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Aggregate Expenditure and Demand (Investment (Non-income determinants of…
Aggregate Expenditure and Demand
Consumption
Consumption Function
The relationship between consumption and income
The
DI
is independent variable (x-axis) and
C
is dependent variable (y-axis) --> both are
flow variables
The Consumption function also depends on "Net wealth, price level, interest rate, expectation
Stock market
boom
--> all the price in stock increase--> household becomes more wealth--> cause the consumption function
up
Increase in price level
--> household want to hold money--> Consumption
shift down
Higher
interest rate--> save more gain more reward--> Consumption
shift down
Marginal Propensity to consume(MPC)
The slope of consumption function
Investment
Investment demand curve
Negative
relationship between
interest rate
(dependent y-axis) and the
quantity of investment spending
(independent x-axis)
There is
no correlation
between
income and investment spending
Non-income determinants of investment
Market Interest rate
If the
interest rate increase
[because the cost of borrowing increase]--> cause the opportunities of investment increase-->
Investment Function shift down
Business Expectations
If firms become more
pessimistic (negative)
about their profit prospects, perhaps expect the worst, investment function
shift down
If firms become more
rosier( positive )
about their profit prospects, perhaps expect the worst, investment function
shift up
Government Spending and Net export
Government purchases and Net tax
do not
depend on income
Aggregate expenditure = Real GDP
Aggregate expenditure is
greater than
Real GDP
Inventories(storage) start to fall and send signal to firm to
increase production
Aggregate expenditure is
less than
Real GDP
Extra output added to inventories and send signal to firm to
decrease production
Spending Multiplier
1/(1-MPC)
Aggregate Demand
When P level
rise
Less wealth of household-->
consumption spending fall
connect the point is the AD curve
When Investment spending
increase
Consumption spending
rise
The overall price level do not change,
Shift the AD curve
directly