A Simple Macroeconomic Model

The model used in this chapter is a very simple one, containing only producer and consumer sectors and no markets for money or securities, but it has illustrated a number of important macroeconomic propositions.

Most important, a shortfall of aggregate demand, as compared to lull-employment output, creates a less than full employment situation, at least in the short term, while an excess of demand creates inflation,

Impacts on aggregate output, income, and employment that are caused by fluctuations in investment expenditures or by fluctuations in the consumption function tend to be aggravated by income-induced effects on consumption expenditures, except as interrupted by the full-employment constraint. J. M. Keynes termed this the multiplier effect.