L13 - ECO 100Y ECO 100Y Introduction to Introduction to...

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Unformatted text preview: ECO 100Y ECO 100Y Introduction to Introduction to Introduction to Introduction to Economic Economic Economics Economics Lecture 13: Lecture 13: Aggregate Expenditure Aggregate Expenditure and Equilibrium Incom and Equilibrium Incom Gustavo Indart Slide 1 and Equilibrium Income and Equilibrium Income Assumptions Assumptions Assumptions Assumptions ! Price level is fixe ! Price level is fixed " Only changes in real GDP ! No depreciation and no indirect taxes " GDP = Y Gustavo Indart Slide 2 Aggregate Expenditure Aggregate Expenditure Aggregate Expenditure Aggregate Expenditure ! Aggregate expenditure ( AE ) is the total desired expenditure on goods and services in the economy ! AE = C + I + G + (X IM) ! The AE function does not measure the actua total ! The AE function does not measure the actual total expenditure on goods and services ! The AE function measures the desired or planned total expenditure on goods and services in the economy Gustavo Indart Slide 3 Aggregate Expenditure and Aggregate Expenditure and Eq ilibri m In m Eq ilibri m In m Equilibrium Income Equilibrium Income ! Desired or planned total expenditure on goods and services means the total expenditure that households, firms, governments, and foreigners wish to make at each level of incom income " Therefore, the AE function relates the level of desired AE to the level of real income ! There is a level of income ( Y* ) at which AE is equal to the actual level of output ( Y ) # Y = AE " i.e., actual expenditure is equal to desired expenditure Y* is the equilibrium level of income or output for the Gustavo Indart Slide 4 ! Y* is the equilibrium level of income or output for the economy Aggregate Expenditure and Aggregate Expenditure and Equilibrium Income Equilibrium Income (contd) (contd) ! 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 and thus the level of output will tend to rise ! If AE < Y , then there is insufficient desired spending in the economy and thus the level of output will tend to fall Gustavo Indart Slide 5 Aggregate Expenditure and Aggregate Expenditure and Equilibrium Income (continued) 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 cant be restored through a change in the price level since the price level through a change in the price level since the price level is assumed fixed " If AE > Y then output will have to increase to " If AE > Y , then output will have to increase to restore equilibrium " Similarly, if AE < Y , then output will have to Gustavo Indart Slide 6 decrease to restore equilibrium Simple Model: Consumption and Simple Model: Consumption and Simple Model: Consumption and Simple Model: Consumption and Investment Investment !...
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L13 - ECO 100Y ECO 100Y Introduction to Introduction to...

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