CONVEGNO REGIONALE CLIL – 21.11.2006WORKSHOP TEMATICI – Economia politica M. CECOTTI - I.T.C. "A. Zanon"
AGGREGATE DEMAND AND INCOME MULTIPLIER • Lesson 1 The aggregate demand function • Lesson 2 Spontaneous and induced changes in aggregate demand • Lesson 3 The income (GDP) multiplier M. CECOTTI - I.T.C. "A. Zanon"
LESSON 1 PLAN(main topics) • The AGGREGATE DEMAND FUNCTION and its components [a quick revision: A=C+I+G+(X-M)]; • The concept of EQUILIBRIUM NATIONAL INCOME (domestic output) Ye; • The concept of FULL EMPLOYMENT LEVEL OF INCOME (output) Yfe (= the maximum level of income (real output) the economy is capable of producing with the existing capacity) M. CECOTTI - I.T.C. "A. Zanon"
LESSON 2 PLAN(main topics) Effects of spontaneous and induced changes in the level of A (Ye): • choices for households and firms • economic policy options • loose bias • tight bias M. CECOTTI - I.T.C. "A. Zanon"
LESSON 3 PLAN(main topics) The NATIONAL INCOME (domestic output) MULTIPLIER • a graphic representation • the concept and the description of income generation triggered by an initial change in the level of autonomous expenditure • deriving the multiplier from AD and C equations M. CECOTTI - I.T.C. "A. Zanon"
CONVENTIONAL NOTATION • Y = income (output) • Yd = disposable income • C = consumption • APC (c’) = average propensity to consume • MPC (c) = marginal propensity to consume • S = saving • APS (s’) = average propensity to save • MPS (s) = marginal propensity to save • I = investment • G = government expenditure on goods and services • T = taxation (direct and indirect) • X = exports • M = imports • MPM (m) = marginal propensity to import • AD (or A) = aggregate demand • AS (or Su) = aggregate supply • = “a change in”, e.g. S = a change in savings • = the multiplier M. CECOTTI - I.T.C. "A. Zanon"
ESSENTIAL GLOSSARY Aggregate demand (AD): the total of planned expenditure for the economy as a whole. Aggregate supply (AS): the total output of all firms in the economy (it’s the same as national income). Consumption (C): the total spending of households on goods and services. Investment (I): it consists of capital goods (machinery, equipment, factory buildings etc.). Government expenditure (G): local and central government expenditure on goods and services. Marginal propensity to consume [MPC (c)]: the rate of change of consumption with respect to income; MPC = C/Y (c = C/Y). Average propensity to consume [APC (c’)]: the proportion of total income spent on consumption; APC = C/Y (c’ = C/Y). M. CECOTTI - I.T.C. "A. Zanon"
Checking comprehension Matching execises, e.g.: the household sector G the firm sector X the government sector I the international sector C Answer simple questions: • Firms’ expenditure on investment goods depends both on …….. and ……… • The slope of the AD line depends on …………………….. • If MPC = 0, then α = ………………. • An increase in α value leads to a steeper/flatter AD line. • Etc. M. CECOTTI - I.T.C. "A. Zanon"
The basic graph A A=C+I+G 45° 0 Ye Yfe Y M. CECOTTI - I.T.C. "A. Zanon"
STUDENTS AT WORK WORK IN SMALL GROUPS A A2 A1 45° 0 Y AD LINE HAS SHIFTED FROM A1 TO A2; WHAT MIGHT HAVE HAPPENED? (make a list): …………………………….. …………………………….. …………………………..... M. CECOTTI - I.T.C. "A. Zanon"