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Components of aggregate deman1

Components of aggregate deman1 - spend after taxes The...

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Components of aggregate demand The first piece of the aggregate demand equation is Y. This represents output or income. Because Y is the total amount of goods and services purchased by consumers, businesses, and the government, taking into account foreign trade, it is necessarily the output for the economy. This number is also the gross domestic product of an economy. Because every unit of output within an economy turns into income for members of the economy, it is reasonable to call output income. More specifically, the output of an economy is the national income for the economy. The per capita income is the national income for the economy divided by the population. This number is useful for comparing the standard of living across countries. All of this information directly results from the aggregate demand equation. The second piece of the aggregate demand equation is C(Y - T). This signifies that consumption is a function of disposable income. Disposable income is the money that consumers have left to
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Unformatted text preview: spend after taxes. The function for consumption is aggregated across all consumers and thus is applicable for all incomes and tax brackets. Consumption captures spending by households on goods and services. Examples include purchasing food, movie tickets, and vacations. The third piece of the aggregate demand equation is I(r). This signifies that investment spending is a function of the real interest rate. That is, as the real interest rate increases, investment spending falls because the cost of borrowing money increases. The real interest rate is simply the nominal interest rate as published in the media corrected for expected inflation. When firms consider investment spending, they routinely take into account the nominal interest rate, inflation, and the real interest rate. Examples of investment spending include machinery, buildings, education, and new housing....
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