Output Determination Aggregate Demand and Aggregate Supply

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Output DeterminationAggregate Demand and
Aggregate Supply
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The consumption and savings function

• CONSUMPTION FUNCTION
• relationship between consumption and income
• slope cMARGINAL PROPENSITY TO CONSUME

• SAVINGS FUNCTION
• relationship between consumption and income
• SlopecMARGINAL PROPENSITY TO SAVE

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45-Degree Guideline

• Assumption prices in economy are given and
  constant
• 45o line means, that the value of income equals
  to the value of spending
• at point E, the quantity of goods supplied
  equals to the quantity demanded at given level
  of prices

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The Multiplier

• a number by which the change in investment must
  be multiplied in order to determine the resulting
  change in total output
• larger that 1 because any given change in
  investment demand sets off further changes in the
  quantity of consumption goods demanded

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Multiplier example MPC 0,75
Step Income Expenditure Expenditure
1 100 investment
2 100 75 consumption
3 75 56,25 consumption
. . . .
. . . .
x 400 total
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AGREGATE DEMAND

• the amount of final products that will be
  demanded in given year by all economic
  participants
• describes a relationship between and INDEX of
  prices and an AGREGATE of the final products
  demanded in a nation instead of a relationship
  between the price and quantity of a single good
• AD curve a graph that shows how the amount of
  aggregate domestic production demanded, measured
  by real GDP will vary with the price level

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Change in AD
Factors of change increase in AD
Real interest rates decrease
The quantity of money in circulation Increase
An exchange rate Depreciation
A level of wealth Increase
Government purchases Increase
Tax rates decrease
Government transfers Increase
Expectations about the future Improved
Income and other economic condition in foreign nations Higher income improvements in economic conditions
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Reasons for the inverse relationship between the
aggregate quantity demanded and the price level

1. the real wealth effect
2. the real interest rate effect
3. the foreign trade effect

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AGGREGATE SUPPLY

• how much products and services are sellers
  willing and able to produce in a given year
• CHANGES IN AS
• - changes in input prices (without affecting
  potential real GDP)
• - changes in quantity and/or productivity of
  inputs (impact on potential real GDP)

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SEGMENTS OF THE AS

• classical approach AS is vertical (assumes
  fully flexible prices)
• keynesians approach upward sloping AS (assumes
  that the prices are rigid )
• neokeynesians approach combines classical and
  keynesians model cstrictly distinguish short-and
  long term AS curve

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MACROECONOMIC EQUILIBRIUM the aggregate
quantity demanded equals the aggregate quantity
supplied

• INFLATIONARY GDP GAP
• can increase in AD puts upward pressure on
  equilibrium real GDP and the price level

• RECESSIONARY GDP GAP
• ca decrease in AD can result in a decrease in
  equilibrium real GDP

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• Examples
• Assuming MPC 0,5 what sort of initial change
  in investment should occur, in order to increase
  output by 1000 mld. EUR?
• Assuming, that investment demand has increased by
  1000 mld EUR. MPC is constant at level of 80 .
  Calculate the multiplier and enumerate the
  resulting change in output. What will happen, if
  MPS increases to 50 in economy?

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• Use the following items to calculate
• Personal consumption expanditure
• Gross private domestic investment
• Net export
• GNP
• NNP
• Expenditure on durable goods 388,3
• Expenditure on non-durable goods 932,7
• Expenditure on services 1441,3
• Fixed investment 675,1
• Change in business inventories 11,4
• Government expenditure 865,3
• Exports 373
• Imports 478,7
• Depreciation 455,1

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• Explain impacts of following situations on ASxAD
• The government has decreased the tax rate
• An import of substitutes from foreign countries
  is banned
• The government has increased the amount of final
  products purchased
• The government has decreased social pensions
• Economic participants expect economic growth
• Increase in nominal wages without being followed
  by increase in productivity of labour