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    Ad as 0810 Ad as 0810 Presentation Transcript

    • Aggregate Demand and Aggregate Supply Session-4
    • Aggregate Demand
      • Other things equal, the amount consumers are willing to buy at a given price level
      • Total demand for goods and services for a given price level
    • Components of Aggregate Demand
      • Consumption Demand (C )
      • Investment Demand (I )
      • Government expenditure (C and I by Government)
      • Net Exports (X) minus Imports (M)
      • Aggregate Demand thus made of
        • Private Sector spending
        • Government sector spending
        • External sector spending
      • This spending happens on
        • Consumption Goods and Services
        • Investment Goods and Services
    • Consumption Demand
      • Aggregate expenditure on Current Consumption of final goods and services.
      • Expressed as a positive relation between Aggregate Consumption and Disposable Income
    • Marginal Propensity to Consume (MPC)
      • Change in consumption expenditure in response to change in disposable income
    • Disposable Income
      • Divided into
        • Consumption
        • Savings
      • 1 – MPC will give us the marginal propensity to save (MPS)
        • MPS highlights the level of saving in the economy
    • Aggregate Consumption Expenditure
      • Desire to have a smooth consumption throughout our lifetime
      • Lifetime consumption path depends on lifetime income
        • Income we receive from our work
        • Income we expect to receive from our wealth
      • Distinction between Permanent and Transitory Income
      • Savings
      • People try to maintain highest smooth consumption path they can get
      • Derived from people’s expectations about permanent lifetime income both from work and wealth
      • Current and past income from wealth and work play an important role in people’s expectations about lifetime income.
    • Fluctuations in Consumption demand
      • Changes in real disposable income
      • Changes in personal tax rates
      • Changes in Interest rates
      • Erosion of wealth due to unexpected happenings.
    • Investment Demand
      • Aggregate Investment Expenditure is for purchase of new assets which will help in production of future goods and services.
        • Purchase new machinery
        • Expenditure on setting up of new plant
    • Capital Stock
      • Rupee value of new plants, capital equipment, machinery etc. at a given point of time.
      • Change in capital stock over a period of time constitutes investment.
    • Importance of investment demand
      • Subject to wider fluctuations and hence more volatile than consumption demand.
      • Affects production capacity and thus the long term growth potential of the economy.
    • Determinants of Aggregate Investment Spending
      • Expected permanent increase in output
        • Based on current trends
      • Investment in capital stock happens if the investors feel that they can sell more at a later date.
      • Costs of machinery and expected benefits
      • Determinants of Costs
        • Interest rates
        • Depreciation
      • Determinants of benefits of investment
        • Expected growth in output
      • Given a rental cost of capital , higher the expectations about future output growth, higher would be the demand for investment
      • Given a level of expectation about output growth, the lower the rental cost of capital, the larger would be the demand for investment and vice versa