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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: 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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