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Final exam review part 2

# Final exam review part 2 - Chapter 16 The equilibrium level...

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Chapter 16 T he equilibrium level of output (GDP) is one in which aggregate expenditures for goods and services by consumers and investors (C + I n ) equals aggregate supply (GDP); this is equivalent to saying that it is the level at which planned savings equals planned investment A ggregate supply exceeds aggregate expenditures this represents unsold output P lanned savings exceed planned investment by X billion – precisely the amount by which aggregate supply exceeds aggregate expenditures or the amount of unsold output. T his unsold output is added to inventories. I nventories: stocks of merchandise in retailer s warehouses, car dealerships W hen aggregate expenditures exceeds aggregate supply, planned investment exceeds planned savings, and by the same amount. T he excess aggregate expenditures is supplied out of inventories. D epletion of inventories causes dealers to step up their orders from the factories. E quality of planned savings and investment occurs only at one unique level of GDP – to wit, X billion. It s the same level of output at which aggregate supply and aggregate expenditures are also equal. T he level of output can be maintained ; it s equilibrium output and employment. T he equilibrium output would be at a level representing full employment. P lanned savings: amount that people plan to save given the level of income Planes investment: amount that businesses plan to invest. E quilibrium is reached when planned savings equals planned investment. F ull-employment output (Y E ) can be anywhere along the horizontal, Y axis. I t would be a sheer coincidence – an extremely unlikely one – for full-employment output to coincide with equilibrium output; for Y FE = Y Chapter 17 T he division of the incremental income between spending and saving depends on the marginal propensities to consume and to save. T he smaller the amount withdrawn from the spending stream at each round in the form of savings --- that is, smaller the MPS – the greater will be the total rise in income. T he proportions of the added income allocated to additional spending and savings depend on the marginal propensities to consume and to save. I ncome converges gradually on a new, higher plateau. E ventually, income or output settles at a permanent equilibrium level, which is higher by 500 than the original level. M ultiplier (K): the ratio between the permanent change in income and the change in investment that brought it about. K = Y/ I Chapter 18 B udgetary deficit: excess of government outlay s or expenditures over tax revenues B udgetary surplus: excess of tax revenue over government expenditures. W hile T is a positive function of income, G is determined politically, and is invariant with respect to income.

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