2009-10-51Output and Expenditure in theShort Run1Output and Expenditure in the Short RunAggregate expenditure model A macroeconomic model that focuses on the relationship between total spending and real GDP, assuming that the price level is constant.2The Aggregate Expenditure ModelLearningObjective 11.1Aggregate expenditure (AE)The total amount of spending in the economy: the sum of consumption, planned investment, government purchases, and net exports.Aggregate Expenditure• Consumption (C)• Planned Investment (I)• Government Purchases (G)• Net Exports (NX)3The Aggregate Expenditure ModelAggregate expenditure = Consumption + Planned investment + Government purchases + Net exportsAggregate ExpenditureLearningObjective 11.1or:AE = C + planned investment + G + NXNote that:GDP = C + Actual investment + G + NX4The Aggregate Expenditure ModelInventoriesGoods that have been produced but not yet sold.The Difference between Planned Investment and Actual InvestmentLearningObjective 11.1When actual investment≠planned investment,Aggregate expenditure = GDPMacroeconomic EquilibriumWhen actual investment inventories change.5The Aggregate Expenditure ModelLearningObjective 11.1In this chapter we will focus on short-run fluctuation. To simplify the analysis, we will assume that the economy is not growing. Then the equilibrium GDP will not change unless AE changes.Therefore we can highlight the importance of the changes in AE. 6
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