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Chapter 11

ECON 2010 Chapter 11 (98% on the test)

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ECON 2010
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Chapter 11 Moores Law states that the capacity of semiconductors doubles every two years In this chapter we will explore the causes of the business cycle by examining the effect of changes in total spending on real GDP When total spending in the economy aggregate expenditure AE and total production of good and services increase by the same amounto Most firms will sell what they expected to sell and wont change the production or the number of workers they hire When total spending in an economy increases more than the production of goods and servicesoFirms will increase production and hire more workers When total spending does not increase as much as total productiono Firms will cut back on production and lay off workers and the economy moves to a recession Aggregate expenditure AE the total amount of spending in the economy the sum of consumption planned investment govt purchases and net exports 111 The Aggregate Expenditure Model Aggregate expenditure modela macroeconomic model that focuses on the shortrun relationship between total spending and real GDP assuming that the price level is constanto Can help us understand the relationships among the different economic variableo In any particular year the level of GDP is determined mainly by the level of aggregate expenditure The relationship between the changes in aggregate expenditures and changes in GDP were first studied during the Great Depression in the 1930s There are four components of aggregate expenditure that together equal GDPo Consumption C spending by households on goods and services cars and haircutso Planned investment I planned spending by firms on capital goods factories office buildings machine tools and by households on new homeso Govt Purchases G spending by local state and federal govt on goods and services aircraft carriers bridges salaries of FBI agentso Net exports NX spending by foreign firms and households on goods and services produced in the US minus spending by US firms and households on goods and services produced in other countriesAggregate expenditure AEConsumption CPlanned Investment IGovt Purchases GNet Exports NXIt is key to remember that the investments are planned and that the amount that businesses plan to spend on investment can be different from the amount they actually spendo Inventories goods that have been produced but not yet soldo Change in inventories are included as port of investment spending along with spending on machinery equipment office buildings and factorieso The difference is that the amount a business expects to spend on machinery and office buildings will be equal to what they actually spend but the amount businesses plan to spend on inventories may be different from the amount they actually spendo Unplanned increase in inventoriesactual investment spendingplanned investment spendingo Unplanned decrease in inventoriesactual investment spendingplanned investment spendingo So actual investment will equal planned investment only when there is no unplanned change in inventories
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