Aggregate expenditure equals the sum of consumption,? ?investment,? ?government
ID: 1185232 • Letter: A
Question
Aggregate expenditure equals the sum of consumption,? ?investment,? ?government
spending,? ?and net exports.? ?These are also the components of aggregate demand.? ?The
aggregate expenditure model looks at the effects of changes in demand on income? (?Y?)?,
assuming that the price level does not change.? ?Likewise,? ?in the flat or Keynesian portion
of the? ?AS? ?curve,? ?the price level will not change when output changes.
B.? ?Say you have two graphs of an economy:? ?a graph showing the Keynesian model? (?as
discussed in part A,? ?above?) ?and another showing the? ?AD/AS? ?model.? ?In the? ?AD/AS
diagram,? ?the? ?AD? ?curve will shift to the right by the amount of the increase in? ?Y
predicted by the Keynesian? ?AE? ?model.? ?If the? ?AD? ?curve intersects the? ?AS? ?curve in the
flat,? ?Keynesian portion of the? ?AS? ?curve,? ?what will be the increase in real output in the
AD/AS? ?model resulting from the? ?$100? ?million increase in government spending??
C.? ?Continuing the line of questioning from part B,? ?above,? ?now say the? ?AD? ?curve
intersects the? ?AS? ?curve where the? ?AS? ?is vertical.? ?What will be the increase in real
output in the? ?AD/AS? ?model resulting from the? ?$100? ?million increase in government
spending??
D.? ?If the? ?AD? ?curve intersects the? ?AS? ?curve in the middle section of the? ?AS? ?curve,? ?can
you calculate the increase in real output in the? ?AD/AS? ?model resulting from the? ?$100
million increase in government spending?? ?If not,? ?what additional information would
you need??
Explanation / Answer
1. The model of aggregate supply (AS) and aggregate demand (AD) can help us understand economic fluctuations and the use of macroeconomic policy to reduce these fluctuations.
AD: the inverse relationship between the aggregate price level (P) and the total quantity of aggregate output demanded by HHs, business, government, and the foreign sectors.
AS: the relationship between the aggregate price level and the total quantity of final goods and services, or aggregate output, producers are willing to supply.
SRAS: positive relationship between the aggregate price level and the level of aggregate output or real GDP. (Short-run AS curve is upward sloping)
LRAS: vertical! The aggregate price level has no effect on the quantity of aggregate output supplied; the level of aggregate output equals potential GDP.
http://www.uri.edu/artsci/ecn/starkey/590/Macro_ch08_v2.pdf