Aggregate Demand Schedule

In one sentence

An aggregate demand schedule shows planned total spending (aggregate demand) at each level of income/output in a period.

What it is (Keynesian cross interpretation)

In the Keynesian cross, you compare:

planned expenditure (AD) and
actual output/income (Y).

Equilibrium occurs where planned spending equals output (planned spending equals income).

Components

Aggregate demand typically includes:

Consumption (C)
Investment (I)
Government purchases (G)
Net exports (X - M) in an open economy

A simple Keynesian-cross equation

In a basic Keynesian-cross setup, planned expenditure can be written as:

\[ AD(Y) = C_0 + c(Y-T) + I + G + NX \]

where $c$ is the marginal propensity to consume (MPC), $T$ is taxes (often treated as exogenous in the simplest model), and $NX$ is net exports.

Equilibrium output is where planned spending equals actual output:

\[ Y = AD(Y) \]

If the only endogenous component is consumption and $0<c<1$, the spending multiplier in this setup is $\frac{1}{1-c}$.

Diagram (spending vs income)

    flowchart TD
	  Y["Income / output (Y)"] --> AD["Planned spending (AD)"]
	  AD --> E{"Is AD = Y?"}
	  E -- "Yes" --> EQ["Equilibrium output"]
	  E -- "AD > Y" --> UP["Unplanned inventory falls<br/>firms raise output"]
	  E -- "AD < Y" --> DOWN["Unplanned inventory rises<br/>firms cut output"]

Common confusion: AD schedule vs AD curve

An aggregate demand schedule is often drawn with income on one axis and planned expenditure on the other (Keynesian cross). The aggregate demand curve in AD-AS models relates the price level to total spending/output demanded, which is a different relationship.

Aggregate Supply (AS): The total supply of goods and services available to a particular market from producers.
National Income Accounting: A system used by a country to measure the overall economic activity.
Fiscal Policy: Government policies regarding taxation and spending.
Monetary Policy: The process by which a monetary authority, like a central bank, controls the money supply.
Supply and Demand: A fundamental concept that describes how the price and quantity of goods/services are determined in a market.

Quiz

### In the Keynesian cross, what does an aggregate demand schedule show? - [x] Planned total spending at each income/output level. - [ ] The relationship between price level and output demanded. - [ ] The supply of goods and services at each income level. - [ ] A list of government spending items only. > **Explanation:** In this context, “AD” is planned expenditure as a function of income/output $Y$. ### What is the equilibrium condition in the Keynesian cross? - [x] $Y = AD(Y)$ - [ ] $Y = AS(Y)$ - [ ] $P = AD(P)$ - [ ] $Y = 0$ > **Explanation:** Equilibrium output occurs where planned spending equals actual output/income. ### If $AD > Y$ at the current output level, what typically happens next? - [x] Unplanned inventories fall and firms expand production. - [ ] Unplanned inventories rise and firms expand production. - [ ] The economy is in equilibrium and nothing changes. - [ ] Prices instantly adjust to restore equilibrium (in the Keynesian cross). > **Explanation:** When planned spending exceeds output, inventories are depleted and firms tend to increase output. ### Which list best matches the standard components of aggregate demand in this setup? - [x] $C + I + G + NX$ - [ ] $Q + P + W + r$ - [ ] $L + K + A$ - [ ] $M + V$ > **Explanation:** Planned expenditure is usually decomposed into consumption, investment, government purchases, and net exports. ### In the equation $AD(Y) = C_0 + c(Y-T) + I + G + NX$, what does $c$ represent? - [x] The marginal propensity to consume (MPC). - [ ] The inflation rate. - [ ] The interest rate. - [ ] The capital stock. > **Explanation:** $c$ is the slope of the consumption function with respect to disposable income. ### True or False: A higher $c$ makes the spending multiplier $\frac{1}{1-c}$ larger. - [x] True - [ ] False > **Explanation:** As $c$ rises toward 1, $1-c$ falls, increasing the multiplier. ### Which change shifts the aggregate demand schedule upward at every $Y$? - [x] An increase in autonomous spending such as $G$ or $I$. - [ ] A decrease in autonomous spending such as $G$ or $I$. - [ ] A decrease in $C_0$. - [ ] A decrease in $NX$. > **Explanation:** Increasing autonomous components raises planned spending even if income is unchanged. ### What is a common confusion about the term “aggregate demand”? - [x] The “AD schedule” in the Keynesian cross is different from the “AD curve” in AD–AS models. - [ ] The AD schedule is the same as the money demand curve. - [ ] The AD schedule only includes consumption. - [ ] The AD schedule is a supply-side concept. > **Explanation:** The Keynesian cross plots planned spending vs income, while the AD curve relates price level to output demanded. ### In the simplest Keynesian-cross model, what role does $T$ (taxes) often play? - [x] It reduces disposable income and therefore consumption for a given $Y$. - [ ] It determines potential output directly. - [ ] It has no effect on planned expenditure. - [ ] It only affects prices, not output. > **Explanation:** With consumption depending on $Y-T$, higher taxes reduce planned consumption at each income level. ### If the economy is initially in equilibrium and $G$ rises, what happens to equilibrium output (all else equal)? - [x] It rises, potentially by a multiple of the initial increase. - [ ] It falls. - [ ] It stays exactly the same. - [ ] The Keynesian cross cannot analyze changes in $G$. > **Explanation:** Higher $G$ raises planned spending and, through the multiplier, increases equilibrium output.