Answer to Question #229012 in Economics for nat

Question

1. With reference to the Keynesian approach, explain the main components of aggregate demand. (10) 2. With the aid of a diagram and using the Keynesian analysis, explain in detail how income and aggregate spending are affected by the following a) ‘government should step in and spend’ b) A cut in spending by European firms (20) 3. Explain the consumption function for a closed economy with a government sector (10)

Answer 1

1. Aggregate demand is the sum of four components: consumption, investment, government spending, and net exports.

2. a) ‘government should step in and spend’ means that the increase in government spending will increase aggregate spending and gross income of the economy.

b) A cut in spending by European firms will decrease aggregate spending and total income.

3. The consumption function, or Keynesian consumption function, is an economic formula that represents the functional relationship between total consumption and gross national income.