Class Notes (839,092)
United States (325,774)
Economics (157)
ECON 0110 (84)
Lecture

Section 17 Notes.doc

7 Pages
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Department
Economics
Course Code
ECON 0110
Professor
K E N K E L

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SECTION 17: EQUILIBRIUM LEVEL OF OUTPUT The level of output in which planned or desired purchases by consumers, businesses, governments and foreigners equals actual aggregate output. When the economy is in equilibrium, producers have no incentive to increase (or decrease) output. EQUILIBRIUM: AGGREGATE PLANNED EXPENDITURES = TOTAL ACTUAL OUTPUT Total Production = Production for immediate sale + Production to increase inventories Equilibrium is achieved when people want to buy everything that has been produced for immediate sale. In this case, the firm’s level of inventories will be at exactly the desired level. Equilibrium is achieved if the amount that people desire to spend matches the amount that producers produced for immediate sale. THREE POSSIBLE SCENARIOS CASE 1. OUTPUT FOR SALE > DESIRED PURCHASES If actual output for immediate sale exceeds desired spending, then producers produced too much and inventories will increase above the desired level. Signal to producers: REDUCE OUTPUT CONCLUSION: If actual output exceeds desired output, actual output will decline. CASE 2. OUTPUT FOR SALE < DESIRED PURCHASES If actual output is less than desired spending, people purchase more than expected and inventories will decrease below the desired level Signal to producers: INCREASE OUTPUT CONCLUSION: If desired output exceeds actual output, output will increase. CASE 3. OUTPUT FOR SALE = DESIRED SPENDING If actual output equals desired spending, then people purchased exactly what the producers expected and inventories will remain at the desired level Signal to producers: DO NOT CHANGE OUTPUT CONCLUSION: If actual output equals desired output, equilibrium is achieved and output does not change. EQUILIBRIUM INCOME IN THE KEYNESIAN MODEL DEFINITIONS: ACTUAL OUTPUT = the actual level of C + I + G + NX The amount that households, firms, governments and foreigners ACTUALLY purchase DESIRED SPENDING = the desired level of C + I + G + NX The amount that households, firms, governments and foreigners WANT to purchase DESIRED SPENDING depends on the ACTUAL level of output because C depends on Y. EQUILIBRIUM OUTPUT = Y e The level of output such that producers have no incentive to change the scale of production EQUILIBRIUM: DESIRED SPE
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