The first to abandon the prevailing views on the ability of a market economy to self-regulation and substantiated the need for state regulation at the macro level was the eminent English economist John Maynard Keynes.

Keynes denied the elasticity of prices, wages, and the interest rate, which supposedly triggers the levers of self-regulation. This is how Paul Heine presents Keynes's main ideas in his book The Economic Way of Thinking (Chapter 18).

“Any observer who summed up the development of the American economy over the past decade in 1939 would be inclined to admit that Keynes was right. Any forces supposed to stop the decline in production and income from 1929 to 1933 were clearly inactive ...

Let's list some of the stabilizing forces that were supposed to be cushioning the recession and preparing for a recovery, and then see why Keynes doubted their effectiveness. One such force is falling prices. Recessions have always been accompanied by a decline in the general price level or an increase in the value of money. But if prices have already fallen, it means that the real value of the signs of the population has already increased. Moreover, if prices have already fallen, more and more people expect them to rise rather than further fall. It was believed that these two consequences of the recession: the increasing purchasing power of the population's money supply and the pervasive expectations of higher prices would induce people to reduce their cash reserves and spend more on purchases than they earn. This will cause revival ...

Reducing investment costs also means that the demand for loans will decrease, which, in turn, lowers the interest on them. But falling interest increases incentives to invest. Some investment projects, which were previously decided to be postponed, will now be implemented due to improved credit conditions. As a result, aggregate investment will rise and this will fuel recovery.

In addition, during a downturn, untapped resources accumulate that can provide entrepreneurs with better opportunities to consume, rent or supply them. Thus, the recession itself creates incentives for new initiatives, increased production and investment. All this slows down the fall and contributes to the beginning of revival "- according to the ideas of the classics.

Keynes's doubts. "Keynes had every reason to suspect that none of these stabilizing forces could have a sufficient impact, especially in a rich, industrialized country. First of all, prices may not fall, although demand has decreased. wage rates, the existence of long-term contracts - all this prevents prices from falling, and if prices do not fall, then a reduction in aggregate demand will not lead to an increase in the purchasing power of money and will only affect production.

If, with a fall in GNP, the money supply does not change, then the ratio of the population's cash reserves to its income, of course, will increase, but this does not necessarily mean that the population will have more money than it would prefer to have. Hence, another Keynesian doubt: the demand for money can increase significantly, as the population anticipates the onset of recession and expects the value of money to increase.

The declines in interest rates and other costs that usually follow a downturn can actually spur investment and production. But is that enough to beat the recession-born pessimistic expectations? Is it able to stimulate entrepreneurs who are afraid that there will be no demand for their products? "

In addition, Keynes vigorously emphasized the role of expectations in economic decision-making. Decisions are made in conditions of uncertainty, when there is a high probability of error, when it takes time to adjust to unexpected events, when the economic system is in turmoil. Keynes attributed much of the economic downturn to the effects of uncertainty and lengthy adjustment. The conclusion is that if the economy has begun to slide into recession, then responding to the changed circumstances of consumers, investors and producers will not necessarily return it to full employment. On the contrary, the economy can remain indefinitely in a situation where the volume of production is much lower than production capacity, and the level of unemployment is high.

To get the economy out of this situation, it is necessary to push the aggregate demand, and especially in terms of investment. Keynes considered investment to be the most uncertain part of demand. People usually keep consumer spending at a relatively stable level, on the contrary, it is easy to decide to cut back on investments.

Keynes believed that in rich countries people tend to save more and more of their income (income growth), but not all savings turn into investments. The fact is that all the most profitable investment opportunities are used up. Further capital gains are channeled into projects that promise the investor a lower rate of return. Consequently, as economic growth progresses, the incentive to invest diminishes. Thus, in rich, industrialized countries, the drive to save will always outstrip the drive to invest. Therefore, the state should stimulate investment.

Even a small change in investment causes multiplier growth in gross national product and employment. To more accurately define this influence, Keynes introduced the concept of a multiplier. In Keynes's theory, a multiplier is a coefficient that shows the dependence of changes in GNP on changes in investment.

With an increase in investment, GNP (gross national product) will grow at a much greater rate than the initial monetary investment. This follows from the fact that investments lead to a multiplier (cumulative) effect.

In addition to the primary effect, there is a secondary, tertiary, etc. Employment in some areas gives rise to employment in others as a derivative. This multiplier effect is called the cartoon effect.

Investment cost multiplier = GNP Increase: Investment Increase

The multiplier multiplied by the investment increment gives the GNP increment.

Keynes introduced such indicators affecting the investment multiplier as the marginal propensity to save and the marginal propensity to consume. These metrics reflect how people manage income growth. The marginal propensity to save is:

savings growth: income growth

marginal propensity to consume is: consumption growth: income growth

The marginal propensity to save tends to grow, which has a negative impact on the growth of investment and, consequently, the growth rate of GNP.

The analysis of the multiplier led Keynes to the idea of ​​the existence of such a paradox as the "paradox of frugality." The paradox of frugality is that society's attempts to save more may actually lead to the same or less actual savings. “Thrift, which has always been treated with great respect in our society, can also be a social evil. From the point of view of an individual, a cent saved is a cent earned. income cent. Frugality can be a good from the point of view of the individual, but it can turn into a disaster from the point of view of society due to the possible undesirable effect on the total volume of production and employment. significant incentives to save more (consume less) just at a time when savings growth is least feasible and economically undesirable — that is, when the economy is likely to enter a production decline, "McConnell and Brue write.

Of course, we can say that the funds saved are placed in the bank, and the banks invest them in production. But the connection is not as direct as it seems. Savers and investors are different faces and are guided by different criteria. Not all forms of money turnover are associated with investments in production.

Keynes's theory leads to the conclusion about the need to stimulate investment from the state.

By stimulating investment and using the multiplier effect, the state can cause a significant recovery in production and employment growth. According to the calculations of Russian economists, in 1994 1 ruble of state investment would entail 4 rubles of private investment. Well-known entrepreneurs believe that in Russia investments, for example, in housing construction, could become a locomotive that would pull the entire economy with it, since the construction industry is provided with the material resources of 70 industries. They cite the example of Norway, where for every 100 people employed in the construction sector, another 175 people are needed in other sectors. This is the multiplier effect of housing investment. There is also a feedback: a reduction in investment in any industry (the same housing construction) reduces the load along the chain in other industries.

Literature to the topic.

1. Textbook on the basics of economic theory. VD Kamaev and a team of authors. Topic 10.

2. Campbell R. McConnell, Stanley Brue "Economics". Digest abstract, "Manager", ch. 70.

3. Economy. Textbook, edited by A.S. Bulatov. Ch. 12

Topics of speeches and reports.

1.Aggregate demand. Aggregate demand curve. Non-price factors of aggregate demand.

2.Aggregate supply. Aggregate supply curve. Non-price factors of aggregate supply.

3. Equilibrium and changes in equilibrium.

4. "Ratchet effect".

Literature: K. McConnell, S. Brue "Economics", ch. eleven.

5.Results of macroeconomic activity. (Inflation, unemployment, economic growth).

6. Production output and economic growth. Production volume per capita. Differences between countries.

7. Modeling the economy as a whole. Aggregate Supply and Demand: Looking Ahead.

8. Economic growth, unemployment and inflation in perspective. Literature: S. Fischer, R. Dornbusch, R. Schmalenzi "Economics", ch. 23.

9.The effect of the multiplier. Squaring the economic circle.

Literature: K. McConnell, S. Brue "Economics", ch. 13. Tests for self-examination (highlight the correct answers)

Control questions.

1. What are the characteristics of aggregate demand and aggregate supply? How do they differ from individual demand and individual supply?

