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Group-4-Agregate-Demand-Edited-FINAL.pptx
- 1. GROUP 4: AGGREGATE DEMAND: SETTING THE STAGEFOR DEMAND-SIDE STABILIZATION CORPORATE FISCAL POLICY MASTER OF BUSINESS ADMINISTRATION (MBA)
- 2. GROUP 4: AGGREGATE DEMAND: SETTING THE STAGE FOR DEMAND-SIDE STABILIZATION CORPORATE FISCAL POLICY MASTER OF BUSINESS ADMINISTRATION (MBA) MAM JOSELYN T. MARQUEZ
- 3. Aggregate Demand: Setting the Stage for Demand-Side Stabilization.
- 4. Aggregate demand (AD) is a macroeconomic concept representing the total demand for goods and services in an economy. This value is often used as a measure of economic well-being or growth. Both fiscal policy and monetary policy can impact aggregate demand because they can influence the factors used to calculate it: consumer spending on goods and services, investment spending on business capital goods, government spending on public goods and services, exports, and imports. It is often the cause of multiple trilemmas.- economic decision-making theory
- 9. The Keynesian model • The model is a response to high unemployment during the Great Depression • The goal of the policy is to increase or decrease demand using govt. spending and taxation • Increased demand = increased GDP = lower unemployment
- 10. GDP AND UNEMPLOYMENT • If unemployment follows GDP; how can we manage GDP? • Keynes believed that any instability in any GDP would result in undesirable fluctuations . • Keynes looked at what was the most unstable.
- 11. GDP= C + I + G + Xn • Xn or F (foreign sector)—was seen as being too small to have an impact • G—Government sector is relatively stable over time (they set budgets) • C—Consumer sector is even more stable (wages are generally stable) • I—Investment sector seemed to be the most unstable. Why? • Changes in stock
- 12. fiscal policy • Keynes felt that only the government was large enough to offset any fluctuations in the investment sector • The government could use two tools: • Spending cuts/increases • Tax cuts/increases
- 13. Income vs. Consumption • We can say that real GDP is = to Yd because an income was received as a result of the production of those goods and services
- 14. Income vs. Consumption •The model shows us how much we consume at various levels of income
- 15. Income vs. Consumption •The economy is most efficient when all of our income is spent (the red, 45 degree line)
- 16. Income vs. Consumption • The intersection of the two curves shows the level of productivity that is ideal for the economy • Keynes would use fiscal policy to target this level of GDP
- 17. Income-Consumption and Income- Savings Relationship • Savings is always (Yd) income – consumption --->Therefore S+C=1 • APC—Average propensity to consume --->Tells us what percentage of our disposable income is spent APC= Consumption/Income
- 18. Income-Consumption and Income- Savings Relationship • APS—Average propensity to save --->Tells us what percentage of our disposable income is saved APS= Saving/Income
- 19. Income-Consumption and Income- Savings Relationship •MPC—Marginal propensity to consume --->It is the additional consumption spending from an additional dollar of income --->Tells us the change in consumption due to a change in income. MPC= Change in consumption/Change in income
- 20. Income-Consumption and Income- Savings Relationship •MPS—Marginal propensity to save --->Tells us the change in saving due to a change in income MPS= Change in savings /Change in income
- 21. The consumption function • C= a + b x Yd • C=consumption • a=autonomous consumption • b=marginal propensity to consume • Yd=disposable income
- 22. The relationship between interest rates and investment (I) • A business will only invest if the marginal benefit is greater than the marginal cost (paid in interest) • Investment demand curve: • As interest (the price of borrowing $) goes up, investment demand goes down • As interest goes down, investment demand goes up
- 24. Determinants that shift investment demand • Maintenance/operating costs • ->A decrease in these costs increase the expected rate of return on investment shifting investment demand to the right • Business taxes • ->Reductions in govt. taxes increases expected profitability of investments, increasing investment demand • Technological change • ->stimulates investment • Stock of Capital Goods • Expectations • ->Future sales, operating costs, profits, etc.
