ON TO THE THEORY OF AGGREGATE DEMAND

We have now completed our introduction to the basic concepts of macroeconomics. We have examined the determinants of consumption and investment and seen how they can fluctuate from year to year, sometimes quite sharply.

At this point, macroeconomics branches into one of two major themes-business cycle sand economic growth .. In the chapters that follow, we begin our survey of business cycles, or the behavior of the .economy the short run. This approach, known as Keynesian economics, shows how changes in investment, government spending and taxation, foreign trade, and the money supply can be transmitted to the rest of the economy. We will see that actual GDP can diverge from its full-employment potential. We will also see how government fiscal and monetary policies can combat recessions and booms. At the heart of the analysis is the movement of consumption and investment that we explored in this chapter