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Aggregate Demand

What is aggregate demand? Aggregate demand refers to total expenditure in an economy in a certain period. That is, aggregate demand comprises everything that is spend in an economy in one period. One can split aggregate demand into different subcomponents. Formally, one can describe aggregate demand (Y) as

Y = C + I + G + NX

As one can see from the equation above, aggregate demand (Y) is equal consumption (C) plus investment (I) plus government spending (G) plus net exports (NX), i.e. how much we are selling abroad to other countries on net.

According to Keynesian theory, aggregate demand determines the amount of available expenditure in an economy. Now, why should one care about available expenditure? Well, in Keynesian economics, available expenditure determines the amount of means available in an economy in order to sustain labor hires in a given period. That is, in the Keynesian model, the available expenditures is what keeps people at work. Boldly speaking, Continue reading Aggregate Demand

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Keynesian Economics

Keynesian Economics is a central doctrine in economics that forms the foundation of modern macroeconomic thinking. It was established by John Maynard Keynes during the 1930s. In 1936, the British economist published his book “The General Theory of Employment, Interest and Money” that forms the basis of the Keynesian school. The following series of blog posts will introduce Keynesian Economics, provide useful insights and discuss the most important concepts. The first post is dedicated to aggregate demand, the key concept of Keynesian Economics. The following post explains the dynamics of Keynesian Economics in an aggregate supply/ aggregate demand (AS-AD) model. The third post discusses the remedies of Keynesian Economics in the light of a recession. Finally, the last post elaborates some drawbacks of Keynesianism. Continue reading Keynesian Economics

Graphically Illustrate Multicollinearity: Venn Diagram

Multicollinearity is a common problem in econometrics. As explained in a previous post, multicollinearity arises when we have too few observations to precisely estimate the effects of two or more highly correlated variables on the dependent variable. This post tries to graphically illustrate the problem of multicollinearity using venn-diagrams. The venn-diagrams below all represent the following regression model Continue reading Graphically Illustrate Multicollinearity: Venn Diagram