Income and Expenditure - The Income–Expenditure Model - Income–Expenditure Equilibrium

7 important questions on Income and Expenditure - The Income–Expenditure Model - Income–Expenditure Equilibrium

Describe the situation of income expenditure equilibrium? What does it exclude? What is planned aggregate expenditure equal to aggregate

  • It is a situation in which there is no unplanned inventory , meaning that the spending of the government and household, is equal to the total value of goods and services that is produced in an economy or real GDP
and when the economy is in income expenditure equilibrium, planned aggregate expenditure is equal to aggregate output

When can Real GDP exceed planned aggregate expenditure?

  • When firms over estimate sales and produced too much , leading to unintended additions to inventories becasue the they are not sold
  • this creates unintended increase in inventories investments
  • excess of real GDP over AE-planned

When can real GDP  be less than planned aggregate expenditure?

  • When firms underestimate sales and produced too little leading to inventory depletion because what whatever is in shortage they have to sell them from their inventories
  • this creates an unintended decrease or negative unplanned inventories investment
  • excess of AE-planned over real GDP
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What is the realtionship betwee the Real GDP gdp, planned aggregate expenditure  and unplanned inventory investment?

  • whenever real GDP exceeds Iplanned, Iunplanned is positive
  • whenever real GDP exceeds Iplanned, Iunplanned is negative
    • GDP = C+I
    • GDP = C+(Iplanned+Inv. Unplanned)
      • --->AE= C+Iplanned
    • GDP = AEplanned+Iunplanned

Considering  the assumptions what can firm do to deal with both a rise and a fall in unintended inventory? What is the effect of these adjust ments what do they eliminate, and what happens to real GDP?

When there is a rise in unintended inventory,  the firm will decrease production
when there is a fall in unintended inventory, the firm will increase production

What is income-expenditure equilibrium point, at this point what do firms do if anything? What should unplanned inventory be equal to? What do we use to denote this point, and what do we call it?

  • The income expenditure approach occurs at the point where real GDP equal to planned aggregate expenditure.
  • this is the only situation where firms wont have an incentive to change output in the next period
  • the unplanned inventory should be equal to zero
  • Y prime, called the income-expenditure equilibrium GDP

What is the point that identifies the income expenditure equilibrium as the point at which the planned aggregate expediture crosses the 45 degree line or the real GDP? Who is the founder? Who is the developer?

Keynesian cross
Jhon Maynard Keynes
Paul Samuelson

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