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Ch8outline - Chapter 8 Aggregate Expenditure and...

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Chapter 8- Aggregate Expenditure and Equilibrium Output 1) Introduction a) The level of GDP, the overall price level, and the level of employment-three chief concerns of macroeconomists- are influenced by events in three broadly defined “markets”: i) Goods-and-services markets ii) Financial (money) markets iii) Labor markets 2) Aggregate Output and Aggregate Income (Y) a) Each period, firms produce some aggregate quantity of goods and services i) Which we refer to as aggregate output(Y) b) Output includes the production of services, consumer goods, and investment goods. i) “real” output c) Aggregate output - the total quantity of goods and services produced (or supplied) in an economy in a given period d) Aggregate Income - the total income received by all factors of production in a given period. i) Aggregate income and aggregate output are the same but seen from two different points of view. e) When output increases, additional input is generated f) When output is cut, income falls, workers may be laid off or work fewer hours, and profits may fall. g) In any given period, there is an exact equality between aggregate output(production) and aggregate income. h) Aggregate output can also be considered the aggregate quantity supplied because it is the amount that firms are supplying during the period. i) “aggregate output” means “real GDP” j) Income, Consumption, and Saving (Y,C, and S) i) Each period, households receive some aggregate amount of income(Y)
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(1) No government and a “closed” economy ( no exports or imports) (2) Households can only do 2 things with their income: buy goods and services or save ii) Saving - the part of its income that a household does not consume in a given period. Distinguished from savings, which is the current stock of accumulated saving. (1) saving= income-consumption (2) it has a triple equal sign meaning it is an identity . (3) Identity- something that is always true (4) Savings does not refer to the total savings accumulated over time. k) Explaining Spending Behavior i) Single economy - no government and 2 types of spending behavior: consumption or investment ii) Household Consumption and Saving (1) The amount of aggregate consumption in the economy depends on a number of factors: (a) Household income (b) Household wealth (c) Interest rates (d) Households’ expectations about the future (2) These factors work together to determine the spending and saving for households (a) Households with higher income and higher wealth spend more (3) Lower interest rates reduce the cost of borrowing, so lower interest rates are likely to stimulate spending.
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