Lecture 13 - ECO100

Lecture 13 - ECO100 - ECO 100Y ECO 100Y Introduction to...

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ECO 100Y troduction to Introduction to conomics Economics Lecture 13: Aggregate Expenditure d Equilibrium Income © Gustavo Indart Slide 1 and Equilibrium Income
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ssumptions Assumptions vel is fixed ± Price level is fixed ¾ Only changes in real GDP ± No depreciation and no indirect taxes ¾ GDP = Net Domestic Income ¾ We will use Y to denote both GDP and Net Domestic Income © Gustavo Indart Slide 2
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Aggregate Expenditure ± Aggregate expenditure ( AE ) is the total desired penditure on goods and services produced in the expenditure on goods and services produced in the domestic economy ¾ AE= C+ I+ G+ (X–IM) ± The function does not measure the actual total expenditure on goods and services produced in the domestic economy ± The function measures the desired or planned total expenditure on goods and services produced in © Gustavo Indart Slide 3 the domestic economy
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Aggregate Expenditure and q ilibri m In m Equilibrium Income ± Desired or planned total expenditure on domestically- dd d d i h l d i produced 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 to the level of real income ± There is a level of income ( Y* ) at which is equal to the actual level of output ( Y ) Æ Y= AE ¾ That is, actual expenditure is equal to desired expenditure at the vel of income or output for the © Gustavo Indart Slide 4 ¾ is the equilibrium level of income or output for the economy
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Aggregate Expenditure and Equilibrium Income (cont’d) ± 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 (i.e., an excess demand ) and thus the level of output will tend to rise ± If AE< Y , then there is insufficient desired spending in the economy (i.e., an excess supply ) and thus the level of output will tend to fall © Gustavo Indart Slide 5 pw d
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Aggregate Expenditure and Equilibrium Income (continued) ± The implicit assumption is that desired aggregate expenditure determines the amount of goods and services produced in the economy ± When AE differs from Y , equilibrium cannot be restored rough a change in the price level since assumed through a change in the price level since P is assumed fixed ¾ If AE > Y , then output will have to increase to eliminate the excess demand and restore equilibrium ¾ Similarly, if AE < Y , then output will have to decrease © Gustavo Indart Slide 6 to eliminate the excess supply and restore equilibrium
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imple Model: Consumption and Simple Model: Consumption and Investment ± AE= C+ I ± The consumption function describes the total desired personal consumption expenditure ± The investment function describes the total vestment expenditure investment expenditure © Gustavo Indart Slide 7
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Consumption Function ± The consumption function is a description of the total desired personal consumption expenditure by all households in the economy ±
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This note was uploaded on 08/10/2011 for the course ECON 100 taught by Professor Carr during the Spring '10 term at University of Toronto.

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Lecture 13 - ECO100 - ECO 100Y ECO 100Y Introduction to...

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