05_Lecture_Slides - Economics 104 Fall 2010 1 The Economy...

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Economics 104 Fall 2010 1 The Economy in the Short Run — Economic Fluctuations 1. A Brief Introduction to Short-Term Economic Fluctuations; chapter 7 2. Spending and Output in the Short Run (basic Keynesian model); chapter 8
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Economics 104 Fall 2010 2 The Economy in the Short Run — Economic Fluctuations 2. Spending and Output in the Short Run (basic Keynesian model) Objective : to set down a simple model of aggregate demand that explains departures from potential (full employment) output. The model is associated with J.M. Keynes. Critical assumption : in the short run firms meet the demand for their products at preset prices. ...sometimes referred to as the fixed price Keynesian model Why might firms choose not to change prices when demand changes? Menu Costs — it is costly to change prices; in the short-run it may be best to set prices and meet demand.
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Economics 104 Fall 2010 3 Planned Aggregate Expenditure At any point in time, consumers, firms, and governments have expenditure plans — what they would like to spend given current conditions. Recall the components of aggregate expenditure: Consumption ( C ) Investment ( I ) Government ( G ) Net Exports ( NX ) Suppose that planned expenditure is less than total production. Then, firms inventories must be increasing (a type of investment, I ). Investment can be decomposed into planned investment and unplanned inventory investment:
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This note was uploaded on 01/28/2011 for the course ECON 104 taught by Professor Voss during the Winter '10 term at University of Victoria.

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05_Lecture_Slides - Economics 104 Fall 2010 1 The Economy...

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