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Macro 2

Chapters 11 and 12

Aggregate Expenditure Model (AEM) Consumption + Investment
Before Aggregate Expenditure Model Laissez-Faire System (minimum government intervention)
How Market took care of problem before AEM? Recession, lowered GDP, made unemployment go up, then Average price level dropped, wages dropped, demand for labor went up, unemployment went down, GDP went up
John Maynard Keynes The General theory of employment, interest and money
Two arguments Keynes had 1) Prices are inflexible downwards = prices don't easily come down 2) Savings do not always turn into investments
Say's Law "Supply will create it's own demand" Creates income (wages, rent, capital) Income --> demand
Assumptions: 1) Closed economy = no exports or imports 2) No government intervention = no role in economy 3) Savings = household savings
Equilibrium GDP = Real GDP = Aggregate Expenditure
Multiplier Change in Real GDP(output or input) / Change in Investment Or 1 / 1-MPC
Injection Investments or the purchase of capital goods
Inflationary expenditure gap the amount by which an economy's aggregate expenditures at the full employment GDP exceed those just necessary to achieve full employment GDP
Recessionary Expenditure Gap the amount by which aggregate expenditures at the full employment GDP falls short of those required to achieve the full employment GDP
Potential GDP = Full employment
Foreign GDP 1) Foreign GDP or Prosperity abroad--> Foreign GDP ^ Income ^ Demand ^ Imports ^Demand for goods ^--> Our exports ^ Net Exports ^
Exchange Rates $ becomes stronger or appreciated = Net Exports ^ $ becomes weaker or depreciated = Net Exports down
Tariffs Tax on imports-->increase the price of imports-->Quantity demanded down-->Imports down-->Net Exports ^ (can be good or bad)
Devaluations Decreasing the value or your currency, government decreases currency
Aggregate Demand (AD) = Aggregate Expenditure ( C+I+G+NE) Price level ^ Demand down Price level down Demand ^
Why AD has negative slope 1 Real balance effect (wealth effect)>Price ^Wealth down AD down 2 Interest Rate Effect>Price^Demand for money^ Interest Rate^ Investment down, Consumption down, AD down 3Foreign Price Effect>Prices ^Exports down, Net Exports down, Imports ^,AD down
Created by: Ktallen