BUSINESS CYCLE & AGGREGATED DEMAND

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BUSINESS CYCLE & AGGREGATED DEMAND

The total expenditure curve (TE)

What it does?

Shows the level of expenditure desired or planned by consumers and businesses

Allocational role of fiscal policy

What are they?

Government tax and spending programs

Disequilibrium

Disequilibrium is when external forces cause a disruption in a market's supply and demand equilibrium

Equilibrium

Is a situation where the different forces at work are in balance.

Multiplier Model

Key points:

Basic multiplier model emphasizes the importance of shifts in AD in affecting output and income

Simples Multiplier

Equals to:

Is numerically = 1/(1  MPC)

What is it?

Macroeconomic theory used to explain how output is determined in the short run.

Business Cycle Theories

Internal

Look for mechanisms within the economic system itself.

Exogeneus

Factors outside the economic system

EXAMPLES:

Wars, revolutions, and elections; in oil prices, gold discoveries, and population migrations

Aggregate Demand

The AD curve slopes downward

Categories:

Exogeneous Variables:

Variables that are determined outside the AS-A framework.

Policy Variables:

Fiscal Policy

Taxes and government expenditures

Monetary policy

The central bank can affect interest rates and other financial conditions

Product Sectors:

Net Exports

(X) Which equal the value of exports minus the value of imports

Government Purchases

(G) Like tanks and school books, the services of judges and public-school teachers.

Investment

(I) Spending includes purchases of buildings, software, and equipment

Consumption

(C) Is primarily determined by disposable income

Aggregate quantity of output that is willingly bought at a given level of prices

Business cycles

Phases:

Trough

Point where expansion starts

Expansion

Economy is moving out of recession

Peak

Point where recessio starts

Recession

Recurring period of decline in total output, income, and employment

Definition:

Economywide fluctuations in total national output, income, and employment