EC 225 Chapter 12 Notes (part 1)
EC 225 Chapter 12 Notes (part 1) EC 225
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This 2 page Class Notes was uploaded by Danielle Rios on Friday September 30, 2016. The Class Notes belongs to EC 225 at Southeast Missouri State University taught by Dr. Chen Wu in Fall 2016. Since its upload, it has received 6 views. For similar materials see Principles of Macroeconomics in Economics at Southeast Missouri State University.
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Date Created: 09/30/16
Chapter 12:Aggregate Expenditure and Output in the Short Run 12.1 The Aggregate Expenditure Model Aggregate Expenditure is another way of saying national income The Model shows the short-run relationship between Total Spending and Real GDP o Key idea of this model: in any year, the level of GDP is determined by the national income level (aggregate expenditure) 4 Components of Aggregate Expenditure o Comsumption (C) o Planned Investment (I) o Government Purchases (G) o Net Exports (NX) o AE = C + I + G + NX Planned Investment vs. Actual Investment o Planned investment is what businesses plan to spend on their inventories o Actual investment is what businesses end up spending on their inventories o These two are equal when unplanned changes in inventories do not happen Macroeconomic Equilibrium o Occurs when Aggregate Expenditure = GDP Adjustments to Macroeconomic Equilibrium o When AE > GDP, inventories decline and GDP/total employment increase o When AE < GDP, inventories increase and GDP/total employment decrease o When AE = GDP, inventories are unchanged and macroeconomic equilibrium is reached 12.2 Determining the Level of Aggregate Expenditure in the Economy Consumption o 5 Variables Current disposable income: income received by households after taxes have been paid and transfer payments have been received Household wealth: assets - liabilities Expected future income: current income = current consumption, but only when current income is not abnormally high or low The price level: average prices of g/s in an economy The interest rate: uses Real interest rate because durable goods are more affected by changes in the interest rate o The Consumption Function refers to the relationship between consumption spending and disposable income Marginal Propensity to Consume (MPC) refers to how much consumption spending changes when disposable income changes Calc: (change in consumption / change in disposable income) o Relationship Between Consumption and National Income (GDP) Disposable income = GDP – Net Taxes GDP = Disposable income + Net Taxes o Income, Consumption and Saving GDP = C + S (aka Saving) + T (aka Taxes) When GDP increases, the equation has to reflect the change ∆Y = ∆ C + ∆S + ∆T Or ∆Y = ∆ C + ∆S Marginal Prosperity to Save (MPS) refers to how much savings change when disposable income changes Calc. 1 = MPC + MPS Or 1 = (∆C / ∆Y) + (∆S / ∆Y) Planned Investment o 4 Categories Expectations of future profitability: how positive or negative a company feels about an investment determines their spending Interest rate: higher interest rate = less investment spending and a lower interest rate = more investment spending Taxes: high corporate income tax decreases investment spending while incentives increase investment spending Cash flow: difference between revenue and spending of cash by a firm Net Exports o 3 Parts Price Level Growth Rate Exchange Rate 12.3 Graphing Macroeconomic Equilibrium Uses 45-degree line diagram (Keynesian cross) All points of macroeconomic equilibrium have to lie on the line (example on 409) Recessions are shown when AE intersects the Keynesian cross at a level of GDP which is below potential GDP (examples on 411 and 412) Notes by Danielle Rios
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