2.3 The determinants of aggregate demand

AD

the relationship between price level and total planned spending ceteris paribus

determinants of consumption

confidence, intrest rates, disposable income, expectations, wealth

AD

the relationship between price level and total planned spending ceteris paribus

determinants of consumption

confidence, intrest rates, disposable income, expectations, wealth

determinants of investment

economic cycle, animal spirits, intrest rates, expectations

determinants of savings

income distribution, wealth, confidence, intrest rates, expectations

Accelerator proccess

A theory that says that investment depends on the rate of change in national income

accelerator effect explained

if there is and increase in demand → increased profits and confidence → firms expect this to be maintained → expect to soon reach full capacity → encourages investment now to meet future demand

limitations of the accelerator effect

time lags

firms wont respond to small chnages in investment → investment is a large commitment and can’t be easily stopped once started dut to loss aversion

will not incease investment in industires that are in structural decline

firms make investment decisions based on

their expectations of future demand

why do neoclassical economists assume that savings = investment

investment is determined by available savings in the economy

If there is an increase in savings, then banks can lend more to firms to finance investment projects.

savings ratio in covid

~30%

savings ratio in 2024

~10%