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A post-Keynesian theory of aggregate demand emphasizes the role of debt, which it considers a fundamental component of aggregate demand; [7] the contribution of change in debt to aggregate demand is referred to by some as the credit impulse. [8] Aggregate demand is spending, be it on consumption, investment, or other categories. Spending is ...
The traditional monetary transmission mechanism occurs through interest rate channels, which affect interest rates, costs of borrowing, levels of physical investment, and aggregate demand. Additionally, frictions in the credit markets, known as the credit view, can affect aggregate demand. In short, the monetary transmission mechanism can be ...
The equilibrium level of national income in the IS–LM diagram is referred to as aggregate demand. Keynesians argue spending may actually "crowd in" (encourage) private fixed investment via the accelerator effect, which helps long-term growth. Further, if government deficits are spent on productive public investment (e.g., infrastructure or ...
Keynes interprets this as the demand for investment and denotes the sum of demands for consumption and investment as "aggregate demand", plotted as a separate curve. Aggregate demand must equal total income, so equilibrium income must be determined by the point where the aggregate demand curve crosses the 45° line. [63]
The predominance of this effect is found robustly across developed and developing countries. [5] [6] Nevertheless, there are also mechanisms by which even non-investment government spending can elicit the crowding-in effect. One proposed mechanism is via increased aggregate demand.
This is the investment that is crowded out. The weakening of fixed investment and other interest-sensitive expenditure counteracts to varying extents the expansionary effect of government deficits. More importantly, a fall in fixed investment by business can hurt long-term economic growth of the supply side, i.e., the growth of potential output ...
Demand for some goods (called inferior goods) decreases with increasing wealth. For example, consider consumption of cheap fast food versus steak. As someone becomes wealthier, their demand for cheap fast food is likely to decrease, and their demand for more expensive steak may increase. Consumption may be tied to relative wealth.
These changes in investment and durable good purchases affect the level of aggregate demand and final production. By contrast, the credit channel of monetary policy transmission is an indirect amplification mechanism that works in tandem with the interest rate channel .