econ102 outline - Chapter 11 Short-Run Fluctuations...

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Chapter 11 20:55 Short-Run Fluctuations Aggregate Expenditure – The total amount of spending in the economy: the sum of consumption, planned investment, government purchases and net exports. During years total spending in the economy increases more than production of goods and services firms will increase production and hire more workers. Opposite for total spending increasing less than total prod. Aggregate Expenditure Model - A macroeconomic model that focuses on the relationship between total spending and real GDP, assuming that the price level is constant. Key idea of the aggregate expenditure model – in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure. Aggregate Expenditure = C (consumption) + I (planned investment) + G (government purchases) + NX (net exports) Difference between Planned Investment and Actual Investment NOTE: The difference between GDP and AE is that in AE it’s planned investment , rather than actual investment spending. Inventories – goods that have been produced but not yet sold. The amount businesses plan to spend on inventories, may be different from the amount they actually spend. Changes in inventories depend on sales of goods, which firms can not always forecast with perfect accuracy. Actual investment will equal planned investment only when there is no unplanned change in inventories. Macroeconomic Equilibrium Aggregate Expenditure = GDP Total spending = Total production Firms sell what the expect to sell and inventories will be unchanged. There’s no incentive to increase or decrease production. When aggregate expenditure is greater than GDP… The total amount of spending in the economy is greater than the total amount of production. With spending being greater than production, many businesses will sell more goods and services than they had expected. The manager is expected to order more refrigerators General Electric, Whirlpool, etc will increase production of refrigerators. These companies will hire more workers. When aggregate expenditure is greater than GDP, inventories will decline, and GDP and total employment will increase.
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Suppose aggregate expenditure is less than GDP. Spending being less than production, many business will sell fewer goods and service than expected inventories will increase. Store manager cuts back on refrigerator orders. General electric and whirlpool will reduce production and lay off. GDP and total employment begin to decrease. When aggregate expenditure is less than GDP, inventories will increase, and GDP and total employment will decrease. If economists forecast that aggregate expenditure will decline in future, that is equivalent to forecasting that GDP will decline and the economy will enter a recession. Government implements macroeconomic policies.
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