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ECON 2010 Prin Macroeconomics Chapter 12 Notes

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ECON 2010
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1Chapter 12IOutputExpenditure in the Short RunaLong Run economic analysis often looks at the supply side of the economyoutput levelsShort Run will focus more on the demand sidebAggregate expenditurethe total amount of spending in the economy the sum of consumption planned investment government purchasesnet exportscReal GDP corrects nominal GDP for the effects of inflationIIThe Aggregate Expenditure ModelaAggregate expenditure modelholding the price level constant this model examines the relationship between total spending aggregate expenditurereal GDP outputbAggregate expenditureiConsumption CiiPlanned Investment IiiiGovernment Purchases GivNet Exports NXvAECIGNXcKey at any given year the level of GRP is determined mainly by the level of aggregate expendituredThe difference between planned investmentactual investment results due to changes in inventoryeRecall unsold goods are held over in inventoryare classified as investmentPlanned investment only focuses upon the portion that is intended not resulting from inventory changefIn macroeconomic equilibrium this will be balancedthere are no leftover goodsgAggregate expenditureGDPhFor economy as a whole actual investment spending will be greater than planned spending when there is unplanned increase in inventory visa versaiOnly during a recession does growth in consumption decline2IIIConsumptionIncomeaEveryone has wantsneeds but spending levels are kept in check by numerous factorsbFive most important determinates of consumptioniCurrent disposable income current disposable income of households has the greatest effect on spendingiiHousehold wealth a households wealth is the value of its assets minus the value of its liabilitiesiiiExpected future income expected future income sentiment shapes how secure people feel about spendingparticularly big ticket items1Current income explains current consumption well but only when current income is not unusually high or unusually low compared with expected future incomeivThe price level consumption is affected by changes in the price level as higher prices will reduce overall consumptionLess can be attained for the same amountthe return on spending declinesAs price level rises real value of wealth declinesvThe interest rate with higher rates the reward to saving is increaseAs well the costs of borrowing are higher1Real interest ratenominalinflation
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