ECON 201 Lecture Notes - Lecture 17: Price Level, Tesla Model X

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7 Feb 2017
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Econ 201 Lecture 17
Review of Equations
Y = C + I
o By definition, since G = 0 and NX = 0
Yd = Y
o By definition, since T = 0
C = a + MPC * Yd
o Not by definition, just a theory
I = Iplanned + Iunplanned
o Not by definition, just a theory
Assumptions underlying the multiplier process
Changes in overall spending lead to change in aggregate output. The aggregate
price level is fixed.
The interest rate is fixed.
Taxes, transfers, and government purchases are 0.
Exports and imports are both 0. No foreign trade.
Planned Aggregate Expenditure and GDP
Planned aggregate expenditure (AEplanned): total amount of planned spending
in the economy
AE depends on Y via consumption
Iplanned just is whatever it is
o Does not vary with Y
AEplanned = C + Iplanned
If you graphed this with real GDP on X axis and AEplanned on Y axis, you would
have two parallel lines (one AEplanned and the other C)
o The difference between the two lines is Iplanned
Income-Expenditure Equilibrium
The income-expenditure equilibrium is reached in an economy when aggregate
output (measured by real GDP) is equal to planned aggregate spending
Income-expenditure equilibrium GDP (noted by Y*) is the level of real GDP at
which real GDP equals planned aggregate spending
o Basically just look at the graph. Where does real GDP and AEplanned
intersect? At that point, look for Y*.
Equations:
o GDP = C + I
o GDP = C + Iplanned + Iunplanned
o GDP = AEplanned + Iunplanned
When AEplanned > Y*
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