Chapter 7- Aggregate Demand, Aggregate Supply And Related Concepts Flashcards
What is aggregate demand
Aggregate demand refers to total demand for all goods and services demanded by all individuals in an economy during an accounting year. Aggregate demand = Ad
What are the components of aggregate demand/aggregate expenditure in a four sector economy
- Private Consumption Expenditure(C)
- Investment Expenditure(I)
- Government Expenditure(G)
- Net Exports (X-M)
Private Consumption Expenditure
It refers to the total expenditure incurred by the households on the purchase of goods and services during a given period of time.
There is positive relation between income and aggregate demand.Here, AD is an upward rising curve.
There is negative relation between aggregate demand and price. Here AD is a downward sloping curve
Investment Expenditure
It is total expenditure by the producing sector for the investment. It is affected by rate of interest and marginal efficiency of capital or investment.
There is inverse relation between investment and rate of interest and positive relation between investment and MEI/MEC
Two types of Investment Expenditure
Autonomous Investment and Induced Investment
Autonomous Investment
Expenditure on capital goods which is independent of the level of income and not influenced by expected profitability.
- Autonomous investment are generally made by the government for social welfare.
- The curves is a horizontal straight line parallel ot X - axis
- It is not induced by profit motive
- It is not affected by changes in level of income
Induced Investment
It is motivated by expected profitability and the level of income in the economy. It is positively related to the level of income.
- There is positive relationship between induced investment and income.
- It is induced by profit motive
- It is directly affected by change in the level of income
Government Expenditure
It is total expenditure incurred by government on
1. Purchase of goods and services in the domestic market
2. Compensation of employees (C. O. E.) paid
3. Direct purchases from abroad by the government for embassies, military bases and consulates located abroad.
Government expenditure is affected by government policy.
eg : in case of inflation, govt. will spend less to control excess dd and vice versa
Net Exports
It is the difference between value of exports and value of imports. Export refers to expenditure by foreigners on purchase of products from another country and imports refers to expenditure by residents on purchase of foreign product’s. Their difference is Net Export.
Net export is affected by foreign exchange rate, inflation or deflation in trading countries etc.
Aggregate demand in two sector model
In a two sector economy, AD has two components :
- Consumption
- Investment
Thus aggregate demand in a two sector economy is sum total of consumption and investment.
So AD = C + I
Where C=Cbar +bY and I=Ibar
There are two assumption
1. Cbar = 50,b = 0.5
2. I (autonomous investment ) = 100
Table
Diagram
