# Week_3 - ECMA06 Aggregate Expenditure 1 Aggregate...

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ECMA06 – Aggregate Expenditure Aggregate Expenditure – The Simplest Short-Run Model Outline Build a simple model that determines equilibrium national income. The simple model consists of consumption and investment only (will take into account of the government and the foreign sector next week). Discuss the adjustment mechanism. Consider how does a change in aggregate expenditure affect national income (we will also discuss the multiplier) 1

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ECMA06 – Aggregate Expenditure Why Do We Want to Develop a Model that Determines National Income? Question: Does demand (planned expenditure) always equal to supply (actual expenditure)? Answer: Not necessary! But why? Supply = actual expenditure = actual national income: GDE = C + I + G + X – IM. Demand (AD) = desired expenditure: AD = C + I + G + X – IM except unexpected changes in inventories . The key is investment (I) in GDE includes unintended change in inventories while investment (I) in AD includes only intended investment . 2
ECMA06 – Aggregate Expenditure It is certainly true that every act of production generates income for Canadians; however , not all of that income gets translated into demand for the output of firms. We want a model that has some positive relationship between The income generated by production and The demand that exists for that production Model of the Macro Economy The underlying model is given by: AE = AE 0 + c Y Y where AE = aggregate expenditure = aggregate demand AE 0 = autonomous expenditure = constant c Y = dY dAE = constant = marginal propensity to spend out of GDP Y = GDP = output = income 3

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ECMA06 – Aggregate Expenditure Start with a Simple Macro Model We will start with a simple model first so that you have a feel what the model looks like. When we make the model more detailed later on, we will have: AE = C + I + G + X – IM FOR NOW , we assume I G, and X are exogenous variables. Exogenous variables – these are given to the model
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## This note was uploaded on 06/18/2011 for the course ECMA 06 taught by Professor Dr.atamazaheri during the Spring '10 term at University of Toronto- Toronto.

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Week_3 - ECMA06 Aggregate Expenditure 1 Aggregate...

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