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Define: Aggregate Expenditure and its model.
Total spending in the economy: the sum of consumption, planned investment, government purchases and net exports
Aggregate Expenditure Model: a study of the short-term interaction between the aggregate expenditure and real GDP, assuming that price level is constant.
Define: inventory.
Unsold produced units.
When is macroeconomic equilibrium achieved? Regarding its components and employment?
When total aggregate expenditure, AE equals total production, GDP.
This occurs when consumption is equal to production, which creates no incentives or disincentives to change production; and therefore employment.
What are the four components of aggregate expenditures? Are they real or nominal?
1. Consumption
2. Planned Investment
3. Government Spending
4. Net Exports
They are adjusted for inflation.
What happens when aggregate expenditure is higher than GDP?
Inventories will decline because consumption is greater than production. This causes both GDP and employment to increase.
What are the five components of consumption?
1. Current Disposable Income
2. Household Income
3. Expected Future Income
4. The Price Level
5. The Interest Rate
When can current income explain current consumption well? Why is this?
Only when current income is not unusually different than expected future income because people will follow a pattern of spending assuming that income is expected to be stable.
If prices increase for a product, what happens to aggregate consumption?
It may not necessarily change because it may not be representative of the economic price level.
What is the effect of a high interest rate on consumption? Are people interested on the real or nominal rate? Why?
Increases incentives to save and decrease spending.
The real rate as people are concerned with the actual spending power.
Define: consumption function
The relationship between consumption and the disposable income.
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