Aggregate Demand Macroeconomics 2. Aggregate Demand Economy without government and foreign trade: AD = C + I Economy with government and without foreign.

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Presentation transcript:

Aggregate Demand Macroeconomics 2

Aggregate Demand Economy without government and foreign trade: AD = C + I Economy with government and without foreign trade: AD = C + I + G Economy with government and without foreign trade: AD = C + I + G + X – Z AD - Aggregate Demand; C - Consumption; I – Investment; G – Government; X – Export; Z - Import

Equilibrium AD = Y Y –Income Economy without government and foreign trade: Y = C + I and Y = C + S S –Savings

Consumption C = C A + MPC Y C A - autonomous consumption, consumer wealth MPC - Marginal Propensity to Consume

Autonomous Consumption The part of consumption that is not financed by current income (consumption that does not depend on current income).

Marginal Propensity to Consume The fraction of additional income that households are going to spend on additional consumption. MPC = ΔC/ΔY

Consumption Function

Savings S = S A + MPS Y S A – autonomous savings MP s - Marginal Propensity to Save

Autonomous Savings The part of save that is not financed by current income (savings that does not depend on current income). C A = - S A

Marginal Propensity to Savr The fraction of additional income that households are going to spend on additional saving. MPS = ΔS/ΔY MPC + MPS =1

Savings Function

Investment Investment decisions of firms don’t depend on current state of economy. In that sense they are autonomous.

Investment Function

Aggregate Demand (AD) in economy without government and foreign trade Aggregate demand: sum of households’ and firms’ expenditures (for consumption and investments respectively) planned at various levels of current income.

Aggregate Demand (AD) in economy without government and foreign trade

The 45° Line At any point on the 45° line, the distance to the horizontal axis is the same as the distance to the vertical axis. The 45° line joins points at which AD (demand) equals Y (supply).

Equilibrium

Thank you!