Chapter_11 - Chapter 11: Aggregate Expenditure and Output...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 11: Aggregate Expenditure and Output in the Short Run Aggregate expenditure Model GDP is the total expenditure on goods and services. There are four aggregate expenditure categories: C Consumption: Households’ spending on goods and services I Investment: Firms’ spending on capital stock and households’ purchases of new houses. G Government Expenditure: NX Net Exports: Exports Imports AE Aggregate expenditures = C + I + G + NX Differentiate between Planned investment spending and Actual investment spending: Remember change in inventories are included in investment spending. Inventories are unsold production. Because the sales are not perfectly forecasted, actual inventories may be different than the planned inventories. Actual Investment = Planned Investment + Unplanned change in inventories. While calculating AE, we use planned investment. At the equilibrium, GDP = AE. That is total spending equals total production. What happens with disequilibrium? For example, AE>GDP People want to buy more than it is available. inventories decrease orders of new goods and services increase gdp increase AE=GDP AE<GDP inventories increase orders of new goods and services are cut back gdp decrease AE=GDP Determining the aggregate expenditures Determinants of consumption: 1. Current disposable income: Income with transfers after taxes. Positively related to consumption spending. 2. Household wealth: assets (what you own) liabilities (what you owe). Positively related to consumption. For example when stock prices rise, consumption is expected to increase. 3. Expected future income: positively related to consumption. Individuals want to keep their consumption smooth. If their expectation about future income is not high, even high current income does not increase consumption.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4. Price level: Greater the price level, smaller the consumption. But this relationship is not like the
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 6

Chapter_11 - Chapter 11: Aggregate Expenditure and Output...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online