ECON 1100 Chapter Notes - Chapter 8: Big Spender

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17 Dec 2011
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Chapter 8 macro: spending & output in the short run. The keynesian model"s crucial assumption: firms meet demand at preset prices. Key assumption: in the short run, firms meet the demand for their products at preset prices. Firms don"t respond to every change in the demand for their products by changing their prices. Instead they typically set a price for some period, & then meet the demand( produce as much as wanted) @ that price. Menu costs: the costs of changing prices constantly. This model so far ignores the fact that prices will eventually adjust. Planned aggregate expenditure (pae): total planned spending on final goods & services. 4 components of total, or aggregate, spending are consumption, private sector investment, government. The gdp accounts are based on assumption that the firm buy"s its unsold inventory from itself. Then count ed as part of the firm"s independent spending (planned aggregate expenditure) pae = c + ip(planned investment) + g + nx.

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