Chapter 21

Chapter 21 - Chapter 21 the simplest short run macro model...

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Chapter 21 – the simplest short run macro model Desired aggregate expenditure: National accounts divide actual GDP into its components: o Ca, Ia, G and NXa a is the ACTUAL Total desired expenditure is divided into the same categories o Desired consumption, C o Desired investment, I o Desired government purchases, G o Desired net exports, NX o Desired expenditure is what consumers and firms(and government) would like to purchase, given their real-world constraints of income and market price. o The sum is called desired aggregate expenditure: AE= C+I+G+NX Two types of expenditures: o Autonomous expenditures do not depend on the level of national income(does not mean unchanging) – (e.g. gross exports – does not depend if a coutry WE ARE IN is doing badly) o Induced expenditures do depend on the level of national income o the components of each type will be identified as we meet them. Where are we going?? o Actual may differ from desired because of unplanned factors o When actual differs from desired, economic forces (‘pressures’) will, over time, tend to pull them together. o When all adjustments of actual to desired have been made, the economy has an equilibrium at Y=AE (actual equals desired) o If Y=AE with an output gap (Y<Y*(*potential) or Y>Y*), there are still pressures for further change, over time, until Y=AE at Y*=Y (i.e. actual = desired at potential GDP)
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We will seek the understand (i) how these stages above work, (ii) their implications for other economic variables – unemployment, inflation, exchange rates, budget deficit/surplus etc. – and (iii) the role of government policy to influence the outcome First step : o We start by assuming the simplest of all economies – an economy with no government and no trade (closed economy). o AE= C + I o We also assume that prices are constant – there is no inflation o In this simplest economy, investment is autonomous(does not depend on GDP) o This economy is highly unrealistic – but it will expose us to many of the tools we will soon need to look at a more complex economy o Desired consumption expenditure – is not a list of what consumers and firms would buy if they had no constraints on their spending – it is much more complex o 2 possible uses of disposable income: Consumption or saving o In the simplest theory, consumption is determined primarily by current disposable
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Chapter 21 - Chapter 21 the simplest short run macro model...

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