Lecture7

# 8100 300 1000 180 08y 2200 08y 8 the nal expression

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Unformatted text preview: 0 − 0.8(100) + 300 + 1000 + 180 + 0.8Y = 2200 + 0.8Y (8) The ﬁnal expression, PAE = 2200 + 0.8Y , shows the relationship between PAE and output. Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 22 / 43 PAE Consumption, PAE, and Output PAE and Output (Figure 10.6) Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 23 / 43 PAE Consumption, PAE, and Output Shifts in PAE Changes in taxes, government spending, investment, net exports, or autonomous consumption will shift the PAE line. An increase in G , I , NX , or C or a decrease in T will shift the PAE line up. Changes in taxes will have a smaller aﬀect on PAE since they enter through consumption, C = C + MPC (Y − T ). Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 24 / 43 PAE Consumption, PAE, and Output An Increase in Investment (Figure 10.7) Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 25 / 43 Short-Run Equilibrium Introduction The next step is to ﬁnd the level of production where there are no unwanted accumulation of inventories. To ﬁnd equilibrium we will set production (Y ) equal to expenditures (PAE ). Y = PAE (9) Using PAE from before we can ﬁnd output by solving for Y. Y = 2200 + 0.8Y (10) Solving for Y, we ﬁnd production and expenditures are equal at a value of 11, 000 Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 26 / 43 Short-Run Equilibrium Short-Run Equilibrium (Figure 10.8) Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 27 / 43 Short-Run Equilibrium Disequilibrium When output is below expenditures (Y < PAE ), there is an unattended decline in inventories. If actual output is \$10, 000, PAE = 2200 + 0.8(10, 000) = 10, 200. This will occur at points to the left of equilibrium. If actual output is \$12, 000, PAE = 2200 + 0.8(12, 000) = 11, 800. This will o...
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## This document was uploaded on 03/18/2014 for the course ECON 202 at Gonzaga.

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