The Economy 2.0: Macroeconomics

Take a closer look at the units of the The Economy 2.0: Macroeconomics – what they’re about, what models they present, how they’re changing compared with The Economy 1.0.

 

Unit 3 — Aggregate demand and the multiplier model

Summary

This unit brings together the modelling of the demand side of the economy (paralleling Unit 1 for the supply side). ‘Measuring the economy’ introduces GDP as a measure of economic output and an imperfect measure of wellbeing. Students learn how GDP is adjusted to facilitate comparisons over time and between countries. This unit introduces the components of aggregate demand and the multiplier model, which is used to study the business cycle. The unit discusses fluctuations in consumption and investment and why investment spending tends to be more volatile than consumption spending.

 

Models

  • The multiplier model, which consists of the equation for goods market equilibrium and the equation for aggregate demand. 
  • Solving the two equations gives the formula for the multiplier. 
  • Models of consumption smoothing and credit constraints motivate the size of the multiplier; a model of volatile investment is used to motivate demand-driven business cycles.

 

Applications

China’s post-COVID-19 aggregate demand problem.

 

Major changes

By the end of Unit 3, students have a working model of demand-driven business cycles around a supply-side equilibrium and can contrast cyclical and structural unemployment. Unit 3 brings together the modelling of GDP and the demand side, which were previously spread across Units 13 and 14. The introduction of demand-side economic policy is postponed to Unit 5. 


← See how Unit 2 is changing See how Unit 4 is changing →