Aggregate demand in the cross model, Macroeconomics

Assignment Help:

Aggregate demand in the cross model

Because C and Im depends positively on Y while G, I and X are exogenous, aggregate demand YD will depend positively on Y: 

YD(Y) = C(Y) + I + G + X - Im(Y)

When Y increases, C and Im increases though since C increases more than Im, aggregate demand would increase when Y increases.  

You may react to the notation YD(Y). Though if you think of Y as the national income (GDP = national income) then YD(Y) basically tells us that aggregate demand depends on income. Aggregate demand is the total quantity of finished services and goods that all sectors (government, consumers, firms and rest of the world) together wish to buy under different conditions. Notation YD(Y) tells us that only endogenous variable which affects aggregate demand is national income. The higher the income, the more we wish to buy. YD, C, Im, S, SH, SG, SR and NT all rely on Y whereas I, G and X are exogenous. We can explain this using the following diagrams. 

1898_Aggregate demand in the cross model.png

Figure: Aggregate demand and its components

Every diagram has real GDP on the x-axis. 

  • First diagram demonstrates exports (X), imports (Im), net exports (NX) and rest of the world savings (SR). In this figure, X = 1.3 and Im = 0.56 + 0.2Y.
  • Second diagram illustrates private consumption (C), investment (I), government spending (G), net exports (NX) and aggregate demand (YD = C + I + G + NX). Here, C = 0.22 + 0.4Y, I = 0.5, G = 0.7.
  • Third diagram shows private savings (SH), public savings (SG), rest of the world savings (SR) and total savings (S = SH + SG + SR). They are created from NT = 0.26Y.

This figure précises all variables in the cross model and how they rely on Y. Essentially these dependences will be the same in all of the Keynesian models.


Related Discussions:- Aggregate demand in the cross model

Economic incidence of the tax on the consumers price, Suppose the demand fo...

Suppose the demand for bread is D(p), where dD/dp Illustrate equilibrium with price on the Y-axis and quantity on the X-axis in which the t > 0. Show the economic incidence

Classical labour market, A rise in the real wage will bring a decrease in t...

A rise in the real wage will bring a decrease in the quantity demanded of labor because of diminishing returns in production. As more and more labor is employed, it is increasingly

Cross-price elasticity of demand, You are the manager of a firm that receiv...

You are the manager of a firm that receives revenues of $50,000 per year from product X and $80,000 per year from product Y. The own price elasticity of demand for product X is -3,

Compute the lost social welfare, Consider a market where supply and demand ...

Consider a market where supply and demand are given by QXS = -18 + PX and QXd = 90 - 2PX. Suppose the government imposes a price floor of $41, and agrees to purchase any and all un

How central banks increase the monetary base, How central banks increase th...

How central banks increase the monetary base When the Central Bank cuts the target rate, they must simultaneously increase the monetary base by buying government securities. The

GDP, Whenever real GDP declines, nominal GDP must also declin

Whenever real GDP declines, nominal GDP must also decline

Purchasing Power Parity, Assume that a Mazda 2 sells for 16,000 Australian ...

Assume that a Mazda 2 sells for 16,000 Australian dollars in Australia and 10,000 Canadian dollars in Canada If purchasing-power parity holds, what is the Canadian dollar/Australia

Determine a decrease in lump sum taxes, Using Simple Keynesian Model, discu...

Using Simple Keynesian Model, discuss the effect of the following: a) An increase in govt. expenditure. b) A decrease in lump sum taxes. In this context compare the govt.

Project of introducing a new product in africa, How to prepare a a project...

How to prepare a a project on a new product in africa.

Federal communications commission, A few years ago, the Federal Communicati...

A few years ago, the Federal Communications Commission (FCC) eliminated a rule that required Baby Bells to provide rivals access and discounted rates to current broadband facilitie

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd