top of page

Keynesian Aggregate Demand and Supply :: interactive model

How to use the interactive model

  • use the sliders (or drag curves) to shift the global supply curve and tariff value 

  • or press the 'try a scenario' button

​​

Why is this stuff important to know?

The Keynesian version of AD / AS model helps to visualise the relative position of the economy on the economic cycle, and to then infer output levels, price levels and employment levels.

I find it really useful to keep an eye on the three zones of the AS curve: 

  • When an economy is really in a bad trough AD will intersect AS along the flat section - where even if AD was to then shift right (increase), output and employment levels can increase, but price level (inflation) stays pretty much the same.

  • The curved section (intermediate zone) is where an increase in AD will result in increase output and employment, but some price level pressure starts to appear. This is where economies tend to function - maybe this could be the RBA 'sweet spot' of 2-3 % inflation.

  • The steep (vertical) section of AS (classical zone) helps to visualise a situation where an economy is producing at full employment of resources. So output can't increase, and any further increase in AD will only create further inflationary pressure.

Neoclassical Aggregate Demand and Supply :: interactive model

How to use the interactive model

  • use the sliders (or drag curves) to shift the global supply curve and tariff value 

  • or press the 'try a scenario' button

​​

Why is this stuff important to know?

The neoclassical version of AD / AS model is helpful to distinguish short-run from long-run aggregate supply (SRAS and LRAS). Where the Keynesian AS curve fits the SRAS and LRAS into one curve, the distinction in this model helps to give a clearer picture of the LRAS as representing the maximum output of an economy at a point in time, regardless of price (aka the Production Possibilities curve!). 

Trade equilibrium will occur at intersect of SRAS and AD - this will determine quantity and price level. The relative position of trade in relation to LRAS can then determine the position of the economy on the economic cycle contracting or expanding (based on whether we are trading the total available supply or not). 

A shift to the right (increase in LRAS) represents structural economic growth - a sustained increase in the level of production output in the economy. This occurs when there is an improvement in the quality and/or quantity of resource inputs (factors of production).

The Circular Flow of Income, Aggregate Demand and Government Intervention in Economic Cycles

Keynesian Multiplier Calculator

How to use the interactive model

  • use the sliders to set levels of leakages - MPS, Tax rate, MPM

  • then adjust slider to view the effects on GDP of an increase in Government Expenditure (injection)

​​

Why is this stuff important to know?

The RBA has some good resources explaining how the multiplier works. Click here for the video

At a high school level, you generally learn the simple multiplier formula that only takes into account MPS.

The calculator here also considers effect of tax rates on multiplier outcomes, as well as the effects of imports. So it gives you a more rounded view of outcomes.

And this stuff is kinda intuitive anyway - like it's probably not an ideal outcome for additional government expenditure to go completely towards purchase imported goods as it represents a leakage in circular flow, so it will have a limited multiplier effect. This calculator now gives you some mathematical rationale. 

Keynesian Cross Multiplier :: interactive model

How to use the interactive model

  • use the slider to adjust the MPC of the economy

  • use slider to change level of Government Expenditure

​​

Why is this stuff important to know?

This model represents a simple multiplier relationship of income and MPC. However it's important to remember that MPC isn't just income minus savings. MPC is the income available for consumption once all leakages (S + T + M)  have been taken into account and removed from income. And then 'marginal' which means 'additional' - what is the proportion of additional expenditure when we get an extra dollar?

The multiplier effect is visible as the increase in additional GDP - when governments put in $1 then we will see a greater than $1 increase in GDP

Disclaimer: This is one of those economic models that I think some teachers teach and others don't seem to get too hung up on it. I've included it for completeness. If you can articulate the idea that each extra dollar of government expenditure has a proportionally larger effect on GDP, then you are probably okay. I think that my calculator above is probably a more useful tool to develop your understanding of multiplier effect. 

Useful learning resources for this topic

Australian Federal Budget

Develop your understanding of fiscal policy, discretionary spending and automatic stabilisers.

Unpacking Inflation

Reserve Bank of Australia.

Videos, explainers and interactives to develop your understanding of inflation.