2. What three options for the macroeconomic equilibrium of aggregate demand and aggregate supply do you know?

3. Why is it necessary to intervene in the economy at the macro level?

4. What role does investment play in stimulating aggregate demand?

Aggregate demand (AD - aggregate demand) is the sum of all types of demand or the total demand for all final products and services produced in society.

In the structure of aggregate demand, the following are distinguished:

Demand for consumer goods and services (C);
demand for investment goods (I);
demand for goods and services from the state (G);
net exports - the difference between exports and imports (X).

Thus, the aggregate demand can be expressed by the formula:

AD = C + I + G + X.

The aggregate demand curve shows the number of goods and services that consumers are willing to purchase at each possible price level. The movement along the AD curve reflects the change in aggregate demand depending on the dynamics of prices. Demand at the macro level obeys the same pattern as at the micro level: it will fall when prices rise and increase when prices fall.

This relationship follows from the equation of the quantitative theory of money:

MV = PY and Y = MV / P, where P is the price level in the economy;
Y is the real volume of the issue for which the demand is presented; M is the amount of money in circulation;
V is the velocity of money circulation.

It follows from this formula that the higher the price level of R., the less (assuming a fixed M and a velocity of their circulation V) the less the quantity of goods and services for which the demand Y is presented.

The inverse relationship between the value of aggregate demand and the price level is associated with:

Interest rate effect (Keynes effect) - as prices rise, the demand for money increases. With a constant supply of money, the interest rate rises, and as a result, demand from economic agents using loans decreases, and aggregate demand decreases;
the wealth effect (the Pigou effect) - the rise in prices reduces the real purchasing power of accumulated financial assets, makes their owners poorer, as a result of which the volume of import purchases, consumption and aggregate demand decrease;
effect of import purchases - an increase in prices within the country with constant import prices shifts part of the demand for imported goods, as a result of which exports decrease and aggregate demand in the country decreases.

Along with price factors, aggregate demand is influenced by non-price factors. Their action leads to a shift of the AD curve to the right or left.

Non-price factors of aggregate demand include:

The money supply M and the velocity of their circulation V (which follows from the equation of the quantitative theory of money);
factors influencing household consumer spending: consumer welfare, taxes, expectations;
factors affecting the investment costs of firms: interest rates, concessional lending, the possibility of obtaining subsidies;
government policies that drive government spending;
conditions in foreign markets affecting net exports: fluctuations in exchange rates, prices in the world market.

Changes in aggregate demand are reflected in Fig. 9.1. A shift of line AD to the right reflects an increase in aggregate demand, and to the left - a decrease.

Aggregate supply (AS - aggregate supply) - all final products (in value terms) produced (offered) in society.

The aggregate supply curve shows the dependence of the total supply on the general level of prices in the economy.

The nature of the AS curve is also influenced by price and non-price factors. As with the AD curve, price factors change the volume of aggregate supply and determine the movement along the AS curve. Non-price factors cause the curve to shift to the left or right. Non-price factors of supply include changes in technology, in the prices of resources and their volumes, in the taxation of firms and the structure of the economy. Thus, an increase in energy prices will lead to an increase in costs and a decrease in the volume of supply (the AS curve shifts to the left). A high yield means an increase in aggregate supply (shift of the curve to the right). An increase or decrease in taxes, respectively, causes a decrease or increase in the aggregate supply.

The shape of the supply curve is interpreted differently in classical and Keynesian economics schools. In the classical model, the economy is considered in the long run. This is the period during which the nominal values ​​(prices, nominal, nominal interest rate) under the influence of market fluctuations change quite strongly, are flexible. Real values ​​(output, employment, real interest rate) change slowly and are taken as constant. The economy operates at full capacity with full employment of the means of production and labor resources.

The aggregate supply curve AS looks like a vertical line, reflecting the fact that in these conditions it is impossible to achieve further increases in output, even if stimulated by an increase in aggregate demand. Its growth in this case causes inflation, but not the growth of GNP or employment. The classic A S curve characterizes the natural (potential) volume of production (GNP), i.e. the level of GNP at a natural level or the highest possible level of GNP that can be created with the technologies available in society, labor and natural resources without an increase in inflation.

The aggregate supply curve can move left and right depending on the development of production potential, productivity, production technology, i.e. those factors that affect the movement of the natural level of GNP.

The Keynesian model looks at the economy in the short run. This is such a period (lasting from one to three years), which is necessary to equalize prices for final products and. During this period, entrepreneurs can make a profit as a result of an excess of prices for final products with a lag in prices for factors of production, primarily for labor. In the short run, nominal values ​​(prices, nominal wages, nominal interest rate) are considered rigid. Real values ​​(volume of output, level of employment) - as flexible. This model is based on the underemployment of the economy. Under such conditions, the aggregate supply curve AS is either horizontal or has an upward trend. The horizontal segment of the straight line reflects the state of deep recession in the economy, underutilization of production and labor resources. The expansion of production in such a situation is not accompanied by an increase in prices for resources and. The ascending segment of the aggregate supply curve reflects a situation when the growth in the volume of national production is accompanied by a slight increase in prices. This can be due to the uneven development of individual industries, the use of less efficient resources to expand production, which increases the level of costs and prices for final products in conditions of its growth.

Both the classical and Keynesian concepts describe reproductive situations that are quite possible in reality. Therefore, it is customary to combine the three forms of the supply curve into one line, which has three segments: Keynesian (horizontal), intermediate (ascending) and classical (vertical). (Fig.9.2)

The intersection of the curves of aggregate demand AD and aggregate supply AS gives the point of general economic equilibrium. The conditions for this equilibrium will differ depending on where the aggregate supply curve AS intersects with the aggregate demand curve AD.

The intersection of the AD curve and the AS curve in the short-term segment means that the economy is in short-term equilibrium, in which the level of prices for final products and real national product are established on the basis of equality of aggregate demand and aggregate supply. (Figure 9.3) Equilibrium in this case is achieved as a result of constant fluctuations in supply and demand. If the demand AD exceeds the supply AS, then in order to achieve an equilibrium state, it is necessary, either with constant production volumes, to increase prices or to expand output. If AS supply exceeds AD demand, then either production should be reduced or prices should be lowered.

The state of the economy that occurs when three curves intersect: the aggregate demand (AD) curve, the short-term aggregate supply (AS) curve, and the long-term aggregate supply (LAS) curve, is a long-term equilibrium. On the graph 9.4. this is point E 0.

Long-term balance is characterized by:

The prices of factors of production are equal to the prices of final products and services, as evidenced by the intersection at point E 0 of the short-term aggregate supply curve AS 1 and the long-term supply curve LAS.
The total planned costs are equal to the natural level of real production. This is evidenced by the intersection of the aggregate demand curve AD 1 and the long-term aggregate supply curve LAS.
Aggregate demand is equal to aggregate supply, which follows from the intersection at point E 0 of the aggregate demand curves AD 1 and the short-term aggregate supply curve AS 1.

Suppose that as a result of the action of some non-price factor (for example, an increase in the supply of money from the Central Bank), there was an increase in aggregate demand, and the aggregate demand curve shifted from position AD 1 to position AD 2. This means that prices will settle at a higher level , and will be in a state of short-term equilibrium at point E 1. At this point, the real output of the product will exceed the natural (potential), prices will rise, and unemployment will be below the natural level. As a result, the expected level of prices for resources will increase, which will cause an increase in costs and a decrease in the aggregate supply from AS 1 to AS 2, and, accordingly, a shift of the AS 1 curve to the position AS 2. At the intersection of E 2 of the AS 2 and AD 2 curves, the equilibrium, but it will be short-term, since the prices of factors of production do not coincide with the prices of final products. Further growth in the prices of factors of production will lead the economy to point E3. The state of the economy at this point is characterized by a decrease in the volume of product output to the natural level and an increase in unemployment (also to its natural level). The economic system will return to its original state (long-term equilibrium), but at a higher price level.

