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Unit 5 ECO11 - Coggle Diagram
Unit 5 ECO11
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Equilibrium- Where quantity of goods produced (GDP) equals the total quantity of goods purchased (C+Ig)
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Marginal Propensity To Consume- The proportion of additional income that is saved. Since you can only consume MPS+MPC=1
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Any GDP for which investment exceeds saving is a below-equilibrium GDP. For example, at a GDP of $410 billion households save only $5 billion, but firms invest $20 billion
When unplanned changes in inventories are taken into account, investment and savings are always equal, regardless of the level of GDP. This is because actual investment consists of planned investment and unplanned investment. Unplanned changes in inventories act as a balancing item that equates the actual amounts saved and invested in any period.
Spending Multiplier- The expenditure multiplier, also known as the spending multiplier, is a ratio that measures the total change in real GDP compared to the size of an autonomous change in aggregate spending. It measures the impact of each dollar spent during an initial rise in spending on a nation's total real GDP.
In a private closed economy, consumption and gross private investment are the components of aggregate expenditures
The level of investment spending is based upon the real interest rate together with the investment demand curve.
Aggregate Expenditure Schedule- Reflects the total amount that will be spent at each possible output or income level?
It is undesirable for actual GDP to be less than the equilibrium level because there will be an unplanned decline in business inventories
When the level of GDP is below the equilibrium level, businesses will respond to the unplanned decline in business inventories by increasing output and employment
It is undesirable for GDP to be greater than the equilibrium level because it will lead to a decline in output, jobs and total income
If GDP is above equilibrium, the aggregate expenditure schedule is located on the graph in a position below the 45° line
If the leakage of saving is greater than the injection of investment then there will be an above-equilibrium level of GDP
The multiplier effect means that there is a bigger change in equilibrium GDP than the change in aggregate expenditures
The multiplier influences the degree to which the GDP changes if there is a change in the rate of return on a firm's potential project or the real interest rate.
Suppose the real interest rate falls, causing businesses to increase investment spending, the aggregate expenditures curve will shift upward to (C+lg)1
When sales fall short of planned production output, the unsold output is known as
unplanned changes in inventory and is included in actual investment
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