1. Aggregate Demand Macroeconomics 2

2. Aggregate Demand Economy without government and foreign trade: AD = C + I Economy with government and without foreign trade: AD = C + I + G Economy with government and without foreign trade: AD = C + I + G + X – Z AD - Aggregate Demand; C - Consumption; I – Investment; G – Government; X – Export; Z - Import

3. Equilibrium AD = Y Y –Income Economy without government and foreign trade: Y = C + I and Y = C + S S –Savings

4. Consumption C = C A + MPC Y C A - autonomous consumption, consumer wealth MPC - Marginal Propensity to Consume

5. Autonomous Consumption The part of consumption that is not financed by current income (consumption that does not depend on current income).

6. Marginal Propensity to Consume The fraction of additional income that households are going to spend on additional consumption. MPC = ΔC/ΔY

7. Consumption Function

8. Savings S = S A + MPS Y S A – autonomous savings MP s - Marginal Propensity to Save

9. Autonomous Savings The part of save that is not financed by current income (savings that does not depend on current income). C A = - S A

10. Marginal Propensity to Savr The fraction of additional income that households are going to spend on additional saving. MPS = ΔS/ΔY MPC + MPS =1

11. Savings Function

12. Investment Investment decisions of firms don’t depend on current state of economy. In that sense they are autonomous.

13. Investment Function

14. Aggregate Demand (AD) in economy without government and foreign trade Aggregate demand: sum of households’ and firms’ expenditures (for consumption and investments respectively) planned at various levels of current income.

15. Aggregate Demand (AD) in economy without government and foreign trade

16. The 45° Line At any point on the 45° line, the distance to the horizontal axis is the same as the distance to the vertical axis. The 45° line joins points at which AD (demand) equals Y (supply).

18. Equilibrium

19. Thank you!