The problem associated with the shape of the aggregate supply curve and the establishment is not only theoretical, but also of great practical importance. The question is being decided whether the market system is self-regulating, or to achieve equilibrium, it is necessary to stimulate the aggregate demand.

It follows from the classical (neoclassical) model that due to the flexibility of the nominal wage rate and interest rate, the market mechanism automatically constantly directs the economy towards a state of general economic equilibrium and full employment. An imbalance (unemployment or a crisis in production) is possible only as a temporary phenomenon associated with the deviation of prices from their equilibrium values. Shifts in the aggregate supply curve A S are possible only with a change in technology or the value of the factors of production used. In the absence of such changes, the AS curve in the long run is fixed at the level of the potential product, and fluctuations in aggregate demand are reflected only at the price level. Changes in the amount of money in circulation affect only the nominal parameters of the economy, without affecting their real values. It follows from this that there is no need to interfere with the operation of the economic mechanism.

In Keynesian theory, the main provisions of neoclassicism are criticized. In contrast to the neoclassical theory, which considers an economy corresponding to conditions of perfect competition, Keynesians point to the presence of many imperfections in the market mechanism. This is the presence of monopolies in the economy, the uncertainty of the values ​​of economic parameters that determine the decisions of business entities, administrative regulation of prices, etc. Wages, prices, interest rates are not as flexible as neoclassical theory suggests.

Keynes proceeded from the fact that the level of wages is fixed by labor laws and labor contracts and therefore is unchanged. In these conditions, a decrease in aggregate demand will lead to a decrease in the volume of production and a decrease in the demand for labor, i.e. the rise in unemployment. (Figure 9.5.) Since wages do not change, there is no reduction in production costs and no reduction in prices. The segment of the aggregate supply curve is horizontal at the price level P 1. (Fig. 9.6.) Point Q 1 in this figure shows the volume of production corresponding to full employment. Beyond this point, the supply curve is vertical. This means that with an increase in aggregate demand, the volume of production cannot grow (due to the depletion of resources), but prices will increase. Within the limits of available resources (on the horizontal section of the AS curve), the economy can come to equilibrium at any point of this segment, but the volume of national production will be lower than at full employment. From this, Keynesians conclude that it is necessary for the state to maintain the aggregate millet (and, therefore, production and employment) at the desired level.

W - wages; L - employment;
Q 1 - the volume of production corresponding to full employment; L 1 - labor supply corresponding to full employment; P3 inflationary rise in prices with an increase in aggregate demand;
(L 2 - L 1) - unemployment;
Q 2 - the volume of production with a reduced aggregate demand.

Aggregate demand growth

Rejecting some of the basic postulates of neoclassicism, for example, the analysis of the market as a self-regulating mechanism, J. Keynes proved that the market can provide effective demand without government regulation of monetary and fiscal policy. state in this area aims to encourage private investment and increase consumer spending in order to increase.

Rice. 6. Aggregate supply models

According to the Keynesian version, the AD-AS model looks different from the classical one (Fig. 6). Moreover, while analyzing the model, J. Keynes revealed the situation of an inflationary gap and a situation of a recessionary gap. Inflationary gap situation. With it, an increase in aggregate demand (a shift to the right and upward of the AD curve) leads in the short term to an increase in production above the potential level. The long-term consequence of rising aggregate demand will be a rise in prices with a simultaneous return to potential output. The inflationary gap between potential and real equilibrium outputs is Y = Y-Y> 0 Y- stable (potential) volume of production of real GDP with available resources, Y- real equilibrium output. Recession gap situation. A decrease in aggregate demand (shift to the left downward of the AD curve) in the short term leads to a decrease in the level of real production in comparison with potential. The long-term consequence of an increase in demand in this case is not a decrease in prices with a simultaneous return to the potential volume of production, but stagnation, a recession, since prices have one-sided flexibility: they rise relatively easily, but fall extremely slowly. The recession gap between potential and real equilibrium outputs in this case is Y = Y-Y. , for example, through the GNP deflator) and the real national (domestic) product (gross or net) that is bought and sold.

Aggregate demand (AD) is the volume of goods and demand for services produced in a given one, which all consumers are willing to buy, depending on the price level. The aggregate demand curve - AD 1 has a descending form (Figure 12-1), which means an inverse relationship between the price level and the volume of aggregate demand for national goods and services. Thus, if there is inflation in the economy, then it reduces the value of the aggregate demand for national goods and services. This dependence is similar to the law of demand. But the factors that explained the desires and capabilities of consumers in the market for a particular product do not explain the behavior of the AD curve.

First, it is impossible to achieve full satisfaction of the needs for all goods and services that make up the national product: some will always be acutely picked up anyway. Second, on a macroeconomic scale, most consumers are at the same time suppliers of resources, and the increase in their costs as buyers due to price increases simultaneously means a proportional increase in their income as sellers. The negative slope of AD is attributed to several factors. On the one hand, inflation reduces the real value of those financial assets of households that have a fixed nominal value (cash, perpetual deposits, bonds, bills of exchange, etc.) and encourages compensation for losses by spending less on purchases of goods and services: this is the wealth effect ... Another factor that determines the shape of the AD curve - the interest rate effect - is associated with an increase in the lending rate during inflation (with a constant money supply), which reduces both private investment and consumer spending using credit funds. Finally, there is the effect of net exports: the rise in prices for national goods reduces the volume of foreign demand for them and, at the same time, increases the demand for imported goods. In the Russian economy, under conditions of extremely high inflation, a dying investment process, and the underdevelopment of reliable instruments for savings and lending, the first two effects, apparently, hardly appear. In addition, inflationary expectations, especially at high rates of price growth, stimulate rush demand, which leads to an increase in current household consumption. Therefore, aggregate demand is relatively low elastic.

Change In reality, aggregate aggregate demand seldom remains stable for long. Demand is made up of the aggregate demand for national goods and services from four large groups of consumers in the macroeconomy: households, private firms, government agencies, and foreigners. Any significant changes in the needs and capabilities of any of these groups will affect aggregate demand, causing it to increase or decrease. Monetarist economists believe that the main reason for the instability of aggregate demand is the excess or shortage of money supply in circulation.

The growth in aggregate demand looks on the chart as a shift of the AD curve to the right and upward (from AD 1 to AD 2). This means that now all consumers, taken together, are ready to buy a larger volume of the national product at the same price level or the same volume of the national product at higher prices.

Accordingly, the decrease in aggregate demand looks on the chart as a shift of the AD curve to the left and downward (from AD1 to AD3). The main difficulty in determining and forecasting aggregate demand is associated with the extraordinary diversity of interests and intentions of numerous groups of consumers, which are simultaneously influenced by many factors of different strengths and nature, often acting in opposite directions. For example, an increase in taxes on personal income and firm income will cause a decrease in consumer spending and private investment, which will push the AD curve downward to the left; but the funds received from additional taxes will partially return to the population in the form of transfer payments and payments for resources, increasing consumption, and will be partially spent by the state on the purchase of national goods and services - all this will push the AD curve upwards to the right. The final result in terms of aggregate demand is rather uncertain.

Aggregate demand level

The aggregate demand curve deviates downward and to the right, i.e. just like the demand curve for an individual product. The reasons for this deviation are different. The previous explanation is related to the effects of income and substitution: when the price of a particular good falls, then the (constant), monetary income of the consumer gives him the opportunity to purchase more of the product (effect: income). Moreover, when the price falls, the consumer is willing to purchase more of the given good because it becomes relatively cheaper than other goods (substitution effect). But these explanations are few when we deal with aggregates.

