What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP? Inventories decrease, GDP increases, and employment increases .
What is the meaning of the 45 line in the 45 line diagram in the 45 line diagram the 45 line shows?
In the 45°-line diagram, the 45° line shows. all the points where aggregate expenditure equals real GDP .
When aggregate expenditure is greater than GDP aggregate expenditure is greater than GDP?
Therefore, when aggregate expenditure is greater than GDP, inventories will decline forcing companies to ramp-up production to meet the now greater expenditures. This will lead to an increase in both real GDP and employment. When aggregate expenditure is less than GDP then spending is less than production.
When planned aggregate expenditure is less than the real GDP as in the diagram to the right what happens to firms inventories?
When planned aggregate expenditure is less than real GDP, as in the diagram to the right, what happens to firms’ inventories? Inventories accumulate if production is not scaled back.
Which equation shows the relationship between aggregate expenditure and the four spending categories?
The equation for aggregate expenditure is AE = C+ I + G + NX . Written out in full, the equation reads: aggregate expenditure = household consumption (C) + investments (I) + government spending (G) + net exports (NX).
What happens if aggregate expenditure is greater than GDP?
Each level of real GDP will result in a particular amount of aggregate expenditures. If aggregate expenditures are less than the level of real GDP, firms will reduce their output and real GDP will fall. If aggregate expenditures exceed real GDP, then firms will increase their output and real GDP will rise .
What happens if GDP is greater than total expenditure?
An inflationary gap exists when the demand for goods and services exceeds production due to factors such as higher levels of overall employment, increased trade activities, or elevated government expenditure. Against this backdrop, the real GDP can exceed the potential GDP, resulting in an inflationary gap.
Why as is 45-degree line?
There is a line that comes diagonally out of the origin at an angle of 45 degrees. The reason why these diagrams have this 45-degree line is that for every point on the line, the value of whatever is being measured on the x-axis is equal to the value of whatever is being measured on the y-axis .
What does the 45-degree line indicate?
A 45-degree line indicates measurement on the vertical axis is equal to the measurement on the horizontal axis .
What is the 45-degree line Keynesian?
The 45-degree line shows all points where aggregate expenditures and output are equal . The aggregate expenditure schedule shows how total spending or aggregate expenditure increases as output or real GDP rises. The intersection of the aggregate expenditure schedule and the 45-degree line will be the equilibrium.
What is the most important determinant of consumption?
The most important determinant of consumption is the current disposable income of households . Consumption depends in part on the wealth of households. A household’s wealth is the value of its assets minus the value of its liabilities.
What is the slope of the consumption function?
The slope of the consumption function is called the marginal propensity to consume . The MPC tells us how much of an additional dollar of income is spent. ... If there are no taxes, disposable income equals real GDP, so we can draw the consumption function as a function of real GDP (Y).
Why do firms need the financial system quizlet?
the financial system provides security to savers by warranting that their funds are fully insured against loss. firms need to borrow funds for new projects , such as building new factories or carrying out new research projects.
Which is the largest component of aggregate expenditure?
These components are used to calculate gross domestic product. The four components are consumer spending , investment on the part of businesses, government purchases, and net exports. Consumer spending makes up the largest part of aggregate expenditures in countries such as the United States.
How do you calculate expenditures?
To calculate the average expenditure per household reporting the purchase of an item, divide the average household expenditure on that item by the corresponding percentage reporting and then multiply by 100 .
How does an increase in government spending affect the aggregate expenditure line?
How does an increase in government spending affect the aggregate expenditure line? It shifts the aggregate expenditure line upward.
