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Chapter 9

Chapter 9 - The Aggregate Expenditures Model

4 Pages
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Department
Economics
Course Code
ECN 204
Professor
Thomas Barbiero

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Chapter 9 The Aggregate Expenditures Model
9.1 Aggregate Expenditures Model: Consumption and Saving
Simplification private closed economy
No government
No taxes
No exports or imports
Consumption and investment schedule
Consumption schedule: higher income = higher consumption
Saving schedule: higher income = higher saving
Relationship between consumption and GDP: as GDP increases, so does consumption
When GDP increases, investment doesnt increase, it stays the same
Investment demand curve: downward sloping
Investment schedule: straight horizontal line
Calculating GDP Table 9.2
Real domestic output determined by aggregate expenditure
Aggregate expenditure: in our closed economy AE = C + I
Disequilibrium: no level other than the equilibrium level can be sustained
Unplanned inventory is the different between production and AE (GDP AE)
When inventories run down, production will increase
Summary: Equilibrium GDP
The equilibrium output is that output which creates total spending just sufficient to
produce that output
Other features of equilibrium GDP:
oSaving equals planned investment
Saving represents a leakage of spending
Investment can be thought of as an injection of spending
oNo unplanned changes in inventories
9.2 Changes in Equilibrium GDP and the Multiplier
In the private closed economy, the equilibrium GDP will change in response to
changes in either the investment schedule or the consumption schedule
Investment schedules are the main source of fluctuations
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Description
Chapter 9 The Aggregate Expenditures Model 9.1 Aggregate Expenditures Model: Consumption and Saving Simplification private closed economy No government No taxes No exports or imports Consumption and investment schedule Consumption schedule: higher income = higher consumption Saving schedule: higher income = higher saving Relationship between consumption and GDP: as GDP increases, so does consumption When GDP increases, investment doesnt increase, it stays the same Investment demand curve: downward sloping Investment schedule: straight horizontal line Calculating GDP Table 9.2 Real domestic output determined by aggregate expenditure Aggregate expenditure: in our closed economy AE = C + I Disequilibrium: no level other than the equilibrium level can be sustained Unplanned inventory is the different between production and AE (GDP AE) When inventories run down, production will increase Summary: Equilibrium GDP The equilibrium output is that output which creates total spending just sufficient to produce that output Other features of equilibrium GDP: o Saving equals planned investment Saving represents a leakage of spending Investment can be thought of as an injection of spending o No unplanned changes in inventories 9.2 Changes in Equilibrium GDP and the Multiplier In the private closed economy, the equilibrium GDP will change in response to changes in either the investment schedule or the consumption schedule Investment schedules are the main source of fluctuations www.notesolution.com
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