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Econ test 3 review - Econ Test#3-Study Guide Ch.10-13...

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Econ Test #3-Study Guide Ch.10-13 Chapter 10- Aggregate Expenditure and Aggregate Demand- Aggregate Expenditure Line- a relationship tracing, for a given price level, spending at each level of income, or real GDP; C+I+G+(X-M) at each level of income, or real GDP. * Slope- equal to the MPC, b/c consumption varies with Income. ** Real GDP demanded- Spending=Income(Real GDP) ***When one component of aggregate expenditure increases and the price level remains constant, the aggregate demand curve shifts to the right. Investment increases- which will cause an upward shift of the AE line means that at initial real GDP level, planned spending exceeds output. Aggregate Demand Curve- derived from altering the price level. A higher price level- reduces consumption, planned investment, and net exports as shown by the downward shift of the AE line and a shift to the left of the AD curve. If the price level falls- the opposite occurs: consumption, investment, and net exports increase at each real GDP shown by an upward shift of the AE line, and a shift of the AD curve to the right. Income-Expenditure Model- a relationship that shows how much people plan to spend at each income level; this model identifies, for a given price level, where the amount people plan to spend equals the amount produced by the economy. 45 degree line - to show where spending equals real GDP, intersection. Aggregate Output demanded- at a given price level occurs where expenditure, equals real GDP aggregate. Spending Exceeds Real GDP- inventory reductions make firms produce more output. Real GDP Exceeds Spending- unsold goods accumulate, causing inventories to swell. Inventories- Producers stocks of finished and in-process goods.
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Inventory Reduction (spending more than GDP)- this causes firms to produce more output; this reduction increases employment and consumer income leading to more spending. Unplanned Inventory Buildups (GDP more than spending)- this causes firms to cut production until the amount they produce equals aggregate spending. Simple Spending Multiplier- the ratio of a change in real GDP demanded to the initial change in spending that brought it about; the numerical value of the simple multiplier is 1/(1-MPC); called “simple b/c only consumption varies with income”. Leakages- such as higher income taxes and increased spending on imports all reduce the size of the multiplier. Equation- 1/MPS+MPM(income spent on import products) MPC- Marginal Propensity to Consume, Change in Consumption/Change in Income. It is the slope of the consumption line. MPS- Marginal Propensity to Spend, Change in savings/Change in Income. It is the slope of the savings line.
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