EC140 Chapter Notes - Chapter 21: Real Interest Rate, Opportunity Cost, Disposable And Discretionary Income
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EC140 Full Course Notes
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Explain the difference between desired and actual expenditure. Understand the meaning of equilibrium national income. Explain how a change in desired expenditure affects equilibrium income through the simple multiplier. Desired expenditure refers to what people desire to spend out of the resources they actually have. Desired aggregate expenditure (ae): the sum of desired or planned spending on domestic output by households, firms, governments, and foreign purchasers of domestically produced commodities. Ae = c + i + g + (x-im) Desired expenditure does not have to equal actual expenditure: ex: firms might not plan to invest in inventory accumulation this year but might do so unintentionally if sales are unexpectedly low. The unsold goods that pile up on their shelves are undesired inventory accumulation and in this case, actual investment expenditure (ia) will exceed desired investment expenditure (i) Autonomous expenditure does not change when national income changes.
