AGGREGATE EXPENDITURE

AGGREGATE EXPENDITURE DESCRIBES SPENDING PLANS

ACHIEVING MACROECONOMIC EQUILIBRIUM

SHORT RUN VERSUS LONG RUN DRIVERS

• In the short run, actual GDP may fail to meet potential output.
• When actual GDP is greater than potential, the economy will overheat.
• The output gap focuses on the balance between supply and demand.

POTENTIAL OUTPUT AND ACTUAL OUTPUT

OUTPUT GAP

THE OUTPUT GAP FLUCTUATES WIDELY

EQUILIBRIUM VERSUS POTENTIAL GDP

• Equilibrium GDP describes the level of GDP at the point of macroeconomic equilibrium
• Equilibrium: Y = AE
• Potential GDP is the economy’s highest sustainable level of production and is determined by available inputs

THE ECONOMY IS CURRENTLY IN MACROECONOMIC EQUILIBRIUM. CONSUMERS BECOME LESS CONFIDENT IN THE ECONOMIC OUTLOOK AND DECREASE THEIR CONSUMPTION SPENDING.

• Consumers become less confident in the economic outlook and decrease their consumption spending
• Businesses will:
• Increase production
• Decrease production

REVIEW: AGGREGATE EXPENDITURE

• Across the whole economy, businesses will adjust their production so the total output matches total spending.
• Aggregate expenditure drives short run fluctuations in output.
• In the short run, actual GDP can be greater than or less than potential GDP.
• Focusing on the output gap provides a way to disentangle the roles of the demand-side and supply-side determinants of GDP