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(Components (AD = C + I + G + (X-M)), Factors affecting Consumption,…
Components (AD = C + I + G + (X-M))
Consumption (C)
Investment (I)
Government spending (G)
Exports (X)
Imports (M)
Factors affecting Consumption
Disposable income
Wealth
Interest rates
Consumer confidence
Taxation
Factors affecting Investment
Interest rates
Business confidence
Demand
Technology
Government incentives
Phases
Boom
Recession
Trough
Recovery
Withdrawals (W) & Injections (J)
Injections: I + G + X
Withdrawals: S + T + M
Equilibrium: J = W
Equilibrium
AD intersects 45° line
If AD > Y: inventories fall → output rises
If AD < Y: inventories rise → output falls
Causes
AD shocks
Supply shocks
Multiplier & accelerator interaction
Keynesian
Market can fail to clear
Unemployment can persist
Need government intervention
Classical
Markets clear automatically
Full employment in long run
Laissez-faire
9. Unemployment in Keynesian Model
Demand-deficient unemployment
Lack of AD
Solved by increasing AD
Equilibrium National Income
Equilibrium where AD = AS
Keynesian AS curve: horizontal until full employment, then vertical
Formula
k = 1 / (1 - MPC)
k = 1 / (MPS + MPT + MPM)
Relationship
Increase in Y → large increase in I
Decrease in Y → fall in investment
Deflationary Gap (recessionary)
Equilibrium income < full employment income
Unemployment, unused capacity
Inflationary Gap
Equilibrium income > full employment income
Excess demand → inflation
Factors affecting size
MPC, MPS, MPT, MPM
45° line
AD = Y
Income Determination
1. Keynesian Model Basics
2. Aggregate Demand (AD)
Definition
Total demand for goods & services in an economy
3. Multiplier Effect 乘数效应
Definition
Change in national income from a change in injection
4. Accelerator Theory
Definition
Investment depends on change in income
5. Keynesian 45° Diagram
6. Inflationary & Deflationary Gaps
7. Business Cycle
8. Keynesian vs Classical Views