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Aggregate Expenditure Model (AEM)
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Before Aggregate Expenditure Model
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Macro 2
Chapters 11 and 12
| Term | Definition |
|---|---|
| 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 |
| Leakage | |
| 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 |
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Ktallen
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