Conf2 - McGill University Macroeconomics Professor Paul...

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McGill University Macroeconomics Professor Paul Dickinson Discussion Questions #2 The Basics of the Short-Run Macro Model 1. Desired Versus Actual Expenditure. From national income accounting (Chapter 20), we know that actual national income equals actual national expenditure and also equals actual national production. But central to the theory of national-income determination is the distinction between “desired” aggregate expenditure and “actual” aggregate income. All measures of income here are real as opposed to nominal (since the price level is assumed to be constant. Also, the model at the moment has no government and no foreign trade. a) Explain the concept of desired consumption expenditure and how it relates to actual national income. b) Explain the concept of desired investment expenditure and how it relates to actual national income. c) Now explain what desired aggregate expenditure is and how it relates to actual national income. d) Imagine a level of actual national income (hereafter GDP) such that desired aggregate expenditure exceeds GDP. Explain how desired aggregate expenditure can exceed GDP even though actual aggregate expenditure cannot. Show this distinction in the 45-degree line diagram that we developed in class. If consumers are actually spending their desired amount, would there be a contradiction here? Explain why/why not. e) Now imagine a level of GDP such that desired aggregate expenditure is less than GDP. Explain
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Conf2 - McGill University Macroeconomics Professor Paul...

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