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Unformatted text preview: ms to layoﬀ workers than adjust prices and wages.
During recessions in was common to observe an excess supply of
goods and workers.
Firms would responds to decreases in demand by cutting production
or increases in demand by expanding production. Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 5 / 43 Keynes Menu Costs Menu Costs Keynes argued it was costly to change prices.
Firms need to estimate the optimal prices which took time and proved
to be costly.
Firms wanted to be sure the change in demand was permanent.
Workers disliked wage cuts. Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 6 / 43 PAE Introduction In the Keynesian model ﬁrms respond to changes in demand through
production, which meant the primary determinant of output is
The more spending that occurs results in greater production and vice
Planned aggregate expenditures (PAE) is total planned spending on
ﬁnal goods and services.
(PAE) include household consumption (C), investment (I),
government spending (G), and net exports (NX). Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 7 / 43 PAE Investment Investment Keynes’ model is fairly simple, ﬁrms must decide on how much to
produce at the beginning of the period and then observe sales
throughout the period.
If spending diﬀers from production ﬁrms will adjust output the
The diﬀerence between spending and production will show up in a
ﬁrms inventories (which is a component of investment).
To understand the diﬀerence between spending and production we
must deﬁne plan and realized investment. Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 8 / 43 PAE Investment Investment cont. At the beginning of the period ﬁrms must predict their level of
production and capital investment. This is called...
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This document was uploaded on 03/18/2014 for the course ECON 202 at Gonzaga.
- Spring '09