The nature of the aggregate demand curve is determined primarily by three factors:

1) the effect of the interest rate;
2) the effect of wealth, or real cash balances;
3) the effect of import purchases.

The interest rate effect assumes that the trajectory of the aggregate demand curve is determined by the effect of changing price levels on the interest rate, and hence on consumer spending and investment. When the price level rises, so do interest rates, and the higher interest rates, in turn, lead to a reduction in consumer spending and investment.

At high interest rates, enterprises and households cut a certain part of their expenses, i.e. respond quickly to changes in interest rates. A firm that expects to receive a 10% return on purchased investment goods will consider this purchase profitable if the interest rate is, for example, 7%. But the purchase will not bring and therefore will not take place if the interest rate rises to, say, 12%. Due to the interest rate hike, consumers will also choose not to buy houses or cars.

So:

1) an increase in the interest rate leads to a reduction in some expenses of enterprises and consumers;
2) a higher price level, increasing the demand for money and raising the interest rate, causes a decrease in demand for the real volume of the national product.

The wealth effect, or the effect of real cash balances, suggests that at a higher price level, the real value, or purchasing power, of accumulated financial assets, in particular assets with a fixed monetary value, such as fixed-term accounts or bonds held by the population, will decrease. In this case, the population will actually become poorer, and therefore it can be expected that it will reduce its spending. Conversely, with a decrease in the price level, the real value, or purchasing power, of material assets will increase and costs will increase.

The effect of import purchases leads to a decrease in the aggregate demand for domestic goods and services with an increase in the price level. Conversely, a comparative decrease in the price level contributes to a decrease in imports and an increase in exports, and thus an increase in net exports in aggregate demand.

Non-price factors of aggregate demand

Changes in the price level lead to the following changes in the real volume of national production: an increase in the price level, other things being equal, will lead to a decrease in demand for real volume of production, and vice versa, a decrease in the price level will cause an increase in the volume of production. However, if one or more “other conditions” change, then the entire aggregate demand curve shifts. These “other conditions” are called non-price factors of aggregate demand.

To understand what leads to changes in the volume of national output, it is necessary to distinguish changes in the volume of demand for a national product caused by changes in the price level from changes in aggregate demand caused by changes in one or more non-price determinants of aggregate demand.

Non-price factors of aggregate demand that shift the aggregate demand curve include:

Change in consumer spending:

A) consumer welfare,
b) consumer expectations,
c) consumer debt,
d) taxes.

Changes in investment costs:

A) interest rates,
b) expected return on investment

Equilibrium of aggregate demand

The intersection of the curves of aggregate demand and supply within the same plane makes it possible to observe the state of general macroeconomic equilibrium. In economic terms, macroeconomic equilibrium is the equilibrium of the economy and its market mechanism, when the demand for factors, finished goods, labor, securities, etc. is approximately equal to their supply from other economic agents, depending on whether the possession and use of whom they are. Accordingly, the point of intersection of supply and demand, on the one hand, shows the equilibrium volume of output, and on the other hand, the equilibrium price level that suits both buyers and sellers.

Macroeconomic equilibrium can be upset and changed. For example, the economy was initially in a state close to full employment. Suppose that the supply of money supply in the country has increased, which makes economic entities more solvent. As a result, the demand for various goods, services and other benefits begins to grow. The aggregate demand curve moves along the supply curve, and short-term equilibrium is established. The increase in demand stimulates the development of production and its volumes. Initially, the product price does not change, but as marginal costs rise, the manufacturer decides to set a higher price level. Consumer demand is declining, which characterizes the return of the economy to the previous level of output, only at a higher price level.

Having considered the general macroeconomic equilibrium, it is necessary to turn to the equilibrium that can arise directly on the commodity market, that is, the market for goods and services that consumers purchase to meet their needs. There are also two main models presented here: classical and Keynesian.

The classics believe that the situation when the total expenditures of all economic entities (GDP = consumer spending + investment expenditures of firms + government expenditures + expenditures abroad for the purchase of goods of our production - our expenses for the purchase of imported goods) may not be enough to purchase all goods produced in full employment of resources is simply impossible. In other words, equilibrium is always established. Moreover, even if we assume that the equilibrium may be upset, then wages, price levels and interest rates will move and begin to rise. This will make it possible to reduce the amount of supply with a declining demand, that is, to ensure a production recession.

Keynesians, on the other hand, believe that there is no self-regulation mechanism for equilibrium. At the same time, the equilibrium itself does not coincide with the full employment of resources, that is, the equilibrium volume of production is always less than the potential one. This is mainly due to the lack of equality of savings and investments, since they are carried out by different economic actors with different goals and motives. For example, households' motives to save more are contained in the following: buying more expensive goods, providing for themselves in old age and children in the future, as well as insurance against unforeseen circumstances, both of an economic nature and other potential dangers. When making a decision to invest, firms, first of all, motivate it by the desire to get the maximum possible profit and a relatively low value of the real interest rate.

Non-price factors of aggregate demand

Expectation. This factor is generated by the usual psychology in the behavior of economic agents, according to which their current decisions must necessarily take into account those changes in the economic environment that are expected in the future. Expectations can influence the current behavior of both households and businesses.

Changes in consumer spending depend on the forecasts made by households. If households believe that their real income will increase in the future, they will be willing to spend most of their current income. As a result, consumption expenditures rise, the aggregate demand curve shifts to the left. A similar effect on the current aggregate demand is exerted by the massive expectation of a new wave of inflation, since in this case households will increase their current purchases of consumer goods, outstripping the rise in prices.

Changes in investment spending depend on the expectations of enterprises. Thus, the emergence of optimistic forecasts regarding the receipt of high returns from invested capital may contribute to an increase in demand for investment goods, which will cause the aggregate demand curve to move to the right. If the prospects for obtaining high returns from future investment programs are unconvincing, then investment costs will decrease, which will cause a decrease in aggregate demand and a movement of its curve to the left.

Changes in the economic policy of the state. Considering the model of economic circulation, we noted that the government can also influence the amount of total spending. Thus, by increasing government purchases, which are one of the components of total spending, the government increases aggregate demand and shifts the curve to the right. By increasing the personal income tax, the government reduces the tax-free income of households, causes a decrease in consumer spending and aggregate demand, which shifts its curve to the left. By raising taxes on corporate profits, the government will lower the expected rate of net return on investment. This will reduce the investment component of aggregate demand, which will shift its curve to the left.

An important element of the state's economic policy is the monetary policy of the National Bank, changes in which also affect aggregate demand. Thus, the National Bank's measures to increase the money supply in the economy increase aggregate demand and shift its curve to the right. The measures of the National Bank to reduce the money supply reduce aggregate demand and shift its curve to the left.

Changes in the global economy. Since aggregate demand is influenced by net exports, this means that changes in the conjuncture of international trade also affect aggregate demand. These changes can occur in several directions.

The first is the growth of economic activity in our trading partners. In this case, the GDP of trading partners grows, which causes an increase in their demand for our goods and an increase in our exports. This increases aggregate demand and shifts its curve to the right.

Another is the change in the price level of our trading partners. If their domestic prices rise, then our goods become relatively cheaper and more attractive to them, which increases our exports and aggregate demand, and its curve shifts to the right. The change in the exchange rate of our trading partners, which may be caused by changes in the conjuncture on the currency markets, has a similar effect on the aggregate demand.

The third is changes in the trade policy of our partners. If in relations with our country they shift the emphasis in trade policy towards the strengthening of the role of protectionist mechanisms, then our exports are falling. If preference is given to free trade mechanisms, then our exports increase. This affects net exports as a component of aggregate demand, which shifts its curve in the corresponding direction.

