NOTES ON MACROECONOMIC THEORY
                                              By
                                    Prof. Humberto Barreto
                                      Dept. of Economics
                                        Wabash College
                           Not for quotation without the author's permission
                                    Revised 8/90, 8/91, 7/92, 8/93, 8/95
                                       Originally Written 8/87
             Many thanks to Prof. Frank Howland for his many suggestions and improvements.
                     Table of Contents
      Chapter 1: Introduction   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     3
      Chapter 2:  Short Run, Fixed Price Keynesian Models  . . . . . . . . . . . . . . . . . . . . . . . . . . . .     6
         Section 1: The Simple Keynesian Model   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     6
         Section 2: The Partial Equilibrium Keynesian Model  . . . . . . . . . . . . . . . . . . . . . . .   24
         Section 3: The General Equilibrium Keynesian Model   . . . . . . . . . . . . . . . . . . . . . .   39
         Section 4: A Comparison of the Three Short Run, Fixed Price Keynesian
            Models  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   72
      Chapter 3: Short Run, Flexible (to Varying Degree) Price Models  . . . . . . . . . . . . . . . . . .   82
         Section 1: The "Conventional" IS/LMÑAD/AS Keynesian Model  . . . . . . . . . . . .   82
         Section 2: A Historical Digression  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   104
      Chapter 4: Conclusion  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   108
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                     Chapter 1: Introduction 
       These are notes on orthodox macroeconomic theory.  Originally written during the
       summer of 1987 in preparation for Econ97 (Senior Seminar) at Wabash College, they
       were substantially revised during the summer of 1990.  The author wishes to thank Prof.
       Frank Howland for his many editorial suggestions and substantive comments.  The
       author accepts responsibility for all remaining errors.  Minor revisions were undertaken
       in August, 1991 by Prof. Howland.  He takes responsibility for all errors that crept in
       during that revision.
       The primary goal of these notes is to enable the undergraduate student to understand
       conventional macroeconomic models.  Particular attention will be paid to the derivation
       of the IS/LMÑAD/AS framework.  Although you have undoubtedly seen much of the
       material presented here, it is hoped that any misunderstandings can be corrected and a
       sense of the "overall picture" can be gained.
       The analysis will consist of a verbal, graphical and mathematical presentation. The
       mathematics will include derivations of multipliers using the calculus, but will be
       supported by graphical analysis.  Graphs are used to aid the student's intuition; but, it
       should be clear that the entire analysis can be presented with mathematical equations.
       It is assumed that you have completed a course in intermediate macro and bring this
       intellectual capital to bear in reading these notes.  In particular, you should understand:
          national income accountingÑespecially GNP, C, I, G, T and R and their
             components
          real v. nominal valuesÑincluding the calculation of price indexes and
             their function
          unemploymentÑincluding the types of unemployment
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         inflationÑincluding the difference between a change in the price level
            and a change in the rate of change of the price level.
         the basics of the Keynesian macroeconomic modelÑincluding the following
            fundamental concepts:
               Equilibrium
               Endogenous and exogenous variables in a model
               Stock concepts versus flow concepts
               Shift ("autonomous change") v. movement along
               Consumption function
                   MPC
               Investment function
               Inventories
               Full employment
               Multiplier
               Fiscal policy tools
               Money market equilibrium
               Monetary policy
      If you find some of these terms unfamiliar or confusing, you are urged to review your
      notes and/or textbook before continuing.
      Finally, these notes are not meant to be exhaustiveÑa great deal of material has been
      omitted. Only those elements absolutely essential for understanding the fundamentals of
      macroeconomic theory as captured by the IS/LMÑAD/AS analysis have been included.
      Thus, these notes are not a substitute for a textbook/lecture (i.e., class) approach to
      macroeconomics.  (The most important omission is the fact that these notes do not
      cover dynamic macroeconomic models in any detail.)
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