ECONOMIC TERM PAPER PRESENTATION

ON

TOPIC

AGGREGATE DEMAND

MADE BY:-

T HARI KUMAR(131449)

K APARNA(131450)

DEEPTHI(131406)

B RAJA(131405)

GOUTHAMI(131404)

CONTENTS

1. INTRODUCTION 2. AGGREGATE DEMAND KEY

VARIABLES3. DERIVING OF DEMAND

CURVE4. AGGREGATE DEMAND

POLICIES5. AGGREGATE DEMAND CURVE

SHIFT6. AGGREGATE DEMAND CURVE

DOWNWARD SLOPING7. EQUILIBRIUM PRICELEVEL

INTRODUCTIONThe aggregate demand curve shows the combinations price and output levels at which the goods and the money markets are simultaneously in equilibrium.

In economics aggregate demand is the total demand for final goods and services in the economy at a given time and price level.

AD = C+I+G+(X-M)

C= Consumption Spending

I = Investment Spending

G = Government Spending

(X-M) = difference between spending on imports and receipts from exports (Balance of Payments)

Aggregate Demand –Key Variables1. Consumption Expenditure- Tax rates, Incomes, Wage.

2. Investment Expenditure- Spending on inventory , Machinery.

3. Government Expenditure- Defense, foreign aid , education.

4. Import Spending- Goods & services bought from Abroad.

5. Export Earning- Goods & services sold to Abroad.

DERIVING THE AGGREGATE DEMAND CURVE

• This curve is derived from the IS-LM framework.

• If the given price level is P0 and the nominal stock of money is M, then the real stock of money is (M/P0).

• The IS curve is denoted by IS.

• The economy is in equilibrium at point E, and the output and interest rates are denoted by Y0 and i0 respectively. The initial price level is represented by P0.

E1

E

AD

Y1

IS

LM (M/

Incom

E

Y0

Interest Rate

i0

i1E1

LM1

(M/P1)

P0

• When P is at P0 the goods and the money market are in equilibrium at an income level of Y0.

• In the next figure, point E shows the income and price combination (Y0, P0). If the price falls from P0 to P1, the real stock of money in the economy Increases to M/P1 (for the same level of nominal stock of money M). This increase in the real stock of money will lead to a shift of LM curve downwards to LM1 (M/P1). The new equilibrium is at point E1. Thus when the price level is P1, the goods market and the money market are in equilibrium at an income level of Y1. When the price level falls form P0 to P1, the income level rises from Y0to Y1 and vice versa. Therefore the aggregate demand curve will be downward sloping.

AGGREGATE DEMAND POLICIES

i1

E1

L

P0

Y1

Output and Spending

Y0

Price Level

P1

Both the fiscal and monetary policy changes influence and cause shift in the AD curve.

1. Fiscal Policy 2. Monetary Policy

Effect of Fiscal policy on AD curve

In the previous of figure 1, the initial LM and IS curves correspond to a given nominal quantity of money and the price level P0. The economy is at equilibrium at point E. The AD curve shifts to the right in case of fiscal

Y0

Price Level

P1

E1

EAD

Y1

IS

LM (M/P0)

Income and Output

E

Y0

Interest

i0

expansion and to the left in case of fiscal contraction. At the initial price level there is a new equilibrium at point E1 with higher interest rates and higher level of income and spending. Thus at initial level of prices P0, equilibrium income and spending are higher. This is shown point E1 in the lower panel. E1 is the new equilibrium point on the new AD curve. A similar exercise at other points on the original demand curve would lead to a new aggregate demand curve AD1.

Effect of monetary policy on AD curve

An increase in the nominal stock of money results in higher real money stock at each level of prices and thus shifts the LM curve to LM1. The equilibrium level of income rises from Y0 to Y1 at the initial price level P0 and the AD curve moves

Income and

E

Y0

Inti0

i1

E1

IS1

Y1

Output and Spendin

to the right in case the equilibrium level of income rises, which occurs due to increase in the nominal stock of money.

Aggregate Demand Curve Shifts

1.Increase in income of consumer.

2.Increase in price of substitute goods.

3.Increase in no. of consumers.

1.Decrease in consumer income.

2. Decrease in price of substitute goods.

3. Decrease in no. of consumer's.

DEMAND Curve downward sloping

The horizontal axis shows the total quantity of domestic goods & services demanded.

The vertical axis shows the aggregate price level, measured by the GDP deflator.

Income effect

Substitute effect

Law of diminishing marginal utility

Size of the consumers

The Equilibrium Price Level

AD represents money and goods market in equilibrium.

AS represents price/output decisions of all firms in ecomony.

P0 and Y0 correspond to equilibrium in the goods market and the money market and a set of price/output decisions on the part of all the firms in the economy.