Shift of the aggregate demand curve

When analyzing aggregate demand and aggregate supply, it is usually assumed that shifts in the curves of aggregate demand and aggregate supply do not affect the natural level of output (which increases at a constant rate). In this case, fluctuations in total output around the level Y in the figure characterize changes in total output in the short run (economic cycle). However, some economists dispute the assumption that shocks to aggregate demand and aggregate supply do not affect Yn.

A group of economists led by Edward Prescott at the University of Minnesota has developed a theory of macroeconomic fluctuations, called the theory of the real business cycle. According to this theory, real supply shocks change the natural output rate (Y). In this theory, exogenous (shocking) changes in preferences (for example, the desire of workers to work) and technology (productivity) are considered the main driving forces of cyclical fluctuations in the short run, since they cause significant fluctuations in Y in the short run. At the same time, shifts in the aggregate demand curve caused, for example, by monetary policy measures, insignificantly affect the fluctuations in the volume of aggregate output. According to the theory of the real business cycle, in most cases cyclical fluctuations occur as a result of fluctuations in the natural level of output, so there is no particular need to pursue an active economic policy and eliminate high unemployment. Real business cycle theory is highly controversial and is currently the subject of intense research.

Another group of economists disagrees that demand shocks do not affect the natural level of output of Y. They argue that the natural level of unemployment and the volume of output are subject to hysteresis, that is, a deviation from the level of full employment as a result of high past unemployment. When a decline in aggregate demand shifting the AD curve to the left leads to an increase in unemployment, there is an increase in the natural rate of unemployment above full employment. This situation arises if the unemployed are desperate to find work or if they are reluctant to hire workers who have been unemployed for a long time, considering this fact as evidence that such workers are not suitable for them. As a result, the natural rate of unemployment rises, which entails a fall in Yn below the level of full employment. Further, the mechanism of self-regulation of the economy comes into play, which can return it only to the natural level of unemployment and the volume of output, but not to the level of full employment. Now, to achieve a decrease in the natural rate of unemployment (and growth of Y) to the level of full employment is possible only through the implementation of a stimulating economic policy that shifts the aggregate demand curve to the right and increases the volume of aggregate output. Thus, supporters of the concept of hysteresis are more inclined to advocate expansionary policy as a means of quickly restoring the level of full employment in the economy.

Aggregate demand and its factors

The aggregate demand curve is described by the same equation as GDP:

AD = C + I + G + Xn,
where C is the demand of households and individuals;
I - investment demand of firms;
G - government demand;
Xn - demand abroad;

Graphically, the aggregate demand curve looks similar to the usual demand curve, only the abscissa is now GDP (Y), and the ordinate is the general price level in the country (P). It is also convex with respect to the origin of the coordinate system and is characterized by the inverse dependence of the demand on the mechanism. If prices go down, each of the subjects strives to satisfy their needs to the greatest extent, to acquire the maximum desired amount of goods, goods, services. Thus, the demand curve shows how much economic benefits consumers want and are ready to purchase at the current price level in the economy.

There are two large groups of factors that, one way or another, have a huge impact on consumer aggregate demand.

Price factors, that is, those that are inextricably linked to the dynamics of pricing.

1. The price of market goods and services is the starting point for making the buyer's choice. Any consumer is always guided by a system of relative prices and, with the same quality, will choose a cheaper product, and with the same price, a better one.
2. The wealth effect, or the Pigou effect. With an increase in the general price level, inflation inevitably occurs, the interest rate in these conditions falls, which reduces the amount of savings and assets. So, it turns out that with the rise in prices, the assets of the population decrease by a certain amount, and, as a result, the aggregate demand also falls. Otherwise, when prices decrease, aggregate demand grows. In other words, with a constant amount of income and a declining value of market goods, the purchasing opportunities of the subject grow: for the same amount of money he can purchase a larger set of goods and services, and accordingly he feels somewhat richer.
3. The interest rate effect, or Keynes effect. Equality of savings and investment implies that the desire of households to save coincides with the desire of firms to make long-term investments. With an increase in prices and interest rates, investing in bank deposits turns out to be the most effective, and the population decides to keep money. At the same time, it is unprofitable for firms to make investments at a high interest rate, since one way or another they take some kind of start-up capital on credit. It turns out that savings are growing, while investments are decreasing. In general, an increase in the interest rate leads not only to an increase in savings, but also to a decrease in consumption by the same amount, which together reduces national income and aggregate demand. When the interest rate falls, households spend more and firms invest more, therefore, GDP grows in parallel with aggregate demand.
4. The effect of import purchases, or the Mundell-Fleming effect. If prices within a country begin to rise, the population partially stops consuming domestically produced products and gives preference to imported goods. This, in turn, causes a decrease in the value of net exports, the share of consumption and aggregate demand. Otherwise, when prices decrease, the value of imported goods in the general structure of the market supply decreases, the consumption of domestic goods and services grows, and the demand for them increases.
Non-price factors. These typically include the availability and prices of substitute goods, the economic and inflationary expectations of buyers, and fashion and taste preferences. Within the framework of macroeconomics, the main non-price factors are the volume of money supply, or money supply in the economy, and the speed of its circulation. The more money is in the hands of the population, in circulation, the higher the purchasing power, as a result of which the prices of goods and services begin to rise, which causes a decrease in overall demand.

Aggregate demand

Aggregate demand obeys the general laws of the formation of demand, which were mentioned above, and therefore it can be graphically depicted as follows (Fig. 2).

Rice. 2. Aggregate demand curve of the country

The aggregate demand curve shows that with an increase in the general level of prices, the value of aggregate demand (the total amount of purchases of goods and services of all types in all markets of a given country) decreases in the same way as in the markets of individual ordinary (normal) goods.

But we know that in the event of an increase in prices for certain goods, the demand of buyers simply switches to analogous goods, substitute goods, or to other goods or services. At first glance, it is not clear how the total demand for all goods and services can decrease, since there seems to be no switching over of buyers' expenses.

Of course, income doesn't disappear anywhere. The aggregate demand model does not violate the general patterns of consumer behavior. They just appear here in a somewhat special way.

If the general price level in the country rises significantly (for example, under the influence of high inflation), then buyers will begin to use part of their income for other purposes.

Instead of acquiring the same volume of goods and services produced by the national economy, they may prefer to spend some of their money on:

1) creation of savings in the form of cash and deposits in banks and other financial institutions;
2) the purchase of goods and services in the future (that is, they will start saving money for specific purchases, and not in general, as in the first option);
3) the purchase of goods and services produced in other countries.
The patterns of change in aggregate demand determine the entire life of the country, and therefore they are devoted to studying

Aggregate demand function

Let's first carry out a graphical analysis of this dependence. The initial joint equilibrium in the markets for goods, money and capital is represented by the point E0. The equilibrium volume of aggregate demand in the market for goods was established at a certain initial price level P0. Let's mark it on the y-axis of the lower part. The point A formed at the intersection of the values ​​y0 and P0 is one of the points on the graph yD (P).

Let the price level rise to P1. Then, for a given nominal amount of money, their real value will decrease, as a result of which the LM curve will shift to the left: LM0 LM1. Joint equilibrium in the markets of goods and financial will become possible only for the values ​​of y1, i1. Therefore, at the price level P1, the effective demand will be equal to y1. Therefore, point B also lies on the graph yD (P).

If the price level falls to P2, the real amount of money in circulation will increase and an LM0 LM2 shift will follow. The effective demand will increase to y2. The coordinates P2, y2 in the lower part correspond to point C. By connecting all the points of the aggregate demand function found in this way, we obtain its graph yD (P). When household consumption depends not only on real income, but also on real cash balances as part of property, then when the price level rises, consumer demand decreases at any interest rate due to a decrease in real cash. Therefore, in the upper part, simultaneously with the shift LM0 LM1, the shift IS IS "will occur, and as a result, in the lower part, instead of point B, we will get point B".

