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Macroeconomic Notes part 2

Macroeconomic Notes part 2 - Macroeconomic Notes part 2...

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Macroeconomic Notes part 2 Macroeconomic equilibrium (45 degree line) What is on top and Under means they want more from the aggregate expenditure or they want less than what is being produced. Desired Aggregate Expenditure Income: Autonomous expenditures------ The sum of G purchases + Exports Induced expenditures------ including certain components of C expenditure minus Imports Equilibrium is where the 45 degree line and the (C+I+G+NX) line intercept With the simplest model, equilibrium national income/expenditure occurs where desired AE Equals Real/Actual GDP. However, sometimes desired or planned AE is less than real/actual GDP because firms end up with inventories that are larger or smaller than they had desired. Changes in inventories are the adjustment mechanism explaining why disequilibrium occurs. To solve that problem firms will either cut back on production or intensify production until they are back to equilibrium. So when it is at equilibrium, there is no unplanned inventory Accumulated. Now they have less problems with that factor since there is Just in Time inventory systems which precent from having overstock. The difference between desired saving and desired investment is exactly equal to the difference between desired AE and Actual/Real GDP. Recognize the difference between movements along and shifts of the Aggregate expenditure function. If there is a cause effect (change on the x axis) there will be an effect (change of place on the 45 degree line) This is called moving along the AE function. If for some reason demand becomes more and more but the 45 degree line stays at the same place we say there is a shift in the AE function. Now what makes the demand go up or down??? (desired consumption) Changes in non-income factors may cause a change in desired consumption (or savings) causing the entire C or S functions to shift. (Fall in real interest rate, an increase in the buying power or net assets, or change in expected future income will result in higher consumption expenditure and shift the consumption function upward). Parallel and non-parallel shifts (do at home) (536)
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Explain the Expenditure Multiplier If autonomous expenditures go up, this induces AE to go up and Real GDP to go up. The multiplier shows that the resulting increase in eq real GDP is > initial change in autonomous spending. The multiplier is a measure of the size of the change in equilibrium national income that results from the change in autonomous expenditure that caused it. The multiplier is the change in equilibrium national Y divided by the change in autonomous expenditure that brought it about. The multiplier is greater than one because an increase in autonomous expenditure induces further increases in expenditure. The multiplier effect occurs both when autonomous expenditure rises and when it decreases.
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