Lecture13-ECO100 - Introduction to Introduction to...

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ECO 100Y troduction to Introduction to conomics Economics Lecture 13: ggregate Expenditure Aggregate Expenditure and Equilibrium Income © Gustavo Indart Slide 1
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ssumptions Assumptions rice level is fixed ± Price level is fixed ¾ Only changes in real GDP ± No depreciation and no indirect taxes ¾ GDP = Y © Gustavo Indart Slide 2
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ggregate Expenditure Aggregate Expenditure ± Aggregate expenditure ( AE ) is the total desired expenditure on goods and services in the economy E ( ± AE = C + I + G + ( X IM ) ± The AE function does not measure the actual total expenditure on goods and services ± The AE function measures the desired or planned p total expenditure on goods and services in the economy © Gustavo Indart Slide 3
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Aggregate Expenditure and Equilibrium Income ± Desired or planned total expenditure on goods and services means the total expenditure that households, firms, governments, and foreigners wish to make at each level of income ¾ Therefore, the AE function relates the level of desired to the level of real income ± There is a level of income ( Y* ) at which AE is equal to the actual level of output ( Y ) Æ Y= AE ¾ i.e., actual expenditure is equal to desired expenditure * the vel of income or output for the © Gustavo Indart Slide 4 ± Y is the equilibrium level of income or output for the economy
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Aggregate Expenditure and Equilibrium Income (continued) ± If AE= Y , then desired spending is equal to output and the economy is in equilibrium ± If AE> Y , then there is excess desired spending in the economy and thus the level of output will tend to rise ± If AE< Y , then there is insufficient desired spending in e economy and thus the level of output will tend to the economy and thus the level of output will tend to fall © Gustavo Indart Slide 5
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Aggregate Expenditure and Equilibrium Income (continued) ± The implicit assumption is that desired aggregate expenditure determines the amount of goods and services produced in the economy vp y ± When AE differs from Y , equilibrium can’t be restored rough a change in the price level since the price level through a change in the price level since the price level is assumed fixed hen output will have to increase to ¾ If AE > Y , then output will have to increase to restore equilibrium ¾ Similarly, if AE < Y , then output will have to © Gustavo Indart Slide 6 decrease to restore equilibrium
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imple Model: Consumption and Simple Model: Consumption and Investment ± AE = C + I ± The consumption function describes the total desired personal consumption expenditure ± The investment function describes the total vestment expenditure investment expenditure © Gustavo Indart Slide 7
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Consumption Function ± The consumption function is a description of the total desired personal consumption expenditure by all households in the economy ± Consumption depends on several variables such as disposable income , wealth , interest rates , and expectations about the future ¾ For simplicity, we will assume all these variables constant except disposable income ¾
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Lecture13-ECO100 - Introduction to Introduction to...

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