- 25. THE MULTIPLIER EFFECT • When a change in spending changes GDP by more than the initial change • One person’s spending becomes another’s income • How much does a given change in spending impact GDP? • The multiplier of course! Multiplier = Change in real GDP/ Initial change in spending
- 26. THE MULTIPLIER EFFECT • By rearranging the equation, we can also say that: • Change in GDP = multiplier X initial change in spending
- 27. THE MULTIPLIER EFFECT • You can also find the multiplier if you know MPC: • Only for government and investment spending Multiplier =_____1_____ Multiplier = ___1___ 1 - MPC or MPS
- 28. THE MULTIPLIER EFFECT • The tax multiplier is used for determining the impact of a tax on GDP (it’s different from the investment and government spending multipliers): Tax multiplier= __-MPC__ OR Tax multiplier= ____- MPC___ [1-MPC] MPS
- 30. GROUP 4: AGGREGATE DEMAND: SETTING THE STAGEFOR DEMAND-SIDE STABILIZATION CORPORATE FISCAL POLICY MASTER OF BUSINESS ADMINISTRATION (MBA) MR. MERWIN G. SAN MIGUEL
- 49. GROUP 4: AGGREGATE DEMAND: SETTING THE STAGEFOR DEMAND-SIDE STABILIZATION CORPORATE FISCAL POLICY MASTER OF BUSINESS ADMINISTRATION (MBA) MAM VENICE MAYBELYN AGUIRRE
- 54. Remember, the following components make up aggregate demand: C = Consumption spending I = Investment spending G = Government spendin X-M = Net Exports - exports minues imports
- 56. WHEREIN: AGGREGATE DEMAND COMPONENTS AND RELATIONSHIPS ARE: WEALTH (Consmption and Investment) INTEREST RATES ( Government) INTERNATIONAL ( Net Exports , X-M)
- 59. • Notice on the graph that as the price level rises, the aggregate supply— quantity of goods and services supplied—rises as well. Why do you think this is? • The price level shown on the vertical axis represents prices for final goods or outputs bought in the economy, not the price level for intermediate goods and services that are inputs to production. The AS curve describes how suppliers will react to a higher price level for final outputs of goods and services while the prices of inputs like labor and energy remain constant. • If firms across the economy face a situation where the price level of what they produce and sell is rising but their costs of production are not rising, then the lure of higher profits will induce them to expand production.
- 62. TO EASILY GRASP THE CONCEPT: AGGREGRATE SUPPLY STARTING POINT AGGREGATE DEMAND STARTING POINT EQUILLIBRIUM POINT PL = 70 REAL GDP = 400 ----------------------- ------- 100 200 300 400 500 100 200 300 400 500 100 200 300 400 500 95 90 85 80 75 70 65 60 95 90 85 80 75 70 65 60 95 90 85 80 75 70 65 60
- 64. THANK YOU!
Editor's Notes
- Aggregate demand measures the total amount of demand for all finished goods and services produced in an economy. Aggregate demand is expressed as the total amount of money spent on those goods and services at a specific price level and point in time. Aggregate demand consists of all consumer goods, capital goods, exports, imports, and government spending.
- Aggregate demand is a macroeconomic term and can be compared with the gross domestic product (GDP). GDP represents the total amount of goods and services produced in an economy while aggregate demand is the demand or desire for those goods. Aggregate demand and GDP commonly increase or decrease together.
- Macroeconomic equilibrium occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied at the point of intersection of the AD curve and the AS curve. If the quantity of real GDP supplied exceeds the quantity demanded, inventories pile up so that firms will cut production and prices.
- Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending—consumption, investment, or government expenditures—cause output to change. If government spending increases, for example, and all other spending components remain constant, then output will increase.
- Neoclassical growth theory outlines the three factors necessary for a growing economy. These are labor, capital, and technology. However, neoclassical growth theory clarifies that temporary equilibrium is different from long-term equilibrium, which does not require any of these three factors.
- Aggregate demand equals GDP only in the long run after adjusting for the price level. Short-run aggregate demand measures total output for a single nominal price level without adjusting for inflation. Other variations in calculations can occur depending on the methodologies used and the various components.
- Aggregate demand consists of all consumer goods, capital goods, exports, imports, and government spending programs. All variables are considered equal if they trade at the same market value.
- PL – Price level Income and Wealth As household wealth increases, aggregate demand typically increases. Conversely, a decline in wealth usually leads to lower aggregate demand. When consumers are feeling good about the economy, they tend to spend more and save less.