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1
Aggregate Demand
AD refers to the effective demand that is equal to the actual expenditure.
Aggregate effective demand refers to the aggregate expenditure of an
economy in a specific time frame.
2
Aggregate Demand
•C = a + bY
•Where, a = constant (representing consumption when income is zero)
•b = proportion of income consumed = ∆C/∆Y
Aggregate Demand
AD = C+I
Expenditure
Income
Aggregate Supply
5
Aggregate Supply
Expenditure
AS= C+S
450
Income
Equilibrium- Income, consumption and savings
relationship
Y = C+S
Expenditure
At equilibrium, AS = AD
C+S = C+I C
S=I E
Dissaving, when AD is greater than
AS
Saving, when AD is less than AS
Saving
O Y
Income
Equilibrium- Income Determination
Expenditure
Y = C+S
At equilibrium, AS = AD
C+I
C+S = C+I
S=I 100
E
Dissaving, when AD is greater than
AS
Saving, when AD is less than AS
O 200
Income
Determination of Equilibrium Level of Income
9
Equilibrium- Income Determination
Expenditure
Equilibrium Y = C+S
At equilibrium, AS = AD
C+I
C+S = C+I
S=I 100
Dissaving, when AD is greater than
AS
Saving, when AD is less than AS
O 200
Income
Equilibrium- Change in AD
Expenditure
Equilibrium Y = C+S
At equilibrium, AS = AD
C+I+ ∆I
C+S = C+I
S=I 100
Dissaving, when AD is greater than C+I
AS
Saving, when AD is less than AS
O 100 200
Income
Summary
Equilibrium is achieved at less than full employment level
Keynes argued that adequate economic stimulus to shift the AD upwards
can be created through:
Monetary Policy: A reduction in interest rates
Fiscal Policy: A rise in government expenditure
However, monetary policy is ineffective during recession as interest rate is
already low
Hence, expansionary fiscal policy is more effective where government
expenditure can be increased
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