Macroeconomics Ch9 - Macroeconomics Ch.9 I Meaning of...

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Macroeconomics Ch.9 I. Meaning of Equilibrium GDP A. Equilibrium - situation in which neither consumers nor firms have any incentive to change their behavior, they are content to continue with things as they are a. Equilibrium of GDP on demand side is (total spending = production) II. Mechanics of Income Determination A. Expenditure schedule - shows relationship between national income (GDP) and total spending B. Induced investment - part of investment spending that rises when GDP rises and falls when GDP falls a. Equilibrium GDP is: Y = C + I + G +(X – IM) C. Income expenditure diagrams - (45° line diagram) plots total real expenditure (on vertical axis) against real income (on horizontal axis). The 45° line marks off points where income and expenditure are equal III. Aggregate Demand Curve A. Higher prices decrease demand for goods and services because they erode purchasing power of consumer wealth B. Higher price level leads to lower real wealth and therefore to less spending at any given level of real income
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