Econ Lecture 8

Front 1

In the short run, however, real GDP:

Back 1

cycles around a long-run upward trend (business cycles).

Front 2

In the long run, real GDP:

Back 2

is growing (long-run economic growth).

Front 3

a macroeconomic model that focuses on the relationship between total spending and real GDP, assuming that the price level is constant

Back 3

Aggregate expenditure model

Front 4

Four components of aggregate expenditure

Back 4

1) consumption (C)

2) planned investment (I)

3) government purchases (G)

4) net exports (NX).

Front 5

Macroeconomic equilibrium occurs where

Back 5

total spending (measured by aggregate expenditure) equals total production (measured by real GDP)

Front 6

We have business cycles because

Back 6

aggregate expenditure does NOT always equal total production

Front 7

Changes in aggregate expenditure affect

Back 7

inventories

(and then changes in inventories, in turn, affect real GDP.)

Front 8

C depends on the following five factors:

Back 8

Current disposable income (Yd)

Household wealth (W)

Expected future income (Ye)

The price level (P)

The real interest rate (r)

Front 9

measured as (Y+TR-T) and is the most important determinant of consumption

Back 9

Current disposable income (Yd)

* When Yd ↑, then C ↑

Front 10

measured as the household’s assets minus its liabilities

Back 10

Household wealth (W)

**when W ↑, then C ↑. Permanent increases in W have a larger effect on C than temporary increases in W.

Front 11

Found when most people prefer to keep their consumption fairly stable from year to year, even if their income fluctuates significantly.

Back 11

Expected future income (Ye)

Front 12

measures the average prices of goods and services in the economy

Back 12

Price level (P)

* When P ↑, the real value of W will ↓and C will ↓

Front 13

The four most important variables that determine the level of investment are:

Back 13

Expectations of future profitability

Real interest rate (r)

Taxes (T)

Cash flow (CF)

Front 14

investors feeling optimistic or pessimistic about the economy is a very important determinant of investment:

Back 14

Expectations of Future Profitability

* when investors are optimistic, I ↑; when investors are pessimistic, I ↓.

Front 15

represents the cost of investing because a lot of firms have to take out business loans to make investments an

Back 15

Real interest rate

** Therefore, when r ↑, the cost of making investment ↑and I↓. When r ↓, then I ↑.

Front 16

firms have to pay corporate income taxes on their profits, including profits from new buildings, equipment, and other investment goods that firms purchase

Back 16

Taxes (T)

** So, when T ↑(corporate income tax increases) then I ↓; when T↓(investment tax incentives), then I↑.

Front 17

the difference between the cash revenues received by a firm and the cash spending by the firm.

Back 17

Cash Flow (CF)

Therefore, when CF ↑, I will ↑; when CF ↓, I will ↓.

Front 18

Notes on Government Purchases

Back 18

G includes all spending by ALL levels of the government: local, state, and federal (17.7% of total GDP).

G does NOT include transfer payments, such as Social Security payments.

G grew steadily during 1979-2006, with the exception of the mid-1990s

Front 19

Notes on NX:

Back 19

NX usually go up during recessions (why?) and go down during economic booms (why?).

During almost all years between 1979 and 2006, the U.S. imports exceeded its exports, causing net exports to be negative (-2.7% of total GDP).

Front 20

Net exports are determined by the following three most important factors:

Back 20

The price level in the United States relative to the price levels in other countries.

The growth rate of GDP in the United States relative to the growth rates of GDP in other countries.

The exchange rate between the dollar and other currencies.