Savings & Consumption

Keynesian Cross Diagram & account for the Keynesian Multiplier effect

Why economies occasionally experienced prolonged recessions ?

He argued that the level of output firms will be willing to produce is determined by the AD for goods and services in the economy.

AD is concerned with the total level of desired (or planned) expenditure in the economy and has four components originating from four different sources.

To understand why AD might fluctuate we need to understand why the components of (C,I,G,X-M) might change. When we know this we can bring the components together to construct a theoretical model of the economy.

Though similar to accounting identity for GDP AD is not the same thing as GDP. The components in AD relate to desired levels of output whereas GDP relates to realised outcomes.

By adding government to the model we have a closed model with government. By adding foreign sector we have an open model. Although all models lack realism they are important for analysis of macroeconomic relationships.

Households have a simple choice with regard the income they receive, they can either spend it or save it. Total Income = Y Household consumption = C and Savings =S

It is assumed that as income rises that savings will rise but not by the same amount. The proportion of any change in income that is spent is known as the marginal propensity to consume MPC