Total aggregate expenditure

Total aggregate expenditure - Y *, is always a multiple of...

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Total  aggregate expenditure AE , can be written as the equation  where  A  denotes total  autonomous expenditure , or the sum  C + I + G  +  NX . Different levels of  autonomous expenditure,  A , and real national income,  Y , correspond to different levels of aggregate  expenditure,  AE.   Equilibrium real GDP in the income-expenditure model is found by setting current real national  income,  Y , equal to current aggregate expenditure,  AE.  Algebraically, the equilibrium condition that  = AE  implies that  where  In words, the equilibrium level of real GDP,  Y *, is equal to the level of autonomous expenditure,  A multiplied by  m , the  Keynesian multiplier.  Because the  mpc  is the  fraction  of a change in real  national income that is consumed, it always takes on values between 0 and 1. Consequently, the  Keynesian multiplier,  m , is always greater than 1, implying that equilibrium real GDP, 
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Unformatted text preview: Y *, is always a multiple of autonomous aggregate expenditure, A , which explains why m is referred to as the Keynesian multiplier. The determination of equilibrium real national income or GDP using the income-expenditure approach can be depicted graphically, as in Figure 1 . This figure shows three different aggregate expenditure curves , labeled AE 1 , AE 2 , and A 3 , which correspond to three different levels of autonomous expenditure, A 1 , A 2 , and A 3 . The upward slope of these AE curves is due to the positive value of the mpc. As real national income Y rises, so does the level of aggregate expenditure. The Keynesian condition for the determination of equilibrium real GDP is that Y = AE. This equilibrium condition is denoted in Figure 1 by the diagonal, 45 line, labeled Y = AE....
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This note was uploaded on 11/18/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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Total aggregate expenditure - Y *, is always a multiple of...

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