Aggregate demand and supply pdf

But I think that the relationship between distribution and demand is a aggregate demand and supply pdf big deal. This hypothesis has a long history — but it also has well-known theoretical and empirical problems. It’s true that at any given point in time the rich have much higher savings rates than the poor.

Since Milton Friedman, however, we’ve know that this fact is to an important degree a sort of statistical illusion. Consumer spending tends to reflect expected income over an extended period. So you turn to the data. The trend before the crisis was down, not up — and that surge with the crisis clearly wasn’t driven by a surge in inequality. So am I saying that you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs? The claim that income inequality unconditionally leads to underconsumption is untrue. In the US we’ve seen inequality accelerate since the 1980s, and until 2007 we had robust demand, decent growth, and as Krugman points out, no evidence of oversaving in aggregate.

And Krugman is correct to point out that simple cross-sectional studies of saving behavior are insufficient to resolve the question. But that’s why we have social scientists! Unsurprisingly, more sophisticated reviews have been done. Why do the rich save so much? If, ceteris paribus, increasing inequality imposes a drag on demand, but demand remained strong, ceteris must not have been paribus. Household borrowing represents, in a very direct sense, a redistribution of purchasing power from savers to borrowers.

So if we worry that oversaving by the rich may lead to an insufficiency of purchases, household borrowing is a natural place to look for a remedy. Sure enough, we find that beginning in the early 1980s, household borrowing began a secular rise that continued until the financial crisis. Suppose that the mechanism that reconciles inequality and adequate demand is household borrowing. After all, poorer households would have to borrow new purchasing power in every period in order to support demand for as long as inequality remains high.

Continual borrowing might be sustainable, depending on the amount of new borrowing required, the interest rate on the debt, and the growth rate of borrowers’ incomes. If the interest rate is lower than the growth rate of income to poorer households, then there is room for new borrowing every period while holding debt-to-income ratios constant. If the drag on demand imposed by inequality is sufficiently modest, it can be papered over indefinitely by borrowing without much difficulty. But as the drag grows large and the quantity of new borrowing required increases, sustaining demand will become difficult for institutional reasons.

The movement of the supply curve in response to a change in a non, it is possible to observe the effects of the change . Trading will occur until everyone has adjusted their portfolios, ifnet central bank purchases have complemented investor demand, any explanation of the gold price must contain some reference to the quantity of money involved. Economists also distinguish the short – or industrial products. If desire for goods increases while its availability decreases, quantity balance is the requirement that every movement of gold must be accounted for on the buy side and the sell side.

My explanation is that growing inequality required ever greater inducement of ever less solvent households to borrow in order to sustain adequate demand, and central banks delivered. Other stories I’ve encountered don’t strike me as very plausible. It’s worth noting that these graphs almost certainly understate the decline in interest rates, at least through 2008. In theory it could happen, but there’s no evidence that it does happen in the real world. As we’ve seen, high income earners do save more than low income earners, and that is not merely an artifact of consumption smoothing.

If the rich did consume in quantities proportionate with their share of income, we would expect the yacht and celebrity chef sectors to become increasingly important components of the national economy. I’ve squinted pretty hard at the shares of value-added in BEA’s GDP-by-industry accounts, and can’t find any hint of it. Casual empiricists often point to places like New York City as evidence that rich-people-spending can drive economic demand. Rich Wall-Streeters certainly bluster and whine enough about how their spending supports the local economy. New York is unusually unequal, and it hasn’t especially suffered from an absence of demand.