aggregate demand

• Aggregate Demand

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Macroeconomics - Aggregate demand–aggregate supply

1 The AD-AS model has become the standard textbook model for

explaining the macroeconomy. This model shows the price level and level of real output given the equilibrium

in aggregate demand and aggregate supply. The aggregate demand

curve's downward slope means that more output is demanded at lower

price levels. https://store.theartofservice.com/the-aggregate-demand-toolkit.html

Aggregate demand

1 The aggregate demand curve is in fact downward sloping as a result of three distinct effects: Pigou effect|

Pigou's wealth effect, Keynes effect|the Keynes' interest rate effect and

the Mundell–Fleming model|Mundell-Fleming exchange-rate effect


Aggregate demand

1 The aggregate demand curve illustrates the relationship between two factors - the quantity of output

that is demanded and the aggregated price level


Aggregate demand

1 If the money supply was increased and thus aggregate demand increased, there would be a

movement up along the Long run aggregate supply curve. The cost of this is a permanently higher level of

prices. As a result of increase in aggregate demand, the economy will

gravitate toward the natural level more quickly.


Aggregate demand - History

1 First, he argued that with a lower ‘effective aggregate demand’, or the

total amount of spending in the economy (lowered in the Crash), the

private sector could subsist on a permanently reduced level of activity

and involuntary unemployment, unless there was active intervention


Aggregate demand - Components

1 An aggregate demand curve is the sum of individual demand curves for different sectors of the economy. The

aggregate demand is usually described as a linear sum of four

separable demand sources:



1 (Inventory accumulation would correspond to an excess supply of

products; in the National Income and Product Accounts, it is treated as a

purchase by its producer.) Thus, only the planned or intended or desired

part of investment ('Ip') is counted as part of aggregate demand



1 This shifts the aggregate demand curve to the left



1 In sum, for a single country at a given time, aggregate demand ('D' or

'AD') = 'C' + 'Ip' + 'G' + '(X-M)'.


Aggregate demand - Aggregate demand curves

1 Understanding of the aggregate demand curve depends on whether it

is examined based on changes in demand as income changes, or as

price change.


Aggregate demand - Aggregate demand-aggregate supply model

1 Sometimes, especially in textbooks, aggregate demand refers to an entire demand curve that looks like that in

a typical Marshallian demand|Marshallian supply and demand

diagram.


Aggregate demand - Aggregate demand-aggregate supply model

1 Carefully using ideas from the theory of supply and demand, aggregate supply can

help determine the extent to which increases in aggregate demand lead to increases in

real output (economics)|output or instead to increases in prices (inflation). In the diagram, an increase in any of the

components of 'AD' (at any given 'P') shifts the 'AD' curve to the right. This increases

both the level of real production ('Y') and the average price level ('P').


Aggregate demand - Debt

1 A Post-Keynesian theory of aggregate demand emphasizes the role of debt, which it considers a

fundamental component of aggregate demand;[http://www.debtdeflation.com/blogs/2009/12/01/debtwatch-no-41-december-2009-4-years-of-calling-the-gfc/ Debtwatch No 41, December 2009: 4 Years of Calling the GFC], Steve Keen, December 1, 2009 the

contribution of change in debt to aggregate demand is referred to by some as the

.[http://ssrn.com/paper=1595980 Credit and Economic Recovery: Demystifying Phoenix Miracles], Michael

Biggs, Thomas Mayer, Andreas Pick, March 15, 2010 Aggregate demand is spending, be it on consumption,

investment, or other categorieshttps://store.theartofservice.com/the-aggregate-demand-toolkit.html


1 Since write-offs and savings rates both spike in recessions, both of

which result in shrinkage of credit, the resulting drop in aggregate

demand can worsen and perpetuate the recession in a vicious cycle.



1 Indeed, a fall in the level of debt is not necessary – even a slowing in the rate of debt growth causes a drop in aggregate demand (relative to the higher borrowing year).However much you borrow and spend this year, if it is less than last year, it means your spending will go into

recession


Aggregate demand - Criticisms

1 Austrian School|Austrian theorist Henry Hazlitt argued that aggregate demand is a meaningless concept in economic analysis. Friedrich Hayek,

another Austrian, argued that Keynes' study of the aggregate

relations in an economy is fallacious, as recessions are caused by micro-

economic factors.


Effective aggregate demand

1 The aggregate demand curve is plotted with real gross domestic

product|real output on the horizontal axis and the price level on the

vertical axis



1 Aggregate demand is expressed contingent upon a fixed level of the

real versus nominal value (economics)|nominal money supply



1 According to the AD–AS model|aggregate demand-aggregate supply

model, when aggregate demand increases, there is movement up

along the aggregate supply curve, giving a higher level of

prices.Mankiw, N. Gregory, and William M. Scarth. Macroeconomics.

Canadian ed., 4th ed. New York: Worth Publishers, 2011. Print.


Pigou effect - Integration with Keynesian Aggregate Demand

1 Keynes argued that a drop in aggregate demand could lower employment and,

simultaneously, the price level; an occurrence observed in the deflationary Great depression|

depression). In the IS-LM framework of Keynesian economics, as formalized by John Hicks, a negative aggregate demand shock

would shift the LM curve left due to rising real wages changing liquidity preference. The Pigou effect would counterbalance this by shifting the IS curve right due to rising real balances raising

expenditures.https://store.theartofservice.com/the-aggregate-demand-toolkit.html

AD-AS model - Aggregate demand curve

1 The Aggregate demand curve AD, which is downward sloping, is derived from the IS/LM

model.


AD-AS model - Aggregate demand curve

1 The real money supply has a positive effect on aggregate demand,

as does real government spending (meaning that when the independent

variable changes in one direction, aggregate demand changes in the

same direction); the exogenous component of taxes has a negative

effect on it.


AD-AS model - Shifts of aggregate demand and aggregate supply

1 The following summarizes the exogenous events that could shift the

aggregate supply or aggregate demand curve to the right.

Exogenous events happening in the opposite direction would shift the

relevant curve in the opposite direction.


AD-AS model - Shifts of aggregate demand

1 The following exogenous events would shift the aggregate demand curve to the right. As a result, the price level would go up. In addition if the time frame of

analysis is the short run, so the aggregate supply curve is upward sloping rather than vertical, real output would go

up; but in the long run with aggregate supply vertical at full employment, real

output would remain unchanged.


AD-AS model - Shifts of aggregate demand

1 Rightward aggregate demand shifts emanating from the IS curve:


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aggregate demand components

aggregate demand d

aggregate demand history

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aggregated price level

active intervention