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chapter+7+agg+demand+Aug+2009 - 1 Macroeconomics as a...

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1 Macroeconomics as a Second Language Chapter 7 (13): Aggregate Demand Martha L. Olney [email protected] August 2009 Aggregate demand is the sum of spending by four different groups: consumption spending by households, investment spending by businesses, government spending by government agencies, and net spending for our exports by the rest of the world. This chapter provides an overview and then sets out the determinants of each of these four components of aggregate demand. Key terms and concepts $ Aggregate Demand $ Consumption Spending $ Goods $ Durable Goods $ Nondurable Goods $ Services Chapter 7 (13): Aggregate Demand (v.1 August 2009) Page 1 of 53
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$ Investment Spending $ Fixed Investment $ Equipment $ Producer Durable Goods $ Construction $ Residential Structures $ Nonresidential Structures $ Government Spending $ Government Purchases of Goods and Services $ Government Consumption Expenditures and Gross Investment $ Federal Agencies $ State and Local Agencies $ Government Consumption Expenditures $ Government Gross Investment $ Transfer Payments $ Net Exports $ Exports $ Imports Chapter 7 (13): Aggregate Demand (v.1 August 2009) Page 2 of 53
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$ Final Goods $ Intermediate Goods $ Wealth $ Assets $ Liabilities $ Financial Assets $ Real Assets $ Interest Rates $ Availability of Credit $ Consumer Expectations $ Consumption Function $ Consumption Function $ Linear Consumption Function $ Marginal Propensity to Consume $ Mpc $ Slope $ Marginal Propensity to Save $ Mps Chapter 7 (13): Aggregate Demand (v.1 August 2009) Page 3 of 53
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$ Average Propensity to Consume $ Average Propensity to Save $ Apc $ Aps $ Personal Saving Rate $ Saving Rate $ Lump-sum Taxes $ Proportional Tax $ Tax Base $ Income Tax $ Movement along $ Shift $ Capital $ Expected Rate of Return on Capital $ Investment Decision Rule $ External Finance $ Internal Finance $ Opportunity Cost Chapter 7 (13): Aggregate Demand (v.1 August 2009) Page 4 of 53
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$ Investment Demand Curve $ Optimism $ Pessimism $ Exogenous $ Exchange Rates $ Appreciation $ Rise of the Dollar $ Depreciation $ Fall of the Dollar Key equations $ AD = C + I + G + NX $ C = a + b*YD $ YD = Y + TR - TA = Y - T Key graphs $ Consumption Function $ Investment Demand Curve Chapter 7 (13): Aggregate Demand (v.1 August 2009) Page 5 of 53
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An Overview of the Four Types of Spending The four types of spending in the macroeconomy are consumption, investment, government, and net export spending. In this section, we look at the composition of each type of spending and its contribution to total or aggregate demand . Consumption Spending Consumption spending is spending by households for final goods and services. Goods are tangible things you can touch and include both durable goods and nondurable goods . Durable goods are goods that last, on average, 3 years or more. Nondurable goods are those that last, on average, less than 3 years. Examples of durable and nondurable goods are: Durable goods Nondurable goods Automobiles Food & Restaurant Meals Furniture Clothing & Shoes Household Appliances Gasoline & Fuel Oil Services are intangibles – things that exist but can’t be touched. Examples of services purchased by households include: Services Chapter 7 (13): Aggregate Demand (v.1 August 2009) Page 6 of 53
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