The classical model explains the continuous realization of employment in the economy, based on Say’s Law, which states that “every supply creates its own demand”. According to this law, a certain amount of income is generated as a result of the production of goods and services. This income is used again to buy goods and services. Firms purchase or lease the resources required in the production process. They pay their owners in the form of fees, interest, rents, and profits. The amount that the producers pay to the owners of the production factors has to be equal to the value of the goods and services produced. Here, the production factor consumes all the income that the owners have gained and everything produced is sold. Thus, according to Say’s Law, every supply creates its own demand.

Autonomous consumption is the portion of consumption expenditures that is independent of income.

Aggregate expenditures (AE) are composed of consumption (C), investment (I), government expenditure (G) and net export (NX). According the macroeconomic equilibrium concept, aggregate expenditures play a key role for the determination of production and income level of a country.

Gross domestic product is the total value of all final (finished) goods and services produced and expressed with market prices in a specific period of time.

Transfer expenditures can be divided into four groups. Economic Transfers: Transfers made by the government in order to support the investments of Public Economic Enterprises. Financial Transfers: Transfers to special budget institutions and local authorities (universities, provincial administrations and municipalities etc.) made by government. Social Transfers: Transfers made  by the state with the social purposes (financial aids for retirement funds and association, student grants etc.). Debt Payments: The expenses not paid in related fiscal year but in following years are assumed as transfer payments. These are the interest               payments the government pays for domestic and international debts, amortization of  debt, expenses of previous years not paid in due date as well as debts of previous years.

The factors determining the import and export are the income levels of the domestic and foreign countries, preferences, restrictions on foreign trade and exchange rates.

When the economy reaches an equilibrium above its full employment level of GDP, the inflationary gap occurs.

According to the Keynesian model, the reason of inflation is the excess of aggregate spending. So, trying to buy more goods and services than the economy can produce causes inflation. As an appropriate policy against inflation, the government needs to adopt policies decreasing aggregate spending or increasing taxes or applying both measures. Arranging fiscal policy for depressing aggregate spending is called as contractionary fiscal policy.

Expenditures of each economic unit create income for the other economic units.

Many economists accept that the amount of money in an economy affects general price level, interest rate and exchange rate as well as its effects on unemployment and production.

In order to find out the total effect of 100 TL income increase in the first stage, we need to calculate the increase in income and consumption in every stage and add up these figures. Although the amount of increase in income and consumption decreases at every stage, they never reach to zero in mathematical terms. Therefore, it doesn’t seem possible to make necessary calculations for every stage and add up these values. However, we can apply a simple methodology to figure out the total increase in income and expenditures. If we know the ratio of unspent (leaked) income increase for domestically produced goods and services, by using its reciprocal, we can easily calculate the total change in income or GDP.

Macroeconomics focuses on behaviors of four groups in an economy: Households and businesses (private sector), government (public sector) and other countries (international sector).

Great Depression is the period started in 1929 in the USA and lasted through 1930s in which a huge economic contraction and very high level of unemployment were experienced.

Great Depression is the period started in 1929 and lasted through 1930s in which a huge economic contraction and very high level of unemployment were experienced.

The investment made by this firm is a planned inventory investment - that is, a stock change. If the firm wants to keep as few unsold winter tires as possible in its stocks until the month of February, and there are still unsold winter tires in February when it comes, this is an unplanned inventory investment. Unplanned stock changes can be regarded as a sign showing that sales are not as good as expected and that there is too much production in the previous period.

If government authorities increase the expenditure, the G line actually shifts upward to position G1.If the expenditures are reduced, the G line shifts downward to G2.

Unplanned investments and undesirable stock changes do not have any impact on the equilibrium level of income. For this reason, economists are interested in factors that affect planned investments. First one is the interest rate. The second factor that determines the amount of investment is the expected profitability of investment. One of the main driving forces behind new investments is technological change. Another factor that affects investment expenditures is the cost of capital goods and the last one is capacity utilization.

Aggregate demand is called effective aggregate demand, at the level where the aggregate demand is equal to the aggregate supply.

The primary automatic stabilizer is the income tax. Another important automatic stabilizer is the unemployment insurance premiums and unemployment benefits. Besides the above mentioned automatic stabilizers, dividend payments of corporations, savings of households, changes in firm stocks, government budget deficit or surplus can also serve as automatic stabilizers.