The document discusses key concepts in aggregate demand and demand-side stabilization policies according to the Keynesian model. It defines aggregate demand and its components. It then explains the Keynesian model's goal of using fiscal policy tools like government spending, taxation, to increase or decrease total demand and stabilize GDP and unemployment. The multiplier effect is discussed as how a change in spending can impact GDP multiple times through subsequent rounds of consumption. The relationships between income, consumption, savings, and how these determine the multiplier are also summarized.

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

8. Keynesian
model
A.K.A. Demand-side Stabilization
Policy

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

23. INVESTMENT
DEMAND

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

34. MACROECONOMIC EQUILIBRIUM

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
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64. THANK YOU!