Topic Eight

What Determines the Level of Aggregate Economic Activity? What Causes Changes in Aggregate Economic Activity (i.e. Economic Growth and Business Cycles)?

Required Readings:

  • Read Module: Macro Workings and Module: Keynesian & Neoclassical Economics
  • The Wall Street Journal

Video Lecture Clips:

Additional Readings:

  • C. Alan Garner, “How Fast Can the U.S. Economy Grow?” Federal Reserve Bank ofKansasCity Economic Review, Dec 1989, pp. 24-39
  • The Economist reviews Robert Gordon’s “Is US Economic Growth over?”
  • Stephanomics, Series 2, Episode 1
  • The Invisible Hand, Episode 8: The Paradox of Thrift (download first, then listen)


This topic is a critical part of the course.  It’s where we learn the two key macro models we’ll use for the rest of the course.

  • You should be able to explain both the economic growth model and the income-expenditure (or Keynesian Cross) model in your own words.
  • You should be able to use the models to determine how changing a parameter in the model (interest rates or improvements in technology, for example) will affect the economy in the short term or the long term.
  • You should be able to explain the relation between actual and potential GDP, and identify the factors which affect each of them.
  • You should be able to define macro equilibrium, and show it graphically.
  • You should be able to explain and demonstrate graphically changes in GDP, both business cycles and economic growth.

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