Econ

ECONOMIC GROWTH

Aggregate Demand and its Components

Y = C + I + G + (X-M) |

What is aggregate demand?

* It is the total amount which all sectors of the economy are willing and able to spend over a given time period.

The 5 sector circular flow

Equilibrium

* Within the circular flow of income, equilibrium is the expected goal.

* S + T + M = G + I + X

* Within the 3 sector model (there are only consumers, business and financial institutions). Therefore:

AD = C + I |

* The reason is: All that can be spent (aggregate demand) in this economy is either consumption expenditure or investment expenditure.

* Within the 4 sector model (there are only consumers, business, financial institutions and the government). This is closed economy because there is no overseas sector. Therefore:

AD = C + I + G |

* The reason is: All that can be spent (aggregate demand) in this economy is consumption or investment or taxation expenditure.

* Within the 5 sector model (this is an open economy and involves the 4 sectors plus the overseas sector). Therefore:

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

* Equilibrium is the level where the income, output and employment plans of firms coincide with spending patterns of all sectors of the economy.

Injections and Withdrawals

Category | I or L | Effect on the CFOI |

Investment | Injection | * Increases the amount of funds circulating through M3 and therefore the amount spent on capital (financial, speculative, productive) * Multiplied throughout the economy and stimulates consumption spending |

Savings | Leakage | * Unspent income is saved * Money is not in circulation and therefore shrinks the size of the CFOI * The higher the rate of savings, the less the economic growth of a nation |

Taxation | Leakage | * Unspent income is taxed * Money is not in circulation and ) ∴ shrinks the CFOI and goes into the government’s coffers * If there is a surplus budget, this money may be...