How aggregate demand derived in the keynesian framework?
Answers
Aggregate demand is the sum of four components: consumption, investment, government spending, and net exports.
Consumption can change for a number of reasons, including movements in income, taxes, expectations about future income, and changes in wealth levels.
Investment can change in response to its expected profitability, which in turn is shaped by expectations about future economic growth, the creation of new technologies, the price of key inputs, and tax incentives for investment. Investment can also change when interest rates rise or fall.
Government spending and taxes are determined by political considerations.
Exports and imports change according to relative growth rates and prices between two economies.
Disposable income is income after taxes.
An inflationary gap exists when equilibrium is at a level of output above potential GDP.
A recessionary gap exists when equilibrium is at a level of output below potential GDP
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