ECON-205 Ch. 9 Notes

ECON-205 Ch. 9 Notes - Chapter 9. Demand-Side Equilibrium:...

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Chapter 9. Demand-Side Equilibrium: Unemployment or Inflation? Terms An expenditure schedule shows the relationship between national income (GDP) and total spending. The multiplier is the ratio of the change in equilibrium GDP (Y) divided by the original change in spending that cause the change in GDP. Important Concepts Free markets seem able to coordinate literally millions of decisions effortlessly and seamlessly. The equilibrium level of GDP on the demand side cannot be one at which total spending exceeds output because firms will notice that they are depleting their inventory stocks. Firms may first decide to increase production sufficiently to meet the higher demand. Later they may decide to raise prices. The equilibrium level of GDP on the demand side cannot be one at which total spending is less than output, because firms will not allow inventories to pile up. They may decide to decrease production, or they may decide to cut prices in order to stimulate demand. GDP will rise whenever it is less than total spending and that GDP will fall whenever it exceeds C+I+G+ (X-IM). The equilibrium level of GDP on the demand side is the level at which total spending equals production. In such a situation, firms find their inventories remaining at desired levels, so they have no incentive to change output or prices. The 45 degree line displays all the points at which the economy can possibly be
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This note was uploaded on 04/30/2008 for the course ECON 205 taught by Professor Kamrany during the Fall '07 term at USC.

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ECON-205 Ch. 9 Notes - Chapter 9. Demand-Side Equilibrium:...

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