ECON 202 Lecture Notes - Lecture 6: Output Gap, Potential Output, Aggregate Demand
2 Apr 2017
School
Department
Course
Professor
Document Summary
World economy gravitates automatically to full employment if the govt leaves it alone. Prices may increase if high demand permanent. Situation where neither consumers nor firms have any incentive to change their behavior. Signals that output or price decisions wrong. Expenditure schedule: shows relationship between national income (gdp) and total spending. Spending: assume that i, g and (x-im) are fixed. Induced investment: investment spending that rises when gdp rises and falls when it falls. Quantity of domestic product demanded at each possible value of the price level. Lower real wealth leads to less spending at any given level of real income. Higher real wealth leads to more spending at any given level of real income. Higher equilibrium of real aggregate quantity demanded. If equilibrium gdp < potential gdp it is because: Decrease total expenditure to reach full employment. Occurs when spending plans and price level are just right.
