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Economics for Management Studies
Iris Au

1 ECMA06 Aggregate Expenditure Aggregate Expenditure The Simplest Short-Run Model Outline Why do we want to develop a model that determines GDP. Build a simple model that determines equilibrium national income. The simple model consists of consumption and investment only (will take into account of the government and the foreign sector next week). Discuss the adjustment mechanism. Consider how does a change in exogenous variable affect national income (we will also discuss the multiplier). www.notesolution.com2 Why Do We Want to Develop a Model that Determines National Income? Question: Does demand (planned expenditure) always equal to supply (actual expenditure)? Answer: Not necessary! But why? (Aggregate) Demand (AD) = desired expenditure (what we intended to spend): AD = C + I + G + X IM. (Aggregate) Supply =ual expenditure = actual national income: GDE = C + I + G + X IM. The key difference is investment (I) in GDE includes unintended change in inventories while investment (I) in AD includes only intended investment. www.notesolution.com
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