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Spending and Output in the Short Run

Spending and Output in the Short Run. Chapter 13. Chapter 13 Learning Objectives. You should be able to:. List the components of investment. Distinguish between actual and planned aggregate expenditure. Describe the consumption function, graph the consumption function.

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Spending and Output in the Short Run

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  1. Spending and Output in the Short Run Chapter 13

  2. Chapter 13 Learning Objectives. You should be able to: • List the components of investment. • Distinguish between actual and planned aggregate expenditure. • Describe the consumption function, graph the consumption function. • Distinguish between autonomous and induced expenditure. • Use the Keynesian cross diagram to determine short-run equilibrium output. • Describe the expenditure multiplier and show its effect on the Keynesian cross diagram. • Explain how fiscal policy is used to stabilize the economy. • Define automatic stabilizers.

  3. Aggregate Expenditure & National Income AE = C + I + G + NX AE = Y

  4. Investment Components • Plant and equipment, office buildings • Inventories • Residential housing

  5. Planned Aggregate Expenditure • Planned Aggregate Expenditure

  6. Consumption Function

  7. The U.S. Consumption Function, 1960-2001

  8. Spending Autonomous: the same regardless of the level of income Induced: dependent on the level of income

  9. Rate of change of Y with a change in G where c is the marginal propensity to consume

  10. Okun’s Law For every 2% change in the output gap, unemployment changes 1%. So with a 4% recessionary gap, expect unemployment to be 2% greater than the natural rate.

  11. Fiscal Policy Government spending. Taxes. Under the control of the Treasury.

  12. Automatic Stabilizers Taxes. Unemployment insurance. Welfare.

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