Chapter 10

Chapter 10 - Chapter 10: Self Adjustment or Instability...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 10: Self Adjustment or Instability Aggregate Demand – the total quantity of output demanded at alternative price levels in a given time period The Circular Flow o All income originates in product markets, where goods and services are sold. o If economy were producing at full employment GDP , then enough income would be available to buy everything a fully employed economy produces. o Consumers typically do not spend all the income they earn in product markets. They save some fraction of it. o Leakages in the Circular Flow Saving is the first leakage. Unless market participants other than the public consumers such as businesses, government, and foreigners buy this unsold output, goods will pile up on producers shelves. As undesired inventory accumulates, producers reduce rate of output and unemployment rises. Imports also represent leakage from circular flow. Sales taxes are taken out of circular flow in product markets. Payroll taxes and income taxes are taken out of wages. Business Saving Revenue is set aside to cover costs of maintaining, repairing, and replacing plant and equipment. (depreciation allowance) Total value of depreciation allowances and retained earnings is called gross business saving o Injections in the Circular Flow Businesses buying plant and equipment. Government purchases and exports. These injections of investment, government, and export spending help offset leakage from saving, imports and taxes. Will spending injections actually equal leakage at full employment? o Flexible Interest Rates – the mechanism assuring equality of leakages and injections Lower interest rates prompt businesses to borrow and invest more. Classical economists concluded that if interest rates fell far enough, business investment would equal consumer savings. o Changing Expectations
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The whole investment function shifts when business expectations change. o Flexible Prices As prices fall consumers buy more output. If prices fell far enough consumers might buy all output produced
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/18/2008 for the course ECON 202 taught by Professor Woroby during the Spring '08 term at Towson.

Page1 / 5

Chapter 10 - Chapter 10: Self Adjustment or Instability...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online