Josh Verlin YouTube series

Josh Verlin is a Victoria based teacher who has produced a great video series covering the topics in this unit.

Gross Domestic Product :: Interactive Practice

Interactive practice activities developed and owned by Marginal Revolution University. Published here for educational purposes. 

Unemployment :: Interactive Practice

Interactive practice activities developed and owned by Marginal Revolution University. Published here for educational purposes. 

Inflation and Money :: Interactive Practice

Interactive practice activities developed and owned by Marginal Revolution University. Published here for educational purposes. 

Subject matter

Topic 1: Macroeconomic objectives and theory

​​​

In Topic 1, students study the primary macroeconomic objectives of the Australian Government and economic theory. They connect this knowledge to a variety of economic concepts, principles and models.

​

  • Comprehend and describe key concepts using economic terminology, including basis point and percentage point changes; consumer price index; deflation; labour force underutilisation; average propensities to consume and save; non-accelerating inflation rate of unemployment; participation rate; percentage change; stagflation; structural deficit.

​​

  • Distinguish nominal and real gross domestic product, wages and interest rates, and use calculations to identify change and scale.

​​

  • Comprehend and explain

    • cyclical and structural factors affecting movements and shifts of short- and long-run aggregate demand and supply

    • the factors affecting the production possibility curve

    • the concept of the multiplier effect and calculate the value of the simple Keynesian multiplier, in terms of the marginal propensity to consume and save

    • the four phases of the economic cycle, in the context of macroeconomic objectives

    • the macroeconomic objectives of sustainable economic growth: full employment; price stability; external stability; sustainable development; and improved living standards

    • how interest rates and federal budget decisions are policy tools that influence economic growth.

​​

  • Comprehend the circular flow of income model and the components of aggregate demand, focusing on economic policy decisions.

​​

  • Comprehend, explain and apply the aggregate demand/aggregate supply model to determine the overall price level and equilibrium level of real output in an economy.

​​

  • Comprehend and explain causes, effects, benefits and costs of the following to different groups and economic agents

    • sustainable economic growth

    • unemployment, including cyclical, structural, frictional, seasonal, natural, hidden, long-term and underemployment

    • inflation, including headline, underlying, demand-pull, cost-push, imported and inflation expectations.

​​

  • Comprehend and explain the role in fiscal policy of automatic stabilisers and the role of discretionary spending in influencing aggregate demand and stabilising the economic cycle, and apply using diagrams.

​

Reproduced from Queensland Curriculum and Assessment Authority,  Economics 2025 v1.2 General senior syllabus October 2024

Internal Assessment 3

Extended Response to Stimulus: Exam Specifications

​

Assessment objectives

Specifications

The teacher provides an examination that:

    1. Comprehend features and economic concepts, principles and models of macroeconomic objectives, theories, economic indicators and budget stances.

    2. Analyse an economic issue that involves economic indicators and budget stances .

    3. Evaluate an economic outcome relevant to economic indicators and budget stances.

    4. Create a response that communicates economic meaning to suit the intended purpose in an analytical essay.

    • relates to Unit 4 Topic 1 and Unit 4 Topic 2

    • is focused on a contemporary economic issue that is of national, state and/or regional significance to Australia

    • requires an analytical essay in response to an unseen question with seen and unseen stimulus

    • allows students to choose two economic criteria for their evaluation

    • must elicit a variety of possible responses.

  • Stimulus specifications

  • The teacher provides seen and unseen stimulus that:

    • enables a selection of current, accurate and relevant data and information from a variety of sources, e.g. government and other institutional websites, published reports, media articles and expert commentaries

    • is a minimum of nine sources that include data and information in visual and written forms that fit on both sides of four A4-size pages or equivalent

    • facilitates both the analysis and evaluation components of the task

    • allows for unique responses.
      The teacher provides unseen stimulus that:

    • fits on both sides of one A4 page or equivalent

    • is succinct enough for students to engage with during planning time

    • includes information that is critical to the item, so that students cannot write pre -prepared

      responses or predict the focus of the unseen question.

​

Reproduced from Queensland Curriculum and Assessment Authority,  Economics 2025 v1.2 General senior syllabus October 2024

yt_logo_rgb_light.png
bottom of page