Aggregate demand

I. Read and memorize the following words, word-combinations and word-groups:

aggregate demand – сукупний попит

E.g. When price and nominal-wage adjustments are slow, changes in aggregate demand will lead to changes in actual real output.

to employ fully productive resources – повністю використовувати виробничі ресурси

E.g. Aggregate demand and aggregate supply are useful concepts only if they help us understand why an economy may not always fully employ its productive resources, have price stability, or grow at an acceptable rate.

individual consumption – індивідуальне споживання

E.g. Individual consumption is directly influenced by individual income.

to save income – накопичувати прибуток

E.g. Individuals (and economies that are not engaged in international trade) can only do two things with their income: they can consume it or save it.

to smooth consumption – вирівнювати споживання

E.g. Aggregate consumption may differ from aggregate real output because individuals want to save in order to smooth consumption relative to income.

life-cycle consumption behavior – режим споживання упродовж життя

E.g. In part, current consumption will be based on our best estimate of our lifetime income and how long we expect to live. This kind of smoothing behavior is a life-cycle consumption behavior.

saving – заощадження

E.g. Saving allows people to transfer consumption from the present to the future.

investment – інвестиції

E.g. If desired investment exceeds desired saving, firms will find that their inventories are lower than they want them to be.

inventories – оборотні фонди; (товарно-матеріальні запаси)

E.g. If desired aggregate saving exceeds desired aggregate investment, firms will accumulate unwanted inventories.

adjustment – регулювання

E.g. Many different kinds of adjustment might occur. Prices may change. Interest rates may change.

fiscal policy (activities) – фіскальна політика (діяльність); фінансово-бюджетна політика

E.g. Government spending, taxes, and subsidies are the fiscal activities of government.

marginal propensity to consume – гранична схильність до споживання

E.g. Economists define the marginal propensity to consume (MPC) as the change in consumption per dollar change in income.

capital stock – основний капітал

to offset depreciation – компенсувати знецінення

E.g. Investment occurs when real output is used to increase the existing capital stock or offset depreciation.

II. Give English equivalents of the following:

фінансово-бюджетна діяльність уряду

наміри зацікавлених фірм або осіб

виходити на пенсію

режим споживання упродовж життя

змінюватися місяць за місяцем

вирівнювати споживання

побічно впливати на сукупний попит

гранична схильність до споживання

III. Fill in the blanks with appropriate words:

current transfer adjustment lower income demand increase

1. Saving allows people to _______ consumption from the present to the future.

2. We also save because of uncertainty about our future _______ and about how long we will live.

3. _______ consumption will not be based solely on current income.

4. Investment occurs when real output is used to _______ the existing capital stock.

5. If desired investment exceeds desired saving, firms will find that their inventories are _______

6. than they want them to be, Increased government expenditure increases aggregate _______.

7. Many different kinds of _______ might occur. Prices may change. Interest rates may change.

IV. Read and translate the text:

Aggregate demand and aggregate supply are useful concepts only if they help us understand why an economy may not always fully employ its productive resources, have price stability, or grow at an acceptable rate.

Supply and demand help us organize the way we think about these markets because each directly corresponds to the intentions of self-interested firms or individuals.

Individuals (and economies that are not engaged in international trade) can only do two things with their income: they can consume it or save it.

Individual consumption is directly influenced by individual income.

While consumption is undoubtedly related to income, it is unlikely that consumption will vary exactly as income varies.

Saving is foregone consumption. Essentially, saving allows people to transfer consumption from the present to the future.

When a person's income fluctuates from month to month, he or she can smooth consumption by saving and dissaving and consumption will be based on some expected or average monthly income rather than on actual monthly income.

Aggregate consumption may differ from aggregate real output because an individual wants to save in order to smooth consumption relative to income.

What determines current consumption if we save for retirement? In part, current consumption will be based on our best estimate of our lifetime income and how long we expect to live. This kind of smoothing behavior is known as life-cycle consumption behavior.

We also save because of uncertainty about our future income and about how long we will live. We may get sick or injured in some way or we may become unemployed. If we do, our income will fall, perhaps dramatically.

