Page 89 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes 4.4 Summary

Keynes in his arguments dropped the microeconomic principles of the supply and demand
as they did not apply at the national level.

In national level, Keynes said, the consumption of the nation will also affect their income.
He formulated his analysis for the closed economy with no government, but the theory
could be extended.
So all income is either spent or saved. Y=C+S, whereas the income of the nation will be the
investment expenditure + consumption. Y=C+I, it follows that the country is in equilibrium
if S=I, but this is just stating an identity.
In practice the time lags are involved and C+S comes from the previous time period,
whereas C+I forms the income for the next period.
The aggregate demand curve shows the total demand for goods and services in an economy.
By defining the aggregate demand curve in terms of the price level and output or income,
it is possible to analyze the effects of other variables, like the interest rate, on aggregate
demand through the aggregate demand equation.
The aggregate supply curve represents the total supply of goods and services in an economy.
By defining the aggregate supply curve in terms of the price level and output or income,
we can analyze the effects of other variables, such as the interest rate, on aggregate supply.
Aggregate supply and aggregate demand show the effects of economic changes on the
economy as a whole.

4.5 Keywords

Aggregate Demand: It is the total demand for final goods and services in the economy (Y) at a
given time and price level.
Aggregate Supply: It is the total supply of goods and services produced by a national economy
during a specific time period.
Consumption Function: A relationship between consumption demand and its various
determinants.

Effective Demand: The demand in which the consumer are able and willing to purchase at
conceivable price.
Investment: An asset or item that is purchased with the hope that it will generate income or
appreciate in the future.
Marginal Propensity to Consume: An economic term for the amount that consumption changes
in response to an incremental change in disposable income.
Paradox of Thrift: Economic concept that if everyone tries to save an increasingly larger portion
of his or her income, they would become poorer instead of richer.
4.6 Review Questions

1. Explain the concept of Planned Aggregate Expenditure and its components.
2. Describe the Consumption Function. Explain by using graph.
3. Describe the Saving Function? Explain by using graph.

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