Lecture 15 Aggregate Expenditure

Lecture 15 Aggregate Expenditure - Aggregate Expenditure...

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Aggregate Expenditure Aggregate expenditure ( AE ): The total amount of spending in the economy: the sum of consumption, planned investment, government purchases, and net exports. Aggregate expenditure model: A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant . (Remember that according to Keynes, AS is horizontal). AE = C + I + G + X - M C : Consumption I : Planned Investment G : Government Purchases X-M : Net Exports Macroeconomic Equilibrium: AE = Y = GDP
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Components of AE: Consumption The following are the five most important variables that determine the level of consumption: Current disposable income: The “most” important determinant of consumption is the current disposable income of households. Household wealth : Consumption depends in part on the wealth of households. A household’s wealth is the value of its assets minus the value of its liabilities. Expected future income : Consumption depends in part on expected future income. Most people prefer to keep their consumption fairly stable from year to year, even if their income fluctuates significantly. The price level: The price level measures the average prices of goods and services in the economy. Consumption is affected by changes in the price level. A lower price level leads to a higher value of wealth, like financial
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Lecture 15 Aggregate Expenditure - Aggregate Expenditure...

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