ch15 - CHAPTER CHECKLIST When you have completed your study...

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When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Distinguish between autonomous expenditure and induced expenditure and explain how real GDP influences expenditure plans. 1 Explain how real GDP adjusts to achieve equilibrium expenditure. 2 Describe and explain the expenditure multiplier. 3 Derive the AD curve from equilibrium expenditure. 4
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The Economy at Full Employment At full employment , real GDP equals potential GDP and the unemployment rate equals the natural unemployment. Potential GDP and the natural unemployment rate are determined by real factors and are independent of the price level. A QUICK REVIEW AND PREVIEW
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The quantity of money and money equilibrium determine nominal GDP. Nominal GDP and potential GDP determine the price level. So changes in the quantity of money change nominal GDP, and change the price level, but have no effect on potential GDP. A QUICK REVIEW AND PREVIEW
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Departures from Full Employment Aggregate supply and aggregate demand determine equilibrium real GDP and the price level in the short run . Fluctuations in aggregate supply and aggregate demand bring fluctuations around full employment – the business cycle. In this chapter, we will develop a model based on Keynes’ ideas, the Aggregate Expenditure model, to explore how this can A QUICK REVIEW AND PREVIEW
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Fixed Price Level In the aggregate expenditure model, the price level is assumed to be fixed – not reality, but not a bad assumption for the short run. The model helps explain: What determines the quantity of real GDP demanded at a given price level How the quantity of real GDP changes at a given price level. A QUICK REVIEW AND PREVIEW
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15.1 EXPENDITURE PLANS AND REAL GDP From the circular flow of expenditure and income, aggregate expenditure is the sum of: Consumption expenditure, C Investment, I Government purchases of goods and services, G Net exports, (X – M) Aggregate expenditure = C + I + G + (X – M).
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15.1 EXPENDITURE PLANS AND REAL GDP Planned and Unplanned Expenditures – simple illustration: Motorola decides to produce 11 million cell phones in 2001. Motorola “plans” to sell 10 million phones and to put 1 million into inventory. People and firms makes their expenditure plans and they decide to buy 9 million phones from Motorola. Planned expenditure on phones is 10 million (9 million + 1 million), which is less than
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15.1 EXPENDITURE PLANS AND REAL GDP Aggregate expenditure equals aggregate income and real GDP. But aggregate planned expenditure might not equal real GDP because firms might end up with up more or less inventories than they planned . Definition: Aggregate planned expenditure is planned consumption expenditure plus planned investment plus planned government expenditure plus planned exports minus planned imports.
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15.1 EXPENDITURE PLANS AND REAL GDP Firms make their production plans, they pay incomes that equal the value of production, so aggregate income equals real GDP. Households and governments make their
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ch15 - CHAPTER CHECKLIST When you have completed your study...

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