Aggregate Demand: Overall level of demand in the economy. The
total amount of goods and services demanded in the economy
overall. It’s represented by the aggregate demand curve, which
describes the relationship between prince levels and the quantity of
output that firms are willing to provide. Normally there is a
negative relationship between aggregate demand and the price
Four components of demand
1) Consumption – larges component of aggregate demand,
people spent money on this clothes etc. it was falling
because of rising unemployment. As people lose their job
then the economy collapse.
2) Business Investment – Most unstable due to business
confidence. In this component business expand their
equipment when they spend money.
3) Government Spending – Government must not spend
beyond their mean. Government spending must be
balanced by the amount of tax revenue, which represents
the revenue of the state and by spending government is
engaging. In the context of 1930s government spending
was decreasing because economy was shrinking as GDP
fell so did tax revenue because people pay tax according
to their income and as people are unemployed, they don’t
pay same amount of tax. Approach is that balanced
budget must be sustained through spending decreases.
4) Net Export ▯different between import and exports.
Export represents a demand of goods, demanded by other
countries for domestic industries’ output. Import
represents the domestic countries demand for the output
from other countries. In 1930s net exports were also
falling, all countries were not demanding from another,
both export and trade were falling because there was trade wars in the 1930s every country was trying to expand
employment by reducing imports into the country.
It’s an economic theory of John Maynard Keynes who advocated
government monetary and fiscal problem intended to stimulate
business activity of increase employment. It was path breaking in
several ways, in particular because it introduced the notion of
aggregate demand as the sum of consumption, investment, and
government spending because it showed that full employment
could be maintained only with the help of government spending.
New approach of this Keynes agreed that the state must take
responsibility for moving against the trend in the private markets.
From this you could get “countercyclical policies by the state”.
Known as Keynesianism ▯state has responsibility to manage
Increase government spending ▯increase aggregate demand in
economy i ▯ ncrease employment ▯increase consumption ▯increase
more employment ▯business will be optimistic about future ▯
increase in business investment ▯ever increase employment ▯
expanding international trade
This sets a virtuous circle that is selfreinforcing – upward
spiral of employment until full employment is reached.
Ideology that state has responsibility ▯Keynes’s responsibilities
increasingly accepted after 1945
Keynes wanted to restore in capital and he wanted to support
capital. Keynes said these crisis couldn’t be solved with orthodox
response, Keynes focused on government expenditure, he argued
that government had to take responsibility taking out capital out of
disaster. He argued government expenditure should rise, should boost aggregate demand, increase consumer expenditure ▯it would
boost consumer expenditure spending it would multiplier effect
which will rise income, employment. Keynes is saying crisis of
1930s can go back. He says deficits should increases and followed
up to the point where full employment is reached. Keynes
economics provide an alternative explanation, which the state new
set, of responsibility in which using fiscal and monetary policy and
fiscal policy is referred to government tax and spending. If state
tax increases then aggregate demand would go down. Monetary
policy is referred to decision concerning the interest rate and
supply of money. The overall demand of services is aggregate
Welfare State – assisting with various markets based risk in the
a) Unemployment insurance program there is state manage and
funded programs in which unemployed people apply for
benefits for nonmarket income. Citizen right to income even
b) Health ▯Canada provides universal access to hospital
services and doctor services. After WWII there were many
development in terms of hospital regardless of income.
Access to services is not based on market income, instead its
state provides and funded.
Canada pension plan it is publically run. Level of
the benefit is depended on the amount of the
contribution. Canada assistance plan developed in
1963, it provides assistance based on need. If your
income is low then you qualify. There is a minimum
level of income in society and it’s a citizens’ right.