Accordingly, when the price level decreases simultaneously with the LM0 LM2 shift, the IS IS "" shift occurs, and then the aggregate demand graph will show not point C, but point C "". Consequently, in the presence of the effect of real cash balances, aggregate demand becomes more elastic in terms of prices (the yD (P) graph becomes flatter).

Aggregate demand theory

"General Theory" (we will call it in abbreviated form, as is usually done), in the general opinion, is a very unintelligible and poorly structured work. After its publication, countless articles and symposia were devoted to the topic “What is the meaning of the General Theory.” This indicates that everyone considered the book extremely important, but no one was completely sure what this importance was. articles on what Keynes actually had in mind continue to appear today, half a century after the publication of General Theory. the problem of recessions, in fact, ignored the problem itself and, second, that the economies of modern industrialized countries, such as the UK or the United States, do not automatically tend to move towards full employment.

Order and disorder in economic systems

The theory Keynes criticized was the theory of ordered coordination. But if downturns occur as a result of breakdowns in the coordinating mechanism, then it is quite clear that we do not have to wait for their satisfactory explanation and means of dealing with them from a theory that assumes that the mechanism is working normally.

Traditional economic theory has viewed recessions as periods of temporary surplus. Indeed, during a downturn, workers are unable to find work and goods remain unsold. The supply of labor and manufactured goods turns out to be higher than the demand for them. Any economist will tell you that to eliminate the surplus, you need to lower the price. If workers cannot find work, then they want to receive wages that exceed their value to the employer. With a lower salary, anyone who wants to work could find a job. If manufacturers cannot sell all of their products, then they are asking too high a price; at a sufficiently low price, all products that bring at least some benefit can be sold. This is the nature of supply and demand. A recession is simply a temporary deviation from equilibrium. It will end as soon as prices and wages reach their equilibrium, "market-clearing" level.

But how long will this process take? Instantly, it occurs only on the charts of economists. In reality, the search for equilibrium prices can take weeks, months or even longer. Meanwhile, life does not stand still. The unemployed, without receiving income, reduce their expenses, which further reduces demand. Producers, overwhelmed with stocks of products that no one wants to buy, cut production, lay off even more workers, and cut demand for raw materials and other goods needed for production. Thus, before prices fall enough to eliminate surpluses, an excess supply of labor and goods produced may well trigger a chain reaction of declining income and demand. In this case, in order to close the widening gap between supply and demand, prices will have to fall even lower. Do we not see such a cumulative process during recessions: a drop in production, a decrease in income, a further drop in production and a further decrease in income?

The timeless equilibrium approach inherent in traditional economic theory, in which Keynes was brought up, made it impossible to explore this groping search for a new equilibrium. Within its framework, it was assumed that if the old equilibrium is violated, there will be an instant jump to a new equilibrium. But if the causes of recessions arise precisely when the economy is out of equilibrium, then traditional theory really ignores this whole problem.

In addition, Keynes vigorously emphasized the role of expectations in economic decision-making. The importance of this role is explained by the fact that decisions are made in conditions of uncertainty, when there is a high probability of error, when it takes time to adjust to unexpected events, in short, when the economic system is in turmoil. All of this had no place in the timeless, orderly, error-free world of traditional equilibrium analysis. In General Theory, Keynes tried to explain economic downturns as the consequences of uncertainty and duration of adjustment. This prompted him to focus his attention on the movement of aggregate demand.

Aggregate Demand Concept

Aggregate demand is a model that is a graph in the form of a curve that illustrates the change in the total real level of purchases planned by all consumers depending on changes in the price level. All other things being equal, the lower the price level, the more the total volume of goods are willing to purchase.

The aggregate demand curve shows how much GNP are willing to purchase at a given price level. The money supply is constant along the aggregate demand curve; its change will cause a shift in the aggregate demand curve.

The structure of aggregate demand can be distinguished:

1) demand for consumer goods and services,
2) demand for investment goods,
3) demand for goods and services from the state,
4) the demand for our exports from foreigners.

Factors affecting aggregate demand

The effect of the interest rate is that when prices rise, buyers of goods and services need more money to pay for agreements. Consequently, the demand for money is growing, which, given a constant money supply, causes an increase in their price, i.e. interest rate. As a result, the aggregate demand decreases due to the demand for those goods, for the purchase of which you need to borrow money. This applies primarily to investment goods, as well as expensive consumer goods, which include mainly durable goods (cars, apartments, televisions, etc.).

The wealth effect is expressed in the fact that with an increase in prices, the real value, that is, the purchasing power, of the accumulated financial assets with a fixed income (bonds, time deposits, etc.) that are in the hands of the population decreases. In this case, the owners of financial assets become really poorer, which reduces their demand, and, conversely, in conditions of falling prices, the real value of financial assets increases, which increases the demand from their owners.

The net export effect reflects the influence of the external sector of the economy on aggregate demand and GDP. It manifests itself when the prices of domestic goods rise or fall than the prices of foreign goods. If domestic prices rise relative to overseas prices, buyers will begin to give preference to imported goods, which will cause an increase in imports. At the same time, foreigners will start buying less domestic goods, which will cause a decrease in exports. Consequently, other conditions unchanged, the rise in prices within the country causes an increase in imports and a decrease in exports. As a result, net exports in aggregate demand are declining.

The factors considered above are price factors of aggregate demand, which indirectly implement the inverse dependence of aggregate demand on price. Their effect on aggregate demand is reproduced on the graph by moving the economy along a fixed aggregate demand curve.

For macroeconomic analysis, the slope of the aggregate demand curve is of great importance. It depends on how significantly the price factors affect the total costs. Thus, purchases of goods and services at the expense of loans and income from financial assets occupy an insignificant part of total expenses.

Changes in net exports under the influence of prices also cannot have a significant impact on the dynamics of total expenditures. In this regard, it would be appropriate to assume that

The aggregate of final goods) that consumers, businesses and the government are ready to buy (for which there is demand in the country's markets) at a given price level (at a given time, under given conditions).

Aggregate demand () is the sum of the planned costs for the acquisition of final products; it is the actual output that consumers (including firms and government) are willing to buy at a given price level. The main factor influencing is the general price level. Their relationship is reflected by a curve that shows the change in the total level of all costs in the economy depending on changes in the price level. The relationship between the real volume of production and the general level of prices is negative or inverse. Why? To answer this question, it is necessary to highlight the main components: consumer demand, investment demand, government demand and net exports, and analyze the impact of price changes on these components.

Aggregate demand

Consumption: with an increase in the price level, real purchasing power falls, as a result of which consumers will feel less wealthy and, accordingly, will buy a smaller share of real output compared to what they would have bought at the previous price level.

Investments: an increase in the price level leads, as a rule, to an increase in interest rates. Credit becomes more expensive, and this keeps firms from making new investments, i.e. an increase in the price level, affecting interest rates, leads to a decrease in the second component - the real volume of investments.

Government procurement of goods and services: to the extent that expenditure items of the state budget are determined in nominal monetary terms, the real value of public procurement will also decrease with an increase in the price level.

Net export: with an increase in the price level in one country, imports from other countries will grow, and exports from this country will decrease, as a result, the real volume of net exports will decrease.

Equilibrium price level and equilibrium volume of production

Aggregate supply and demand affect the establishment of an equilibrium general level of prices and an equilibrium volume of production in the economy as a whole.

All other things being equal, the lower the price level, the more of the national product consumers will want to purchase.

The relationship between the price level and the real volume of the national product for which demand is presented is expressed by the graph of aggregate demand, which has a negative slope.

The dynamics of consumption of the national product is influenced by price and non-price factors. Effect of price factors is realized through a change in the volume of goods and services and is graphically expressed by movement along a curve from point to point. Non-price factors cause a change in in by shifting the curve left or right to or.

