Monthly Archives: February 2015

Model of the Macro Economy

When I think about what model best describes the macro economy, I can’t help but veer towards the classical aggregate supply and demand model. Its simplicity in structure allows it to be versatile when held up against the theories of the economists of the Monetarist and Austrian schools. It holds firm against the theory that supply creates its own demand, thus concluding that aggregate supply will always equal aggregate demand. It also confirms the idea that saving equals investment. The model itself is affected by a wide range of factors, including aggregate price, input costs, investments, exchange rates, distribution of income, and my personal favorite: changes in monetary and fiscal policy.  With a demand curve that encapsulates all of the components of GDP and a long run supply curve in which no input prices are assumed to be constant, which is applicable to reality. Although no model is perfect, this one is a relatively good at describing the macro economy.