ad and as: 2. injectionswithdrawals · 2017-05-02 · inventory approach 2. injectionswithdrawals....
TRANSCRIPT
Chapter 10 AD_AS_Business Cycle.notebook
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AD and AS:
The equilibrium real output and price levels of an economy is
determined by the intersection of the AD and AS curves.
Can be explained using two approaches:
1. Inventory approach
2. InjectionsWithdrawals
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Price level > equilibrium:
Real Output > Real Expenditures
Inventories rise, causing a surplus in inventories.
positive unplanned investment an unintended increase in
inventories; a surplus.
To alleviate the surplus, price level falls causes an increase in
spending
Inventory Approach
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Price level < equilibrium:
Real Output < Real Expenditures
Inventories fall, causing a shortage in inventories.
negative unplanned investment an unintended decrease in
inventories; a shortage.
To alleviate the shortage, price level rises causes an decrease in
spending
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injection additions to the economy's incomespending stream.
Three injections:
Investment (I)
Government (G)
Exports (X)
Total Injections = I + G + X
InjectionsWithdrawals Approach
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withdrawal deductions from the economy's incomespending
stream.
Three withdrawals:
Savings (S)
Taxes (T)
Imports (M)
Total Withdrawals = S + T + M
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Total Injections > Total Withdrawals:
Real output and spending rise.
Total Injections < Total Withdrawals: Real output and spending fall.
Total Injections = Total Withdrawals:- Equilibrium
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Equilibrium vs Potential Output:
If equilibrium does not correspond to the potential level of output in
an economy, two situations can result:
1. Recessionary Gap the amount by which equilibrium output falls
below potential output.
2. Inflationary Gap the amount by which equilibrium output exceeds
potential output.
unemployment levels fall below the natural level of unemployment
and inflation will be an issue.
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Practice Questions Page 277:• 1, 2, 3abd
Chapter Exercises Page 293 294:• 2(a f), 3(a f), 4
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