Spending and Output in the Short Run

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# Spending and Output in the Short Run - PowerPoint PPT Presentation

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

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.
• 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.
Aggregate Expenditure & National Income

AE = C + I + G + NX

AE = Y

Investment Components
• Plant and equipment, office buildings
• Inventories
• Residential housing
Planned Aggregate Expenditure
• Planned Aggregate Expenditure
Spending

Autonomous: the same regardless of the level of income

Induced: dependent on the level of income

Rate of change of Y with a change in G

where c is the marginal propensity to consume

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.

Fiscal Policy

Government spending.

Taxes.

Under the control of the Treasury.

Automatic Stabilizers

Taxes.

Unemployment insurance.

Welfare.