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ECN204 - Chapter 9.docx

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ECN 204
Thomas Barbiero

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CHAPTER 9: HE A GGREGATE EXPENDITURES M ODEL 9.1 The Aggregate Expenditure Model: Consumption and Saving Assumption and Simplifications  Fundamental assumption of aggregate expenditures is that prices in the economy are fixed  Even if a sudden increase in demand occurred, prices were unlikely to rise at all because the massive oversupply of productive resources would keep prices low  Aggregate expenditures model can help understand how the modern economy is likely to adjust in the short run to various economic shocks including changes in things such as tax rates, government spending, consumption expenditure and investment spending Consumption and Investment Schedules  In a private closed economy the two components of aggregate expenditures are consumption C and gross Investment Ig  Planned Investment represents the investment plans of businesses in the same way the consumption schedule represents the consumption plans of the household o Assume that planned investment is independent of
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