Supplementary resources for high school students
Definitions and Basics
Aggregate Demand, from Khan Academy
The Aggregate Demand Curve, from Marginal Revolution University
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….
Fiscal Policy, from the Concise Encyclopedia of Economics
The most immediate effect of fiscal policy is to change the aggregate demand for goods and services. A fiscal expansion, for example, raises aggregate demand through one of two channels. First, if the government increases its purchases but keeps taxes constant, it increases demand directly. Second, if the government cuts taxes or increases transfer payments, households’ disposable income rises, and they will spend more on consumption. This rise in consumption will in turn raise aggregate demand.
Fiscal policy also changes the composition of aggregate demand. When the government runs a deficit, it meets some of its expenses by issuing bonds. In doing so, it competes with private borrowers for money loaned by savers. Holding other things constant, a fiscal expansion will raise interest rates and “crowd out” some private investment, thus reducing the fraction of output composed of private investment.
In the News and Examples
Using Infographics to Visualize Macroeconomic Data: The AD-AS Model, from the Federal Reserve Bank of Atlanta
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….
Pedro Schwartz, Keynes as Lucifer, at Econlib, September 2015
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….
Arnold Kling on Patterns if Sustainable Specialization and Trade, at EconTalk, February 2011.