584 PA R T V I I Monetary Theory Aggregate Demand, Yad ($ billions) 1200 1000 Y = Y ad ad Y2 = C + I + G + NX2 = 600 + 0.5Y ad Y1 = C + I + G + NX1= 500 + 0.5Y 800 600 500 400 200 200 400 600 800 1000 1200 Y1 Y2 Aggregate Output, Y ($ billions) FIGURE 22-6 Response of Aggregate Output to a Change in Net Exports A $100 billion increase in net exports from NX1 * to NX2 * 100 shifts the aggregate demand function upward from Y 1ad to Y 2ad The equilibrium moves from point to point 2, and equilibrium output rises from Y1 * $1000 billion to Y2 * $1200 billion Summary of the Determinants of Aggregate Output Our analysis of the Keynesian framework so far has identified five autonomous factors (factors independent of income) that shift the aggregate demand function and hence the level of aggregate output: Changes Changes Changes Changes Changes in in in in in autonomous consumer expenditure (a) planned investment spending (I ) government spending (G) taxes (T ) net exports (NX ) The effects of changes in each of these variables on aggregate output are summarized in Table 22-2 and discussed next in the text A rise in autonomous consumer expenditure a (say, because consumers become more optimistic about the economy when the stock market booms) directly raises consumer expenditure and shifts the aggregate demand function upward, resulting in an increase in aggregate output A decrease in a causes consumer expenditure to fall, leading ultimately to a decline in aggregate output Therefore, aggregate output is positively related to autonomous consumer expenditure a CHANGES IN AUTONOMOUS CONSUMER SPENDING ( a ) CHANGES IN PLANNED INVESTMENT SPENDING ( I ) A rise in planned investment spending adds directly to aggregate demand, thus raising the aggregate demand function and aggregate output A fall in planned investment spending lowers aggregate demand and causes aggregate output to fall Therefore, aggregate output is positively related to planned investment spending I A rise in government spending also adds directly to aggregate demand and raises the aggregate demand function, increasing aggregate output A fall directly reduces aggregate demand, lowers the CHANGES IN GOVERNMENT SPENDING ( G )