econ ch 10

StudyBlue printing of econ ch 10 html, body, div, span, applet, object, iframe, h1, h2, h3, h4, h5, h6, p, blockquote, pre, a, abbr, acronym, address, big, cite, code, del, dfn, em, font, img, ins, kbd, q, s, samp, small, strike, strong, sub, sup, tt, var, b, u, i, center, fieldset, form, label, legend, table, caption, tbody, tfoot, thead, tr, th, td { margin: 0; padding: 0; border: 0; outline: 0; font-size: 100%; background: transparent; } body { line-height: 1; } blockquote, q { quotes: none; } blockquote:before, blockquote:after, q:before, q:after { content: ''; content: none; } /* remember to define focus styles! */ :focus { outline: 0; } /* remember to highlight inserts somehow! */ ins { text-decoration: none; } del { text-decoration: line-through; } /* tables still need 'cellspacing="0"' in the markup */ table { border-collapse: collapse; border-spacing: 0; } /* end RESET */ .header { min-width:800px; } .logo { padding:6px 20px 2px 20px; margin:0; font-size:25px; font-weight:bold; color:#808285; position:relative; border-bottom: 1px solid #c5c5c5; } .logo-blue { color:#70adc4; } .logo-desc { font-weight:normal; font-size:19px; color:#cccccc; margin-top:50px; position:absolute; display: none; } .back-button { position:absolute; top:20px; right:20px; font-size:13px; line-height:25px; color:rgb(0,175,225); font-weight:normal; } .back-button a { color:rgb(0,175,225); } .instructions { padding:0; margin:0; width:100%; position:relative; color:rgb(100,100,100); } .step-holder { border-left:1px solid #ededed; margin-left:20px; } .steps { padding:15px 0; float:left; width:24%; border-right:1px solid #ededed; text-align:center; } .steps-01 { } .steps-02 { } .steps-03 { } .steps-04 { } .label { padding:5px 10px; } .print-button { } .print-button a { background-color:rgb(0,175,225); color:white; line-height: 19px; padding:9px 8px 5px 30px; font-size:14px; text-decoration:none; background-image: url(images/printer.png); background-repeat: no-repeat; background-position: 7px 50%; -moz-border-radius: 5px; -webkit-border-radius: 5px; } .print-button a:hover { background-color:black; } .theNote .content { width: 8.0in !important; margin: 5px auto; padding:20px; background-color:white; } .theNote .header { border-bottom: 1px dashed #C8C8C8; font-size: 17px; padding: 0 0 10px; line-height: 19px; color: #00ADE1; min-width:500px; } .theNote .body { font-size: 14px; line-height: 19px; padding: 10px 0; } .theNote{ padding:6px 0; clear:both; background-color: rgb(200,200,200); } .theNote h3{ color: rgb(100,100,100); } .theNote h1, .theNote h3{ background-color:white; padding:2px 20px; width:8.0in !important; margin: 0 auto; font-size: 15px; } .theNote h1{ padding-top: 10px; font-size: 15px; } .theNote h1:first-child{ font-size: 20px; } .theNote h3 { font-size: 14px; font-weight: normal; } #options { border: 3px double #ccc; padding: 5px 12px; margin: 10px 50px 10px 20px; float: left; } #info { border-top: 1px solid #ccc; padding-top: 5px; font-style: italic; } li { margin: 5px 10px 5px 25px; } ul li { list-style: disc; } ol li { list-style: decimal; } img { border: 0; } table { clear: both; width: 100%; border: 1px solid #c5c5c5; border-width: 1px 0; margin: 0; page-break-after: always; } table#page { page-break-after: auto; } td { text-align: center; font-size: 12px; border-bottom: 1px dashed #c5c5c5; height: 1.75in; width: 50%; padding-left: 15px; } .leftside { border-right: 1px solid #cccccc; padding: 0 15px 0 0; } .bottom td { border-bottom: none; } .clearfix { clear:both; line-height:1px; height:1px; } img { max-width:80%; max-height:150px; margin:20px; } @media print {.header { display: none; } .content .header{ display:inherit; } table { border: 1px dashed #bbb; border-width: 1px 0; } .theNote{ background-color:white; } } chapter 10 GDP =aggregate income Aggregate expenditure line =a relationship tracing for a given price level spending at each level of income or real GDP · Real GDP=horizontal axis, aggregate expenditure on vertical · Only spending component that varies with real GDP is consumption and consumption only varies with income · AE line=MPC Income expenditure model =relationship that shows how much people plan to spend at each income level; identifies for a given price level where the amount people plan to spend equals the amount produced in the economy What if spending exceeds real GDP: · When the amount people want to spend exceeds the amount produced, inventories have to give · Because firms cant draw down inventories indefinitely, inventory reduction prompt firms to produce more output which increases employment and consumer income, leading to more spending. As long as spending exceeds output, firms increase production to make up the difference · This process of more output, more income and more spending continues until spending equals real GDP What if real GDP exceeds spending? · If real GDP exceeds spending, unsold goods accumulate and swells inventories more than firms planned · Firms thus cut production, which reduced employment and income · Unplanned inventory buildups cause firms to cut production until the amount they produce equals aggregate spending=real GDP The simple spending multiplier: · An increase in spending: o Upward shift of the AE line while real GDP demanded increases as well o Real GDP can be thought of as both the value of production and the income arising from that production. Production yields income, which generates spending. o We can think of each trip around the circular flow as a round of income and spending: § Round one: upward shift of the AE line, spending exceeds output. Firms match this increased investment spending by an unplanned reduction in inventories § Round two: spending increase leads to firms increasing their output and is seen by income increases real GDP § Round three: 4/5 of the money earned in round 2 will get spent during round three, while 1/5 is saved. The added spending causes firms to to increase output § As long as spending exceeds output, production increases, thereby creating more income, which generates still more spending o Simple spending multiplier is the factor by which real GDP demanded changes for a given initial change in spending § Simple spending multiplier-1/(1-MPC) The aggregate demand curve: · A higher price level: o decreases the real value of these money holdings. This cuts consumer wealth, making people less willing to spend at each income level. It also tends to increase the market interest rate, which reduces investment and also foreign goods become cheaper for US consumers and US goods become more expensive abroad o Imports rise and exports fall, decreasing net exports o Reduce aggregate spending which reduces real GDP demanded · A lower price level: o The value of bank accounts, currency and other money holdings increases. o Consumers are wealthier and thus spend more to each real GDP o Decreases the market interest rate which increases investment o Makes US products cheaper abroad and foreign products more expensive here so exports increase, imports decrease and next exports increases The multiplier and shifts in the aggregate demand: · While price level remains constant; An increase in investment shifts the aggregate expenditure line up and because of the mult effect, real GDP demanded goes up and the aggregate demand curve shifts to the right BIG PICTURE: for a given price level, the aggregate expenditure line relates spending plans to income or real GDP. Real GDP demanded is found where the amount people plan to spend equals the amount produced. A change in the price level shifts the aggregate expenditure line, changing real GDP demanded. Changes in the price level and consequent changes in real GDP demanded generate points along an aggregate demand curve but at a given price level, changes in spending plans, such as changes in investment, consumption, or government purchases, shifts the aggregate demand curve.