Saving is a way of transferring current income into future consumption. Because of fluctuating incomes associated with our jobs, declining incomes with retirement, and uncertainties about length of life, sickness, incapacitation, or unemployment, individuals will choose to consume some of their current income and save or dissave, thereby smoothing consumption through time.

Current consumption will not be based solely on current income.

Investment occurs when real output is used to increase the existing capital stock or offset depreciation.

If desired aggregate saving exceeds desired aggregate investment, firms will accumulate unwanted inventories. Conversely, if desired investment exceeds desired saving, firms will find that their inventories are lower than they want them to be.

Many different kinds of adjustment might occur. Prices may change. Interest rates may change. The production of real output may change. It turns out that with sticky prices, output changes occur before prices fully respond.

Individuals make consumption and saving decisions. Firms make investment decisions. But there is another participant in the economy – the government. Government activities may affect the economy in one of two ways. First, government spending directly affects aggregate demand. Second, government taxes and subsidies directly affect consumption, saving, and investment and, hence, indirectly affect aggregate demand. Government spending, taxes, and subsidies are the fiscal activities of government.

Increased government expenditure (like increased desired consumption or increased desired investment) increases aggregate demand. Decreased government expenditure (like decreased desired consumption or decreased desired investment) decreases aggregate demand.

Since consumption expenditures are determined by income, albeit in complex ways, changes in income will also affect consumption. How individuals respond to changes in income turns out to be important. Economists define the marginal propensity to consume (MPC) as the change in consumption per dollar change in income.

V. Answer the following questions:

1. What is individual consumption influenced by?

2. What phenomenon is known as life-cycle consumption behavior?

3. What is the consequence, when desired saving is not equal to desired investment?

4. What is referred to as fiscal policy?

5. What can individuals do with their income?

6. Why may aggregate consumption differ from aggregate real output?

7. What can you say about government expenditures?

VI. Define the terms:

fiscal activities of government

life-cycle consumption behavior

marginal propensity to consume (MPC)

aggregate demand

aggregate supply

saving

VII. Translate into English:

1. Фірми виробляють товари, тому що споживачі бажають купити їх. 2. Накопичення сприяють створенню капіталу та економічному зростанню. 3. Державні видатки, податки та субсидії – це фінансово-бюджетна діяльність уряду. 4. Сукупний попит знижується, коли зростають податки, і зростає, коли податки зменшуються. 5. У сучасній ринковій економіці зміни в сукупному випуску спостерігаються частіше, ніж зміни в загальному рівні цін. 6. Люди можуть витрачати або заощаджувати свій прибуток. 7. Розв'язання таких питань, як державні видатки, податки та субсидії належить до сфери фінансово-бюджетної політики.

VIII. Read and dramatize the following dialogue:

Banker: Mrs. West, I was sorry to hear of your husband's death.

Mrs. West: Thank you. I'm pleased that the bank was named executor of the estate.

B.: We'll help you in every way we can. We've looked through the contents of the safe-deposit box and made an inventory. Everything seems to be in good order.

W.: I know so little about my husband's affairs.

B.: Our counseling service is for people in just your position.

W.: I'm most concerned about my immediate expenses.

В.: Well, we're empowered under the terms of the will to provide you with an allowance until the estate has been probated.

W.: Oh, that's fine.

B.: And there are three life insurance policies. You are the beneficiary in each of them.

W.: Yes, I knew about those.

B.: The benefits from these policies will be paid directly to you within the next two weeks.

W.: Oh, I don't have to worry, then.

B.: No. The income from your inheritance is going to be quite sizable. Of course, we don't know yet what demands will be made against the estate.

W.: As far as I know, there are no large creditors.

B.: We hope not. You understand, also, that this bank is named trustee under the will. This means that we will take care of the portfolio of an annual report of all transactions.

W.: Yes, I understand that. I feel much better about the future now.

IX. Make up your own dialogue using the following expressions and word-combinations:

aggregate demand to employ fully productive resources

aggregate income to smooth income

fiscal policy to offset depreciation

desired investment desired saving