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Final Notes - Econ 2030 Final Expenditure approach national...

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Econ 2030 Final Expenditure approach, national income accounting Y=C+I+G+X- IM we want the model to explain the macro economy- based on buying selling, putting it all together The total willingness and ability to purchase goods and services, real GDP produced in the US Demand curves don’t work in macro economy because when the dollar falls its becoming cheaper for the buyer but the seller is earning less. Your nominal income decreases but your real doesn’t because you can buy exactly the same stuff-prices are lower everywhere (aggregate price level) Decrease in price will cause an increase in real GDP. Why? 1. Real wealth effect: as the prices change you still have 50 bucks in your hand, but if prices go down you can buy more with your 50 bucks prices down, real wealth up, people will spend more; not just income that matters but wealth 2. Interest rate effect- Fisher effect- inflation rates are related to interest rates. If aggregate price levels go down then interest rates go down, more advantageous to borrow, people will borrow more and spend more 3. Exchange rate effect- if interest rates go down its less desirable to save in US same w lending- the dollar depreciates- US exports are cheaper, imported goods are more expensive so we buy less but sell more, GDP goes up MS/P interest down, depreciates what will cause aggregate demand to increase or decrease? Many things matter but we can group them into 2 things. Policy and expectations.
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Monetary policy- the fed and the fed open market committee controls it Fiscal policy- changes in gov spending (+)and net taxes (-). Gov spending originate in the house- pluses mean it will cause ad to increase and vice versa The two policies are totally separate. 1. Expansionary monetary policy increase money supply, decrease interest rates, demand and GDP go up as well 2. Expansionary fiscal policy- gov buying more or decreases taxes, will have the same effects as above 1. contractionary monetary policy- money supply goes down interest rates go up less spending 2. contractionary fiscal policy- decrease G spending, increase taxes same as above Expectations- if you have confidence we will spend more, if you are worried about losing your job you will spend less (consumer confidence) pessimism down, optimism up Foreign economic growth (+) our trading partners suffer when we suffer. We have the power to import/export recession. People spend less on everything when they lose their job foreigners earn less also. If foreign GDP goes up, US GDP goes up, more jobs, you want more foreign economic growth Exchange rate change (-) if US dollar depreciates, exports cheaper, imports more expensive, foreigners will buy more US goods, demand goes up and vice versa, This is only the demand side Aggregate supply Short run vs.
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