Price factors other than price level:

Non-price determinants (factors) affecting aggregate demand:

• Consumer expenses that depend on:
  • Consumer welfare. With an increase in welfare, consumer spending increases, that is, an increase in AD occurs
  • Consumer expectations. If an increase in real income is expected, then expenses in the current period increase, that is, AD increases
  • Consumer debt. Debt Reduces Current Consumption and AD
  • Taxes. High taxes reduce aggregate demand.
• Investment costs, which include:
  • Change in interest rates. An increase in the interest rate will lead to a decrease in investment costs and, accordingly, a decrease in aggregate demand.
  • Expected return on investment. With a favorable prognosis, AD increases.
  • Business taxes. When taxes go up, AD goes down.
  • New technologies. Usually lead to an increase in investment costs and an increase in aggregate demand.
  • Excess capacity. They are not fully utilized, there is no incentive to increase additional capacity, investment costs are reduced and AD is falling.
• Government spending
• Net export costs
• National income of other countries. If the national income of countries grows, then they increase purchases abroad and thereby contribute to an increase in aggregate demand in another country.
• Exchange rates. If the exchange rate for its own currency rises, then the country can buy more foreign goods, and this leads to an increase in AD.

Aggregate supply

Aggregate supply is the real volume that can be produced at a different (specific) price level.

The law of aggregate supply - with a higher price level, producers have incentives to increase production and, accordingly, the supply of manufactured goods increases.

The aggregate supply graph has a positive slope and consists of three parts:

• Horizontal.
• Intermediate (ascending).
• Vertical.

Non-price factors of aggregate supply:

• Change in resource prices:
  • Availability of internal resources
  • Prices for imported resources
  • Market dominance
• Change in productivity (production / total cost)
• Legal changes:
  • Business taxes and subsidies
  • Government regulation

Aggregate Supply: Classical and Keynesian Models

Aggregate supply() Is the total amount of final goods and services produced in the economy; it is the total real output that can be produced in a country at various possible price levels.

The main factor influencing is also the price level, and the relationship between these indicators is direct. Non-price factors are changes in technology, resource prices, taxation of firms, etc., which is graphically reflected by a shift of the AS curve to the right or left.

The AS curve reflects changes in the aggregate real volume of production depending on changes in the price level. The shape of this curve largely depends on the time interval in which the AS curve is located.

The difference between the short and long run in macroeconomics is associated mainly with the behavior of nominal and real values. In the short term, nominal values ​​(prices, nominal wages, nominal interest rates) under the influence of market fluctuations change slowly, are "rigid". Real values ​​(output, employment, real interest rate) vary significantly and are considered "flexible". V long term the situation is just the opposite.

Classic model AS

Classic model AS describes the behavior of the economy in the long run.

In this case, the AS analysis is built taking into account the following conditions:

• the volume of output depends only on the number of factors of production and technology;
• changes in factors of production and technology are slow;
• the economy is operating in full employment and the volume of output is equal to the potential;
• prices and nominal wages are flexible.

Under these conditions, the AS curve is vertical at the level of output at full employment of production factors (Fig. 2.1).

Shifts AS in the classical model are possible only with a change in the value of factors of production or technology. If there are no such changes, then the AS curve in the short term is fixed at a potential level, and any changes in AD are reflected only at the price level.

Classic model AS

• AD 1 and AD 2 - aggregate demand curves
• AS - aggregate supply curve
• Q * - potential production volume.

Keynesian model AS

Keynesian model AS examines the functioning of the economy in the short term.

The analysis of AS in this model is based on the following assumptions:

• the economy operates under conditions of underemployment;
• prices and nominal wages are relatively tight;
• real values ​​are relatively mobile and react quickly to market fluctuations.

The AS curve in the Keynesian model is horizontal or has a positive slope. It should be noted that in the Keynesian model, the AS curve is bounded on the right by the level of potential output, after which it takes the form of a vertical straight line, i.e. actually coincides with the long-term AS curve.

Thus, the volume of AS in the short term depends mainly on the value of AD. In the conditions of underemployment and price rigidity, fluctuations in AD cause, first of all, a change in the volume of output (Fig. 2.2) and only subsequently can they be reflected in the price level.

Keynesian model AS

So, we looked at two theoretical AS models. They describe quite possible in reality different reproductive situations, and if we combine the assumed shapes of the AS curve into one, then we get the AS curve, which includes three segments: horizontal, or Keynesian, vertical, or classical and intermediate, or ascending.

AS Curve Horizontal Segment corresponds to a recessionary economy, high unemployment and underutilization of production capacity. In these conditions, any increase in AD is desirable, since it leads to an increase in the volume of production and employment, without increasing the general level of prices.

Intermediate segment of the AS curve presupposes a reproduction situation in which an increase in the real volume of production is accompanied by a slight increase in prices, which is associated with the uneven development of industries and the use of less productive resources, since more efficient resources are already involved.

AS Curve Vertical Segment occurs when the economy is operating at full capacity and it is no longer possible to achieve further growth in production in a short time. An increase in aggregate demand in these conditions will lead to an increase in the general price level.

General model AS.

• I - Keynesian segment; II - classic segment; III - intermediate segment.

Macroeconomic equilibrium in the AD-AS model. Ratchet effect

The intersection of the AD and AS curves determines the point of macroeconomic equilibrium, the equilibrium volume of output and the equilibrium price level. A change in equilibrium occurs under the influence of shifts in the AD curve, the AS curve, or both.

The consequences of an increase in AD depend on which segment of AS it passes through:

• on the horizontal segment AS, the growth of AD leads to an increase in the real volume of output at constant prices;
• on the vertical segment AS, an increase in AD leads to an increase in prices with a constant volume of output;
• on the intermediate segment AS, the growth of AD generates both an increase in the real volume of output and a certain increase in prices.

Reducing AD should have the following consequences:

• on the Keynesian segment AS, the real volume of production will decrease, while the price level will remain unchanged;
• in the classical segment, prices will fall, and the real volume of production will remain at the level of full employment;
• in the middle, the model assumes that both real output and price levels will decline.

However, there is one important factor that modifies the effects of declining AD in the classical and intermediate segments. A reverse movement of AD from position b (Fig. 2.4) may not restore the initial equilibrium, at least for a short period of time. This is due to the fact that prices for goods and resources in a modern economy are largely inflexible in the short term and do not show a downward trend. This phenomenon is called the ratchet effect (a ratchet is a mechanism that allows the wheel to be turned forward, but not backward). Let us consider the effect of this effect using Fig. 2.4.

The initial growth of AD, up to the state, led to the establishment of a new macroeconomic equilibrium at the point, which is characterized by a new equilibrium level of prices and volume of production. A drop in aggregate demand from state to, will not lead to a return to the initial equilibrium point, since the increased prices do not tend to decline in the short term and will remain at the level. In this case, the new equilibrium point will move to the state, and the real level of production will drop to the level.

As we found out, the ratchet effect is associated with price inflexibility in the short run.

Why don't prices tend to go down?

• This is primarily due to the inelasticity of wages, which amounts to approximately of the costs of the firm and significantly affects the price of products.
• Many firms wield significant monopoly power to counter price declines when demand is falling.
• Prices for some types of resources (other than labor) are fixed by the terms of long-term contracts.

However, in the long run, when prices fall, prices will go down, but even in this case, the economy is unlikely to be able to return to its original equilibrium point.

Rice. 1. Consequences of AS growth

AS Curve Offset... With an increase in aggregate supply, the economy moves to a new equilibrium point, which will be characterized by a decrease in the general price level with a simultaneous increase in real output. A decrease in aggregate supply will lead to higher prices and a decrease in real NNP
(Fig. 1 and 2).

