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Chapter 21 Simplest Short Run Macro Model.docx

7 Pages

Economics (Arts)
Course Code
ECON 209
Mayssun El- Attar Vilalta

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Chapter 21 The Simplest Short Run Macro Model 211 Desired Aggregate ExpenditureNational accounts divide actual GDP into its components o GDPC I G and NX aaaa Total desired expenditure is divided into same categories o Desired consumption o Desired investment o Desired government purchases o Desired net exportsWhat does desired really mean o Desired expenditure is not just a list of what consumers and firms would buy if they had no constraints on their spendingit is much more realistic than that o Desired expenditure is what consumers and firms would like to purchase given their realworld constraints of income and market pricesThe sum is called desired aggregate expenditure o AECIGNXTwo types of expenditures o Autonomous expenditures do not depend on the level of national income expenditure is not a function of income o Induced expenditures do depend on the level of national income expenditure is a function of income Desired Consumption ExpenditureIn simplest theory consumption is determined primarily by current disposable income Y D Disposable income amount of income households receive after deducting what they pay in taxes and adding what they receive in transfersTwo possible uses of disposable income consumption C or saving S o Difference between disposable income and amount of consumption is the amount savedKey factors influencing desired consumption o Disposable income o Wealth o Interest rate o Expectations about future incomeIn more advanced theories individuals are forward looking and so consumption depends more onlifetime income
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