Macroeconomics week 8 – income and spending 8.1 Aggregate demand and equilibrium output-Aggregate demand-The total amount of goods demanded in the economy-The AD function represents demand in the four sectors of the economy.-AD = C + I + G + NX (8.1)-The AD function-AD consists of autonomous spending as well as induced spending.-Autonomous spending is independent of income.-Induced spending changes as income changes.Equilibrium output is when quantity of output supplied is equal to the quantity demanded.8.2 The consumption function and aggregate demand•The consumption function describes the relationship between consumption, C, and income, Y:-The intercept represents the autonomous consumption, which is independent to y.-C= the marginal propensity to consume. This is the increase in consumption per one unit increase in income. 8.2 Consumption and saving- consumption and saving , income must be either spent or saved, hence the saving function;this equation shows that saving is a positive function of the level of income. •s = the marginal propensity to save (MPS) is:s = 1 – c8.2 Consumption, aggregate demand and autonomous spending- we now refine our model of aggregate demand further to include the other sectors of the economy. •We add investment (I), government spending (G), transfers (TR), taxes (TA) and the overseas sector (NX).•For the moment, each of the components is assumed to be autonomous.-The addition of government sector includes taxes and transfer payments.-Taxes and transfer payments impact on income and through this on consumption.-Consumption depends on disposal income -_ __ __-C = C + c( Y – TA + TR )-__ __-YD = Y – TA + TR
Equilibrium income and output•From Figure 8.2, the 45°line shows points at which AD and output are equal, i.e.