Econ 102 Chapter 11 Study Guide

Econ 102 Chapter 11 Study Guide - Econ Chapter 11 Study...

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Econ Chapter 11 Study Guide 22:32 Aggregate expenditure : Total spending in the economy. In some years this number increases as much as does the production of good  and services. o If this happens, most firms will sell about what they expected  to sell, and  will not increase or decrease production or the number of workers hired.  o If increases relative to production, companies hire and produce more. o If deceases, companies hire and produce less.  Aggregate Expenditure Model:  focuses on the short run relationship  between total spending and real GDP o Assumes price level is constant o In any particular year, the level of GDP is determined mainly by the level of  aggregate expenditure.  Components: o Consumption:  Spending by households on goods and services, such as  automobiles and haircuts o Planned Investment:  Planned spending by firms on capital goods, such  as factories, office buildings, and machine tools, and by households on  new homes o Government Purchases:  This is spending by local, state, and federal  governments on goods and services, such as aircraft carriers, bridges,  and salaries of FBI Agents o NX:   This is spending by foreign firms and households on goods and  services produced in the United States minus spending by U.S. firms and  households on goods and services produced in other countries. o o AE=C+I+G+NX Difference between planned and actual investment: o The fact that its planned investment vs. actual investment differentiates AE  from GDP
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Changes in inventories are included as part of investment spending  along with spending on machinery, equipment… WE assume that the  amount businesses plan to spend on machinery and office buildings is  equal to the amount they actually spend, but the amount businesses  plan to spend on inventories may be different from the amount they  actually spend.  Actual investment will equal planned investment only when there is  no unplanned change in inventories. 
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