Please enable JavaScript.

Coggle requires JavaScript to display documents.

AGGREGATE EXPENDITURE MODEL (KEYNESIAN MODEL (Planned Investment (Ip)…

- - - - autonomous consumption
        
        consumption on necessities*, as it is independent to changes in disposable income**
      - induced consumption
        
        discretionary consumption. induced consumption increases as disposable income increases
      - marginal propensity to consume (MPC)
        
        extra consumption undertaken as a result of *receiving extra income
      - C=Y
        
        shows all points where consumption equals income
        
        if consumption line is above 45 degress, consumption
        expenditure is greater than income + household are dis-saving
        
        if consumption line is below 45 degrees, consumption expenditure is less than income + households are saving
      - EQUILIBRIUM!!
        
        the household sector is in equilibrium at income level Y1 where the consumption function and the 45 degrees line intersect
      - FORMULA: C = AUTONOMOUS CONSUMPTION (a) + INDUCED CONSUMPTION (bY)
        
        b - marginal propensity to consume
        Y - disposable income
      - FORMULA (SAVINGS FUNCTION): S = -a + (1-b)Y
      - FACTORS
        
        disposable income
        the more sales after income*, the higher the consumption spending**
        
        interest rates
        the higher the rate of interest, the bigger the rewards for savings + the more expensive it becomes to finance consumption purchase
        
        inflation
        if consumer expects price to increase = consumers will purchase instantly
        
        wealth and debt
        rise in share prices / house prices increase household wealth consumption expenditure may rise
        
        higher level of debt may lead households to reduce consumption
        
        expectation and consumer confidence
        the higher the level of consumer confidence and expectation, the higher the level of consumption
  - - - WHY INVESTMENT IS MORE VOLATILE THAN CONSUMPTION?
        1) Investment is riskier and unpredictable
        2) much of consumption is non-discretionary (spending on necessities)
        3) profits are a major determinant on investment and are highly variable
      - assume all investments are autonomous
      - level of investment spending does not vary with level of income
    - - real interest rates
      - profitability
      - expectations and confidence
      - government policies
  - - - shocks (natural disasters, war)
      - demographic (aging population)
      - health care cost
      - level of tax revenue
      - political stance