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MGEA06H3 (176)
Iris Au (165)
Lecture

Week3 Lecture

18 Pages
63 Views

Department
Economics for Management Studies
Course Code
MGEA06H3
Professor
Iris Au

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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.com
2
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 = actual 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
3
ECMA06 – Aggregate Expenditure
It is certainly true that every act of production generates income for Canadians; however, not
all of that income gets translated into demand for the output of firms.
We want a model that has some positive relationship between
The income generated by production
and
The demand that exists for that production
Model of the Macro Economy
Exogenous Variables vs. Endogenous Variables
Any model must consist 2 types of variables – exogenous variables and endogenous variables.
Exogenous variables – these are given to the model (i.e., they are constants and you do not need
to solve for them).
However, external factors can change the values of these variables.
Endogenous variables – the values are determined within the model (i.e., you need to solve for
them)
The Underlying Model
The underlying model is given by:
AE = AE0 + cYY
where AE = aggregate expenditure = aggregate demand
AE0 = autonomous expenditure = constant
cY = = = constant
= marginal propensity to spend out of GDP
Y = GDP = output = income
Solving for Equilibrium
Question: What level of Y gives us the equilibrium?
Answer: The equilibrium level of Y, Y*, is the level o f Y that generates enough AE to buy itself.
Example: Suppose AE = 100 + Y. Find the equilibrium level of Y.
A Simple Macro Model
www.notesolution.com

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Description
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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