CH11 - 2009-10-5 Learning Objective 11.1 The Aggregate...

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2009-10-5 1 Output and Expenditure in the Short Run 1 Output and Expenditure in the Short Run Aggregate expenditure model A macroeconomic model that focuses on the relationship between total spending and real GDP, assuming that the price level is constant. 2 The Aggregate Expenditure Model Learning Objective 11.1 Aggregate 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 ) 3 The Aggregate Expenditure Model Aggregate expenditure = Consumption + Planned investment + Government purchases + Net exports Aggregate Expenditure Learning Objective 11.1 or or: AE = C + planned investment + G + NX Note that: GDP = C + Actual investment + G + NX 4 The Aggregate Expenditure Model Inventories Goods that have been produced but not yet sold. The Difference between Planned Investment and Actual Investment Learning Objective 11.1 When actual investment planned investment, Aggregate expenditure = GDP Macroeconomic Equilibrium When actual investment inventories change. 5 The Aggregate Expenditure Model Learning Objective 11.1 In 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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2009-10-5 2 The Aggregate Expenditure Model Adjustments to Macroeconomic Equilibrium Learning Objective 11.1 IF … THEN … AND … the economy is in Table 11-1 The Relationship between Aggregate Expenditure and GDP Aggregate expenditure is equal to GDP inventories are unchanged macroeconomic equilibrium. Aggregate expenditure is less than GDP inventories rise GDP and employment decrease. Aggregate Expenditure is greater than GDP inventories fall GDP and employment increase . 7 Determining the Level of Aggregate Expenditure in the Economy Learning Objective 11.2 Table 11-2 Components of Real Aggregate Expenditure, 2006 EXPENDITURE CATEGORY EXPENDITURE (BILLIONS OF 2000 DOLLARS) Consumption $8,091 Investment 1,946 Government 1,998 Net Exports 618 8 Determining the Level of Aggregate Expenditure in the Economy Learning Objective 11.2 Consumption FIGURE 11-1 Real Consumption, 1979–2006 9 Determining the Level of Aggregate Expenditure in the Economy Learning Objective 11.2 • Current disposable income Consumption The following are the five most important variables that determine the level of consumption: • Household wealth • Expected future income • The price level • The interest rate 10 Determining the Level of Aggregate Expenditure in the Economy Learning Objective 11.2 The most important determinant of consumption is the current disposable income of households.
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This note was uploaded on 02/22/2010 for the course FBE ECON1002 taught by Professor Rao during the Spring '10 term at HKU.

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CH11 - 2009-10-5 Learning Objective 11.1 The Aggregate...

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