Ch 10 - Chapter 10 - Aggregate Expenditure and Aggregate...

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Chapter 10 - Aggregate Expenditure and Aggregate Demand 1. Aggregate Expenditure and Income a. Each dollar of spending translates directly into a dollar of aggregate income i. Therefore, GDP equals aggregate income b. Components of Aggregate Expenditure i. Planned aggregate expenditure shows how much households, firms, governments, and the rest of the world plan to spend on U.S. output at each price level of real GDP, or real income 1. Planned Aggregate Expenditure (AE) = C + I + G + (X - M) ii. Consumption is the only spending component that varies with real GDP 1. As real GDP increases, so does disposable income, which increases consumption iii. Planned Investment - the amount firms plan to invest iv. Actual Investment - the amount of investment actually undertaken 1. Equals planned investment plus unplanned changes in inventories v. Unplanned Inventory Adjustments - real GDP minus planned aggregate expenditure, or Y - AE 1. Planned spending greater than amount produced a. Firms must rely on inventories to make up the shortfall in output b. Firms respond to shortfalls in output by increasing production until they produce the amount people want to buy (real GDP = planned aggregate expenditure) 2. Amount produced greater than planned spending a. Firms get stuck with unsold goods, which become unplanned increases in inventories b. Firms respond by reducing output until they produce the amount people want to buy 3. Amount produced equal to amount people plan to spend a. No unplanned inventory adjustments, so planned investment equals actual investment b. At a given price level, the quantity of real GDP demanded occurs where spending plans match the amount produced c. Real GDP Demanded i.
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Ch 10 - Chapter 10 - Aggregate Expenditure and Aggregate...

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