How the supply of money affect the economy

THE GOODS MARKET
DETERMINATION OF EQUILIBRIUM
INCOME

,The NIA framework is used to estimate a nation’s outpu
i.e. it is used to measure economic activity.

It is limited however, in explaining the behaviour of a
nation’s output. E.g. national income accounts cannot
explain why output grows more rapidly in some years
than in others.

We therefore rely on economic theory to determine the
factors that influence economic activity.

,AS-AD Approach
We use the Keynesian model to determine the behaviou
of a nation’s output.

Fundamental to the Keynesian model is the concept of
Aggregate Demand (AD).

Aggregate Demand (AD)=Total planned Spending on fin
goods and services, i.e. Consumption (C), Investment (I
Govt expenditure (G) and Net exports (NX)
AD=C+I+G+(X-M)

, We assume that output is solely explained by changes
total demand.
i. If AD is not sufficient to bring result in full
employment, unemployment results & output falls
below the potential level.
ii. If AD is just sufficient, full employment results &
output reaches its potential
iii. If AD is excessive (beyond full employment) inflation
results.