So, we examined the most important macroeconomic indicators - aggregate demand and aggregate supply, identified the factors influencing their dynamics, and analyzed the first model of macroeconomic equilibrium. This analysis will serve as a certain springboard for a more detailed study of macroeconomic problems.

Rice. 2. Consequences of the fall of AS

Keynesian model for determining the equilibrium volume of production, income and employment

To determine the equilibrium level of national production, income and employment in the Keynesian model, two closely interrelated methods are used: the method of comparing total expenditures and volume of production and the method of "withdrawals and injections". Consider the first cost-output method. For its analysis, the following simplifications are usually introduced:

• there is no government intervention in the economy;
• the economy is closed;
• the price level is stable;
• there is no retained earnings.

Under these conditions, total expenditures are equal to the sum of consumer and investment expenditures.

To determine the equilibrium volume of national production, the investment function is added to the consumption function. The total expenditure curve crosses the 45 ° line at the point that determines the equilibrium level of income and employment (Fig. 3).

This intersection is the only point at which the total costs are equal. No levels of PNP above equilibrium are sustainable. Stocks of unsold goods are rising to unwanted levels. This will push entrepreneurs to adjust their activities in the direction of reducing the volume of production to the equilibrium level.

Rice. 3. Determination of the equilibrium NPP by the "costs - volume of production" method

At all potential levels below equilibrium, the economy tends to spend more than entrepreneurs produce. This stimulates entrepreneurs to expand production to an equilibrium level.

Seizure and injection method

The method of determining by comparing costs and volume of production makes it possible to clearly represent the total costs as a direct factor that determines the levels of production, employment and income. While the “seizure and inject” method is less straightforward, it has the advantage of focusing on inequality and NPP at all but equilibrium levels of production.

The essence of the method is as follows: under our assumptions, we know that the production of any volume of products will give an adequate amount of income after taxes. But it is also known that households can save part of this income, i.e. do not consume. Saving, therefore, represents the withdrawal, leakage, or diversion of potential expenditures from the expense-income stream. As a result of savings, consumption becomes less than total production, or NPP. In this regard, consumption in itself is not enough to take the entire volume of production from the market, and this circumstance, most likely, leads to a decrease in the total volume of production. However, the business sector does not intend to sell all products only to end consumers. Part of the production takes the form of means of production, or investment goods, which will be sold within the business sector itself. Therefore, investment can be viewed as an injection of expenditure into an income-expenditure stream that complements consumption; in short, investments represent potential compensation, or reimbursement, withdrawals for savings.

If the withdrawal of funds for savings exceeds the injection of investment, then there will be less NNP, and this level of NNP is too high to be sustainable. In other words, any level of NNP where savings exceed investment will be above equilibrium. Conversely, if the injections of investment exceed the drain on savings, then there will be more than the NNP and the latter should rise. To reiterate, any size of NNP, when investment exceeds savings, will be below the equilibrium level. Then, when, i.e. when the drain on savings is fully offset by injections of investment, the total cost is equal to the volume of production. And we know that such equality determines the balance of the NNP.

This method can be illustrated graphically using savings and investment curves (Figure 3.6). The equilibrium volume of NPP is determined by the point of intersection of the curves of savings and investment. Only at this point does the population intend to save as much as entrepreneurs want to invest, and the economy will be in a state of equilibrium.

Change in equilibrium NNP and multiplier

In the real economy, NPPs, income and employment are rarely in a stable state of equilibrium, and are characterized by periods of growth and cyclical fluctuations. The main factor influencing the dynamics of NPP is investment fluctuations. At the same time, the change in investment affects the change in NNP in a multiplied proportion. This result is called the multiplier effect.

Multiplier = Change in real NNP / Initial change in cost

Or, transforming the equation, we can say that:

Change in NNP = Multiplier * Initial change in investment.

There are three points to make from the outset:

• The "initial change in spending" is usually caused by shifts in investment spending, for the simple reason that investment appears to be the most volatile component of total spending. But it should be emphasized that changes in consumption, government procurement or exports are also subject to a multiplier effect.
• "Initial change in expenditure" means an upward or downward movement of the aggregate expenditure schedule due to a downward or upward shift in one of the components of the schedule.
• From the second remark it follows that the multiplier is a double-edged sword that works in both directions, i.e. a slight increase in costs can give a multiple increase in the NNP; on the other hand, a small reduction in costs can lead, through the multiplier, to a significant decrease in NPI.

To determine the magnitude of the multiplier, the marginal propensity to save and the marginal propensity to consume are used.

Multiplier = or =

The value of the multiplier is as follows. A relatively small change in entrepreneurial investment plans or household savings plans can cause much larger changes in the equilibrium level of NPP. The multiplier amplifies the fluctuations in entrepreneurial activity caused by changes in spending.

Note that the more (less), the more the multiplier will be. For example, if - 3/4 and, accordingly, the multiplier is 4, then a decrease in planned investments in the amount of 10 billion rubles. will entail a decrease in the equilibrium level of NPP by 40 billion rubles. But if - only 2/3, and the multiplier - 3, then a decrease in investment by the same 10 billion rubles. will lead to a fall in the NPP by only 30 billion rubles.

The multiplier as presented here is also called a simple multiplier for the simple reason that it is based on a very simple economic model. Expressed in the 1 / MPS formula, the simple multiplier reflects only savings withdrawals. As discussed above, in reality, the sequence of income and spending cycles can fade due to tax and import exemptions, i.e. in addition to the drain on savings, one part of the income in each cycle will be withdrawn in the form of additional taxes, and the other part will be used for the purchase of additional goods abroad. Taking these additional exemptions into account, the formula for the multiplier 1 / MPS can be modified by substituting one of the following indicators instead of MPS in the denominator: "the proportion of changes in income that is not spent on domestic production" or "the proportion of changes in income that" flows out "or withdrawn from the stream of “income-expenses.” A more realistic multiplier, which is obtained by taking into account all these withdrawals - savings, taxes and imports, is called a complex multiplier.

Equilibrium output in an open economy

So far, in the aggregate spending model, we have abstracted from foreign trade and assumed the existence of a closed economy. Let's now remove this assumption, take into account the presence of exports and imports, as well as the fact that net exports (exports minus imports) can be either positive or negative.

What is the ratio of net exports, i.e. exports minus imports, and total costs?

Let's take a look at export first. Like consumption, investment, and government procurement, exports generate increases in production, income, and employment domestically. While goods and services that have costly to produce are going overseas, other countries' spending on American goods leads to expanding production, creating more jobs, and increasing income. Therefore, exports should be added as a new component to the total cost. Conversely, when the economy is open to international trade, we must recognize that a portion of the spending intended for consumption and investment will go to imports, i.e. goods and services manufactured abroad and not in the United States. Therefore, in order not to overestimate the value of the volume of production within the country, the sum of consumption and investment expenditures must be reduced by the part that goes to imported goods. For example, when measuring the total cost of domestically produced goods and services, it is necessary to deduct the cost of imports. In short, for a private, non-foreign trade, or closed, economy, total costs are, and for a trading, or open, economy, total costs are. Recalling that net exports are equal, we can say that the total costs for a private, open economy are equal
.

3.7. Impact of net exports on NMP

From the very definition of net exports, it follows that it can be either positive or negative. Consequently, exports and imports cannot have a neutral effect on the equilibrium NPP. What is the real impact of net exports on NPPs?

Positive net exports leads to an increase in total costs in comparison with their value in a closed economy and, accordingly, causes an increase in the equilibrium NPP (Fig. 3.7). On the graph, the new point of macroeconomic equilibrium will correspond to the point, which is characterized by an increase in real NNP.

Negative net exports on the contrary, it reduces domestic aggregate expenditures and leads to a decrease in domestic NNP. On the graph, the new equilibrium point and the corresponding volume of NNP -.