chapter9 - AggregateDemand CHAPTER9 KeynesQuestions:

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CHAPTER 9 Aggregate Demand
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Keynes’ Questions: What are the components of aggregate demand? What determines the level of spending for each  component? Will there be enough demand to maintain full  employment?
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Macro Equilibrium Aggregate demand and aggregate supply confront  each other in the marketplace to determine macro  equilibrium. Equilibrium is established where AS and AD  intersect.
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The Desired Adjustment All economists agree that short-run unemployment is  possible. The debate is over whether the economy will self- adjust to full employment. If not, government might have to step in to increase  AD to reach full employment.
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Escaping a Recession AS (Aggregate supply) AD 1 E 1 REAL OUTPUT (quantity per year) PRICE LEVEL (average price) AD 2 Q F Q E P E
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Four Components of Aggregate Demand Consumption (C) Investment (I) Government spending (G) Net exports (X - IM) LO1
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Consumption  Consumption   expenditures are spending by  consumers on final goods and services. Consumer expenditures account for over two-thirds  of total spending. Most consumers spend most of whatever income they  have. Disposable income  is the after-tax income of consumers –  personal income less personal taxes. LO1
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Income and Consumption By definition, all disposable income is either  consumed (spent ) or saved (not spent). Saving   is that part of disposable income not spent on  current consumption; disposable income less  consumption. Disposable income = Consumption + Saving Y D = C + S LO1
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U.S. Consumption and Income DISPOSABLE INCOME (billions of dollars per year) $1000 2000 3000 4000 Actual consumer spending 6000 5000 4000 3000 2000 1000 0 5000 6000 7000 45° $7000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 1999 2000 CONSUMPTION (billions of dollars per year) C = Y D LO1
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Consumption vs. Saving Keynes described the consumption-income  relationship in two ways: As the ratio of  total  consumption to  total  disposable income. As the relationship of  changes  in consumption to  changes  in  disposable income. LO1
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Average Propensity to Consumption The   average propensity to consume   ( APC ) is total  consumption in a given period divided by total  disposable income. LO1
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Average Propensity to Save APS = 1 – APC LO1
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The  marginal propensity to consume   ( MPC ) is the  fraction of each additional (marginal) dollar of  disposable income spent on consumption. LO1
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chapter9 - AggregateDemand CHAPTER9 KeynesQuestions:

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