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  Keynes aggregate demand equation

Keynes aggregate demand equation:

Due to the primary three keyne's assumptions the fundamental equation:

Y = C + I + G + X-M

has been condensed to,

Y = C + I

In figure shown below, vertical axis measures net or aggregate demand (i.e., or aggregate expenditure). Horizontal axis evaluates income and output. The National Income states that in the aggregate economy, expenditure, income, and output are equivalent. Therefore they are evaluated in the similar axis.

Aggregate supply is the net value of all commodities which the firms intend to supply (i.e., produce). This purely based on available technology, resources (i.e., material and human), effectiveness of labor, and so on. Most of such factors change only in long run and stay constant in short run.

Since the aggregate supply curve symbolizes equality of total income and output, the 45o line is drawn from the origin symbolizing AS curve. The 45o line divides the quadrant in two equivalent halves with equivalent distance from two axes. Each and every point on the line points out equivalent amount of income, output and expenditure (i.e., Y = E). The significance of this is that when any other line intersects the 45o line, the point of intersection will exhibit an equivalent amount of income, output and expenses.

2200_aggregate demand curve.jpg

Aggregate demand symbolizes the total expenses on consumption and investment (or net expenditure). The aggregate demand (i.e., expenditure) curve is the combination of consumption and investment function. In figure above, C symbolizes consumption function. Whenever investment is added, it becomes C+I. Value of investment is illustrated by the vertical distance between C and C+I curves.

Therefore,

Aggregate Expenditure (AD) = C + I

Equilibrium takes place at the point of intersection of aggregate demand and supply. At point E the planned total spending (or aggregate demand) by consumers(C) and investors (I) is equivalent to the total quantity of national income (Y = C + I). The equilibrium extent of output as well determines the equilibrium level of employment. Therefore, at point E, we acquire equilibrium extent of income, output and employment.

The equilibrium extent of employment require not correspond to complete employment. When any of the components of aggregate demand occurs at each level of income, for illustration, since government raises its expenditure that shifts the whole AD line upward. This increases equilibrium income and output. Likewise, when any one component of AD falls, this moves the line downward and lowers equilibrium output.

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