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lec18slides - Aggregate Output Amount produced = Aggregate...

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4 Aggregate Output Amount produced = Aggregate output = Y Amount that people want to buy = Planned aggregate expenditures = AE Equilibrium: AE = Y 7 Today, assume: No government. No imports or exports. Prices and interest rates are fixed.
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10 Who buys goods? Consumers: Consumption C. Firms: Planned Investment I. AE = C + I 12 Consumption C 1. Aggregate output Y is aggregate income to consumers. 2. Higher Y Higher consumption.
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13 Relation between C and Y: C Y C 14 Planned Investment Assume firms want to invest fixed amount I.
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15 Relation of AE to Y : AE Y C C + I I 16 Equilibrium: Amount people want to buy = Amount produced Planned Expenditures = Aggregate Income AE = Y C + I = Y
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17 AE Y 45 o 45 o line gives points where AE=Y 20 Equilibrium AE Y C + I Y*
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22 AE Y C + I Y 1 Y* Y 2 Movement toward equilibrium. 25 Technical detail: Investment includes change in inventories. Planned investment includes planned change in inventories. Equilibrium occurs when planned change in inventories equals actual change in inventories.
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26 Example: C = 100 + 0.75 Y I = 25 C + I = 125 + .75 Y 27 AE Y C + I ? 125 slope = .75
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28 Example: C = 100 + 0.75 Y I = 25 C + I = 125 + .75 Y Equilibrium: C + I = Y 125 + .75 Y = Y
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