Econ 104 Notes.pdf

# When income rises faster in us than other countries

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When income rises faster in US than other countries, US consumers' purchase of foreign goods and services increase faster than foreign consumers' purchase of US goods -> net exports fall Growth rate in US vs other countries: As the value of the US dollar rises -> foreign currency prices of US products in other countries rises -> dollar price of foreign products sold in US falls Exchange Rate: Macroeconomic equilibrium occurs when GDP is equal to aggregate expenditure The 45 o line diagram is also called the Keynesian cross We can use a graph called the 45 o line diagram to illustrate macroeconomic equilibrium All points above the line, aggregate expenditure will be greater than GDP All points below the line, aggregate expenditure will be less than GDP All points of macroeconomic equilibrium must lie along the 45 o line Used to find the actual level of equilibrium real GDP, given the actual level of planned real expenditure Aggregate expenditure function: which shows the amount of planned aggregate expenditure that will occur at every level of national income or GDP C + I line is above C line by the constant amount of planned investment The C + I + G line is higher than the C + I line by the constant amount of government purchases The C + I + G + NX line is higher than the C + I + G line by constant amount of net exports C line is the lowest An increase is autonomous expenditure will shift the AE function up and lead to a multiplied increase equilibrium GDP Autonomous expenditure: an expenditure that does not depend on the level of GDP Multiplier: the ratio of the increase in equilibrium real GDP to the increase in autonomous expenditure Occurs because an initial increase in autonomous expenditures sets off a series of increases in real GDP Delta y / delta I = change in real GDP/change in investment spending Calculate the multiplier by dividing the increase in equilibrium real GDP by the increase in autonomous expenditures Multiplier effect: the series of induced increases in consumption spending that results from an initial increase in autonomous expenditures 12.3 Graphing Macroeconomic Equilibrium: A Formula for the Multiplier: Lesson 8 Page 64

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Multiplier = change in equilibrium real GDP/ change in autonomous expenditures = 1/ 1-MPC A Formula for the Multiplier: The multiplier effect occurs both when autonomous expenditure increases and when it decreases 1. Because of the multiplier effect, a decline in spending & production in one sector of the economy can lead to declines in spending and production in many other sectors of the economy i. The multiplier effect makes the economy more sensitive to changes in autonomous expenditure 2.
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