Output Determination Aggregate Demand and Aggregate Supply

1. Output DeterminationAggregate Demand and Aggregate Supply

2. CONSUMPTION FUNCTION relationship between consumption and income slope čMARGINAL PROPENSITY TO CONSUME SAVINGS FUNCTION relationship between consumption and income SlopečMARGINAL PROPENSITY TO SAVE The consumption and savings function

3. 45-DegreeGuideline • Assumption: prices in economy are given and constant • 45o line means, that the value of income equals to the value of spending • at point E, the quantity of goods supplied equals to the quantity demanded at given level of prices

4. The Multiplier • a number by which the change in investment must be multiplied in order to determine the resulting change in total output • larger that 1 because any given change in investment demand sets off further changes in the quantity of consumption goods demanded

5. Multiplier – example MPC = 0,75

6. AGREGATE DEMAND • the amount of final products that will be demanded in given year by all economic participants • describes a relationship between and INDEX of prices and an AGREGATE of the final products demanded in a nation instead of a relationship between the price and quantity of a single good • AD curve = a graph that shows how the amount of aggregate domestic production demanded, measured by real GDP will vary with the price level

7. Change in AD

8. Reasons for the inverse relationship between the aggregate quantity demanded and the price level • the real wealth effect • the real interest rate effect • the foreign trade effect

9. AGGREGATE SUPPLY • how much products and services are sellers willing and able to produce in a given year • CHANGES IN AS: - changes in input prices(without affecting potential real GDP) - changes in quantity and/or productivity of inputs (impact on potential real GDP)

10. SEGMENTS OF THE AS • classical approach –AS is vertical (assumes fully flexible prices) • keynesians approach –upward sloping AS (assumes that the prices are rigid ) • neokeynesians approach – combines classical and keynesians model čstrictly distinguish short-and long term AS curve

11. RECESSIONARY GDP GAP: ča decrease in AD can result in a decrease in equilibrium real GDP INFLATIONARY GDP GAP čan increase in AD puts upward pressure on equilibrium real GDP and the price level MACROECONOMIC EQUILIBRIUM= the aggregate quantity demanded equals the aggregate quantity supplied

12. Examples: • Assuming MPC = 0,5;what sort of initial change in investment should occur, in order to increase output by 1000 mld. EUR? • Assuming, that investment demand has increased by 1000 mld EUR. MPC is constant at level of 80 %. Calculate the multiplier and enumerate the resulting change in output. What will happen, if MPS increases to 50 % in economy?

13. Use the following items to calculate: • Personal consumption expanditure • Gross private domestic investment • Net export • GNP • NNP • Expenditure on durable goods 388,3 • Expenditure on non-durable goods 932,7 • Expenditure on services 1441,3 • Fixed investment 675,1 • Change in business inventories 11,4 • Government expenditure 865,3 • Exports 373 • Imports 478,7 • Depreciation 455,1

14. Explain impacts of following situations on ASxAD • The government has decreased the tax rate • An import of substitutes from foreign countries is banned • The government has increased the amount of final products purchased • The government has decreased social pensions • Economic participants expect economic growth • Increase in nominal wages without being followed by increase in productivity of labour