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AD/AS, IS/LM, Keynesian Cross, Money Mkts. & fiscal policy.

A). In the basic supply and demand analysis, we usually look at the demand curve and the supply curve for one commodity in a market. When we look at the macro economy, the corresponding terms are called Aggregate Demand (AD) and Aggregate Supply (AS). What do these two curves AD and AS represent and discuss their properties.

B). Fiscal policies are implemented through manipulating the two curves AD and AS. Discuss fiscal policies that shift these two curves. How do these fiscal policies affect your work place?

Solution Preview

This is a big question with many layers of explanation. As Morpheus says to Neo in The Matrix, "how far down the rabbit hole do you want to go?" Since this is listed as a year 3 problem I'll give you the intermediate macro version.

A). In the basic supply and demand analysis, we usually look at the demand curve and the supply curve for one commodity in a market. When we look at the macro economy, the corresponding terms are called Aggregate Demand (AD) and Aggregate Supply (AS). What do these two curves AD and AS represent and discuss their properties.

The AD/AS model is a classic model of macroeconomics. Keynes was the founding father of macroeconomics and it is build upon his work. Until Keynes all of economics was essentially microeconomics. Economists thought of the macro economy as just an aggregate of market supply and demand curves where shifts in supply in demand in one market would just be balanced by shifts of supply and demand in other markets leading to shifts in what gets produced in an economy and how it gets produced. This is sometimes referred to as a Marshallian view. Keynes was Marshall's student.

Keynes developed the Keynesian ...

Solution Summary

In the attached solution I describe the foundations of the AD/AS model. In other words how it is built up from the IS/LM model which depends on the money market and the Keynesian cross model. I then demonstrate how fiscal policies are used to steer the macro economy from within this framework.

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