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Keynesian Aggregate Expenditure Model - Essay Example

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The writer of this short essay seeks to outline the principles of aggregate demand -  the total expenditure on domestic goods and services. The essay focuses on the Keynesian Aggregate Expenditure Model. Additionally, the essay describes the relations between aggregate supply and demand…
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Keynesian Aggregate Expenditure Model
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of the of the Concerned 7 June Keynesian Aggregate Expenditure Model The current US government is facing many challenges owing to the slowdown of economy and the poor performance of many US institutions. In that context, the Keynesian Aggregate Expenditure Model is of apt relevance. Aggregate expenditure or aggregate demand is the total expenditure on the domestic goods and services. As per this model, the aggregate demand in an economy comprises of Consumption expenditure (C), Net exports (E), Investment expenditure (I) and Government Expenditure (G) (Pass & Lowes 8). Hence: Aggregate Demand = C+I+G+E Some aspects of the aggregate demand tend to be stable and alter at a slow pace at any time (Pass & Lowes 8). Other aspects of aggregate demand like Investment expenditure tend to be volatile and change at a short notice, thereby influencing the level of economic activity in a country (Pass & Lowes 8). It is the level of interaction of the aggregate demand with aggregate supply in an economy that determines the equilibrium level of national income (Pass & Lowes 8). A government can resort to fiscal and monetary measures to regulate the aggregate demand in a country to tackle problems like unemployment and inflation. These fiscal and monetary measures may include making investments in large public projects, increasing government spending and purchases, lowering the tax rates, extending loans and lowering interest rates. Increased government spending gives way to the multiplier effect as per which a little increase in the rate of spending results in a more than proportionate rise in the national income (Pass & Lowes 366). The logic behind the multiplier effect is that though the increase in the rate of spending is small, the multiple numbers of transactions owing to that increase stimulate the economy (Pass & Lowes 366). The money entering an economy due to increased spending gives way to a multiplier effect owing to an increased circulation of money (Pass & Lowes 366). Works Cited Pass, Christopher & Lowes, Bryan. Collins Dictionary of Economics. New York: Harper Collins, 1993. Read More
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