Aggregate demand and its components Essay Example | Topics and Well Written Essays - 1250 words

heap up demand and its components - Essay manakinThis essay is an attempt to figure verboten the constituents of store up demand and how they interact to determine the national income. The primary(prenominal) focus of this essay is Keynesian economics and how aggregate demand is determined in Keynesian economics. A basis proposition of Keynesian theory is that the equilibrium level of income and output depends on the economys aggregate spending for output. If aggregate spending is excessive, it results in inflation. My goal in this essay is to figure out how national income is determined through aggregate demand and what is the impact of aggregate demand on other major macro economic variables. Introduction In national income determination, aggregate demand plays a life-sustaining role. The first major objective of any economy is to add-on and sustain its national income, an analysis of aggregate demand is very important. By controlling the aggregate demand, you can control th e major economic variables. Aggregate demand is the total demand in an economy for all the goods and services produced. It consists of Consumption expending, Investment phthisis Government expenditure Net export Aggregate demand = C+ I+ G+ (X-M) The followers sections analysis each of these variables in detail Consumption Expenditure Consumption expenditure depends on the legitimate income of the house hold. An increase in the real income of the household leads to an increase in the consumption expenditure and a reduction in the real income of the household results in a reduction in consumption expenditure. ... tion expenditure, Keynes gave antecedency to consumption function which is a mathematical function showing the relationship between consumption expenditure and income. As income increases, people set aside a portion of their income for their future needs. In other words, as income increases, nest egg also increase. Even though the consumption increases as the income in crease, the rate of increase is less. But, as the income increases, the nest egg increase at an increasing rate. It means, the individual set aside a larger portion of his income for savings and a smaller portion of consumption. Keynes considered consumption function as constant in the presently term. The variety in consumption is always greater than zero and less than one. It means, whenever there is a change in income, people wont spent the whole amount on consumption. Investment Expenditure Keynes gave much importance to investment demand than consumption demand. The investment demand depends on two things 1) Marginal strength of capital 2) Rate of interest Out of these two, rate of interest is usually stable in the short run (changes based on the policy of the central bank). So the investment demand depends largely on marginal efficiency of capital. The marginal efficiency of capital means the expected rate of profit that the investor hopes to get up from the investment in capital assets. The marginal efficiency of capital depends up on the replacement follow of capital goods and profit expectations of investors. As there is no replacement in the short run, the investment in short run mainly depends on profit expectations. To increase national income and employment, government should take those measures which increase investment. So, the investment demand depends on the marginal efficiency of capital and