CH 9 Macroeconomics

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CH 9 Macroeconomics
2011-10-06 22:51:49
Keynesian model action

Basic definitions
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  1. Aggregate Expenditures model.
    The model that determines the equilibrium level of GDP by the intersection of the aggragate expenditures and aggreagate output (and income) curves.
  2. Spending multiplier (SM)
    • The ratio of the change in real GDP to an initial change in any component of aggregate expenditures, including consumptions, investment, goverment spending and net exports.
    • 1 / (1-MPC) or
    • 1 / MPS
  3. Spending multiplier Arithmetic
    • Any initial change in spending by the goverment, household or firms creates a chain reaction of further spending, which causes a greater comulative change in aggregate expenditures.
    • chg in G X [1 / (1-MPC)]
    • this formula will tell us how much will be the increase in G after the end of all rounds.
  4. Recessionary Gap
    The amount by which the aggregate expenditures curve must be increase to achieve full employment equilibrium.
  5. Tax multiplier
    • The change in aggregate expenditures (total spending) resulting from an initial change in taxes.
    • TM = 1- SM
  6. Inflationary Gap
    The amount by which the aggregate expenditures curve must be decreased to achive full-employment equilibrium.