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

Flossy''s budget constraint, Flossy has a quasi-linear utility function, 16...

Flossy has a quasi-linear utility function, 16q1^0.5 + q2. The price of good 1 is fixed at one. Thus, Flossy's budget constraint is q1 + p2q2 =Y, where Y denotes income. 6.1 Compu

Relationship between the interest rate and the bond price, Relationship bet...

Relationship between the interest rate and the bond price Note that the higher the issue price, the lower the interest rate. In the same way, when the price of a government bon

Mulitplier, Hello, I am having difficulty in understanding what multiplier ...

Hello, I am having difficulty in understanding what multiplier is.

Explain quantity supplied and supply, What is the difference between 'quant...

What is the difference between 'quantity supplied' and 'supply'?  There is a distinction among supply and quantity supplied. Supply explains the behavior of sellers at every pr

NATIONAL INCOME VARIATION, give and explain the different causes of nationa...

give and explain the different causes of national income variation

MARKET, COMPARE AND CONTRAST KEYNESIAN THEORY AND CLASSICAL MODEL

COMPARE AND CONTRAST KEYNESIAN THEORY AND CLASSICAL MODEL

Ricardian model, a) There is a general trade, and sometimes prominent as in...

a) There is a general trade, and sometimes prominent as in case of UK, Canada, and Europe. When the tariff rates are showing an upward trend, the trade/GDP ratio is either declinin

Describe exports and imports in as-ad model, Q. Describe Exports and import...

Q. Describe Exports and imports in AS-AD model? Exports and imports. This is more difficult to justify owing to exchange rate. Suppose that we have a flexible exchange rate a

Calculate asset turnover, The following information has been extracted from...

The following information has been extracted from the recently published accounts of Noddy Plc:                           Balance sheet as at 31 st May

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