Lecture 13 - ECO100

# Lecture 13 - ECO100 - Introduction to Introduction...

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© Gustavo Indart Slide 1 ECO 100Y ECO 100Y Introduction to Introduction to Economics Economics Lecture 13: Lecture 13: Aggregate Expenditure Aggregate Expenditure and Equilibrium Income and Equilibrium Income

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© Gustavo Indart Slide 2 Assumptions Assumptions ± Price level is fixed ¾ Only changes in real GDP ± No depreciation and no indirect taxes ¾ GDP = Y
© Gustavo Indart Slide 3 Aggregate Expenditure Aggregate Expenditure ± Aggregate expenditure ( AE ) is the total desired expenditure on goods and services in the economy ± AE = C + I + G + ( X IM ) ± The AE function does not measure the actual total expenditure on goods and services ± The AE function measures the desired or planned total expenditure on goods and services in the economy

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© Gustavo Indart Slide 4 Aggregate Expenditure and Aggregate Expenditure and Equilibrium Income Equilibrium Income ± Desired or planned total expenditure on goods and services means the total expenditure that households, firms, governments, and foreigners wish to make at each level of income ¾ Therefore, the AE function relates the level of desired AE to the level of real income ± There is a level of income ( Y* ) at which AE is equal to the actual level of output Æ Y = AE ¾ i.e., actual expenditure is equal to desired expenditure ± Y* is the equilibrium level of income or output for the economy
© Gustavo Indart Slide 5 Aggregate Expenditure and Aggregate Expenditure and Equilibrium Income (continued) Equilibrium Income (continued) ± If AE = Y , then desired spending is equal to output and the economy is in equilibrium ± If AE > Y , then there is excess desired spending in the economy and thus the level of output will tend to rise ± If AE < Y , then there is insufficient desired spending in the economy and thus the level of output will tend to fall

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© Gustavo Indart Slide 6 Aggregate Expenditure and Aggregate Expenditure and Equilibrium Income (continued) Equilibrium Income (continued) ± The implicit assumption is that aggregate expenditure determines the amount of goods and services produced in the economy ± When AE differs from Y , equilibrium can’t be restored through a change in the price level since the price level is assumed fixed ¾ If AE > Y , then output will have to increase to restore equilibrium ¾ Similarly, if AE < Y , then output will have to decrease to restore equilibrium
© Gustavo Indart Slide 7 Simple Model: Consumption and Simple Model: Consumption and Investment Investment ± AE = C + I ± The consumption function describes the total desired personal consumption expenditure ± The investment function describes the total investment expenditure

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© Gustavo Indart Slide 8 Consumption Function Consumption Function ± The consumption function is a description of the total desired personal consumption expenditure by all households in the economy ± Consumption depends on several variables such as disposable income , wealth , interest rates , and expectations about the future ¾ For simplicity, we will assume all these variables constant except
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## This note was uploaded on 01/16/2011 for the course ECO ECO100 taught by Professor Inheart during the Fall '09 term at University of Toronto.

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Lecture 13 - ECO100 - Introduction to Introduction...

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