L4 - Demand in the long run

Question 1

What does the aggregate demand model (ADM) analyse?

Answer 1

Where demand for expenditure Y comes from.

Question 2

What are the main assumptions of the ADM?

Answer 2

Closed economy (next exports = 0) and market clearing. Supplied income/output is fixed.

Question 3

What are the components of aggregate demand?

Answer 3

C - consumer demand for G&S.
I - demand for investment goods.
G - government demand for G&S.

Question 4

Define disposable income.

Answer 4

Total income minus total taxes (Y - T).

Question 5

What is the consumption function?

Answer 5

C = c(Y - T)

Question 6

Define marginal propensity to consume (MPC).

Answer 6

The increase in C caused by a one unit increase in disposable income.

Question 7

State the investment function and explain real interest rate.

Answer 7

I = I(r).
Real interest rate is the nominal interest rate adjusted for inflation; the cost of borrowing and opportunity cost of using funds to finance investment spending.

Question 8

What is assumed about government spending and total taxes in the ADM?

Answer 8

Government spending and total taxes are exogenous.

Question 9

Give equations for aggregate demand, aggregate supply and the case at equilibrium.

Answer 9

Photo on phone.