| *Home* *ECON2301* *Chapter 11* Page 1 |
| Chapter 10 29 September Aggregate expenditures-the total amount spent for final goods and services in an economy Nominal GDP-the GDP measured in terms of the price level at the time of measurement Real GDP-adjusted for inflation; GDP in a year divided by the GDP price index for that year (index expressed as a decimal) Investment Demand Curve-shows the amount of investment demanded by economy at a series of interest rates -the lower the interest rate, the more $ business will spend on investment goods Investment schedule-shows the amounts firms plan to use on investment goods at various possible values of real GDP Consumption schedule-consists of the amount of disposable income consumed, whatever left is saved. -generally, the higher the income, the more that is spent. In a CLOSED economy: Equilibrium GDP- the GPD at which the total quantity of final goods and services purchased (aggregate expenditures) is equal to the total quantity of final goods and services produced (real domestic output) -the real domestic output at which the aggregate demand curve intersects the aggregate supply curve C+Ig Real Domestic Output = Aggregate Expenditures (people buying exactly everything the business produce) Disequilibrium -"no level of GDP other than the equilibrium level of GDP can be sustained." -when real domestic output is higher than aggregate expenditures, employment and output need to be decreased. -when aggregate expenditures are higher, employment and output need to be increased. Other Features of Equilibrium GDP *Saving and planned investment are Equal 1. Leakage- withdrawl of potential spending from the income-expenditures stream via saving, tax payments, or imports. -this is why not everything is sold off the shelves! 2. Injection- an addition of spending to the income-expenditures stream via investment (purchase of capital goods), govt. purchases, and net exports **when leakage is more, C+Ig will be less than GDP when injection is more, C+Ig will be more and drive GDP upward **There are no unplanned changes in inventory Multiplier & changes in equilibrium change in output and income Multiplier = change in investment spending remember, Multiplier = 1/MPS Now, an OPEN Economy... adding in... Exports (X) - goods and services produced in a nation and sold to buyers in other nations -create domestic production, income, and employment! Imports (M) - goods and services produced abroad -these must be subtracted so as to not overstate value of domestic production SO... C+Ig becomes C+Ig+(X-M) or C+Ig+Xn International Economic Linkages- how policies abroad effect our GDP --Prosperity abroad- foreign trading partners able to buy our stuff --Tariffs- imposing these on imports to stimulate their own GDP --Exchange Rates- value of a dollar relative to other currencies Adding Public Sector *Govt Purchases C+Ig+Xn becomes Ca+Ig+Xn+G=GDP *Taxation--govt spends and collects taxes --lump sum tax- tax of a constant amount; a tax yeilding the same amount of tax revenue at each level of GDP --taxes- decrease disposable income used for consumption and saving Injections, Leakages, and Unplanned Changes in Inventories *For the private closed economy, S=Ig *For the expanded economy, imports and taxes are added leakages Sa + M + T = Ig + X + G (leakages = injections) Recessionary Gap-- the amount by which aggregate expenditures at the full employment GDP fall short of those required to acheive the full employment GDP. *exists where equilibrium GDP is below full employment GDP* Inflationary Gap-- the amount by which an economy's aggregate expenditures at the full employment GDP fall short of those required to acheive the full-employment GDP *exists where aggregate expenditures exceed full-employment GDP* |