Supplementary resources for high school students
Definitions and Basics
Keynesian Economics, from the Concise Encyclopedia of Economics
Keynesian economics is a theory of total spending in the economy (called aggregate demand) and of its effects on output and inflation….
Aggregate Demand, at Investopedia
Aggregate demand is an economic measurement of the sum of all final goods and services produced in an economy, expressed as the total amount of money exchanged for those goods and services. Since aggregate demand is measured by market values, it only represents total output at a given price level and does not necessarily represent quality or standard of living.
Aggregate Demand, at Wikipedia
In macroeconomics, aggregate demand (AD)… is the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels. This is the demand for the gross domestic product of a country. It is often called effective demand, though at other times this term is distinguished.
The aggregate demand curve is plotted with real output on the horizontal axis and the price level on the vertical axis. It is downward sloping as a result of three distinct effects: Pigou’s wealth effect, Keynes’ interest rate effect and the Mundell-Fleming exchange-rate effect. The Pigou effect states that a higher price level implies lower real wealth and therefore lower consumption spending, giving a lower quantity of goods demanded in the aggregate. The Keynes effect states that a higher price level implies a lower real money supply and therefore higher interest rates resulting from financial market equilibrium, in turn resulting in lower investment spending on new physical capital and hence a lower quantity of goods being demanded in the aggregate.
In the News and Examples
Effects of trying to boost the economy via aggregate demand during business cycles: Gross Domestic Product, from the Concise Encyclopedia of Economics
In the short run, in business cycles the Keynesian emphasis on demand is relevant and alluring. But heavy-handed reliance on “demand management” policies can distort market prices, generate major inefficiencies, and destroy production incentives. India since its independence and Peru in the eighties are classic examples of the destruction that demand management can cause. Other less developed countries like South Korea, Mexico, and Argentina have shifted from an emphasis on government spending and demand management to freeing up markets, privatizing assets, and generally enhancing incentives to work and invest. Rapid growth of GDP has resulted….
A Little History: Primary Sources and References
John Maynard Keynes, biography from the Concise Encyclopedia of Economics
Keynes’s General Theory revolutionized the way economists think about economics. It was path breaking in several ways. The two most important are, first, that it introduced the notion of aggregate demand as the sum of consumption, investment, and government spending….
John R. Hicks, biography from the Concise Encyclopedia of Economics
His second major contribution was his invention of what is called the IS-LM model. The IS-LM model is a graphical depiction of the argument Keynes gave in the General Theory about how an economy could be in equilibrium with less than full employment. Hicks published it in a journal article the year after Keynes’s book was published. It is reasonably certain that most economists became familiar with Keynes’s argument by seeing Hicks’s graph….