ECO100Y1 Lecture Notes - Lecture 17: Output Gap, Potential Output
Document Summary
Review: macro model with fixed prices (unrealistic assumption: fixed prices) Introduction to national income (gdp) determination: price level is fixed. *undesired (unplanned) fluctuations in inventory investment cause firms to change production. Undesired inventory investment (actual sales < planned sales) reduce production. Undesired inventory disinvestment (actual sales > planned sales) expand production: multiplier. Insight: autonomous expenditure (expenditure not related to change in income y) vs. induced expenditures (expenditure related to change in income y) C + i = desired aggregate expenditure = ae. Actual i > desired i if unintended inventory investment (inventories are investment) aey. Fiscal policy: using government expenditures and/or taxes to influence aggregated demand [ad] Graph 2: recessionary gap: self-correction (in long run) The intersection of as0 and ad, with income/output=y0 is short run equilibrium: yp y0 = recessionary gap, real gdp < potential gdp .
