Ch. 23: Aggregate Expenditure & Output in the Short Run Flashcards
6 Failures due to fiscal policy
1) politicians don’t care about macroeconomic goals
2) officials don’t follow their own rules
3) crowding out
4) gov’ts wait until recession hit to increase gov’t spending
5) 2/3 of gov’t expenditures are fixed
6) public choice
Aggregate Expenditure (AE)
value of G&S purchased; model focused on SR relationships, assuming price lvl is constant
AE Equation
AE = C + I + G + NX
Income
value of G&S produced
Income (y) equation
y = wages + interest + rent + profit
OR
y = C + Iactual + G + NX
Planned vs. Actual Investments
reliant on INVENTORIES
planned = predicted change in inventories based on sales of goods
actual = actual change in inventory
MACROECONOMIC EQUILIBRIUM IS WHERE??
where AE = y
AKA I planned = I actual
(the only diff between the 2 eqs)
Macroeconomic Equilibrium Graph
AE = GDP, 45 degree line on the AE graph
What happens if AE > y?
ex:
1) expected 40/month
2) sales increase to 70/month
3) all companies request more from wholesaler
4) wholesalers request from manufacturer
5) manufacturer increases income to make more
RESULT: AE = y
KEY TAKEAWAY
y rises or falls to MEET AE
Components of AE
C + G + Iplanned + NX
Components of Consumption
1) ↑ Disposable y, ↑ C
2) ↑ Wealth, ↑ C
3) ↑ Expected y, ↑ C
4) Unexpected Price Level
5) ↑ nom interest rates, ↑ Saving, ↓ C
Consumption Function
C = C0 + (MPC)*y
Components of Planned Investments
1) ↑ Expected π, ↑ I planned
2) ↑ real interest rates, ↓ I planned
3) ↑ Taxes, ↓ I planned
4) Cash Flow
Components of Net Exports
(1) Relative Prices (prices in US vs. other countries)
(2) Relative real GDP growth rate (more growth, more imports)
(3) Exchange Rates (if $ appreciate -> M less expensive)
Planned expenditure > GDP
if above the 45 degree line
Aggregate Demand Curve
curve showing relationship between the price level & level of planned aggregate expenditure in the economy (GDP)
