Ortujan, Hazel Yen G.

BSA 4A2-1 ECO3

Net Exports
Net export is the value of countrys total exports minus the value of its total imports. It is
the amount by which foreign spending on a home countrys goods and services exceeds the home
countrys spending on foreign goods and services.

Aggregate Planned Expenditure and Real GDP

Aggregate expenditure is the sum of planned expenditures in all final goods and services
at a given price level. It composes of all domestic consumption, investment, government
expenditures and expenditure on exports less expenditure on imports.
If aggregate expenditure exceed real GDP, it means planned expenditure exceed current output.
Inventories are drawn down in an unplanned manner. If aggregate expenditure are less than real
GDP, it means people are planning to buy fewer goods and avail fewer services than are
currently being produced. Unplanned inventories are accumulated.

Equilibrium Expenditure
Equilibrium expenditure is the level aggregate expenditure that occurs when aggregate
planned expenditure equals real GDP.

The Concept of Multiplier Effect

Multiplier effect is an effect in which an increase in spending produces an increase in
national income and consumption greater than initial amount spent. It refers to how an increase
in one economic activity can cause an effect throughout many other related economic activities.
The multiplier concept can be used any situation where there is a new injection into an economy.
Examples of such situations include:
1. When the government funds building of a new motorway
2. When there is an increase in exports abroad

3. When there is a reduction in interest rates or tax rates, or when the exchange rate falls.
Fiscal Multipliers
Fiscal multiplier is used to measure the effect of government spending on the subsequent
income level of a country. In theory, increased fiscal spending can lead to increased
consumption, which then leads to a cycle of consumption and wealth creation.

Aggregate Demand and what determines it

It is the total amount of goods and services demanded in the economy at a given overall
price level and in a given time period. It is represented by the aggregate-demand curve, which
describes the relationship between price levels and the quantity of output that firms are willing to
provide.
Aggregate demand is the demand for the gross domestic product (GDP) of a country, and is
represented by this formula: AD = C + I + G + (X-M)
C = Consumers' expenditures on goods and services
I = Investment spending by companies on capital goods
G = Government expenditures on publicly provided goods and services
X = Exports of goods and services. M = Imports of goods and services

Aggregate Supply and what determines it

It is the total supply of goods and services produced within an economy at a given overall
price level in a given time period. It is represented by the aggregate-supply curve, which
describes the relationship between price levels and the quantity of output that firms are willing to
provide. Normally, there is a positive relationship between aggregate supply and the price level.
Rising prices are usually signals for businesses to expand production to meet a higher level of
aggregate demand.
A shift in aggregate supply can be attributed to a number of variables. These include changes in
the size and quality of labor, technological innovations, increase in wages, increase in production
costs, changes in producer taxes and subsidies, and changes in inflation. In the short run,
aggregate supply responds to higher demand (and prices) by bringing more inputs into the
production process and increasing utilization of current inputs.
Macroeconomics Equilibrium

The state where aggregate supply equals aggregate demand.

Expectations and Macroeconomic Equilibrium

In the short-run, an unanticipated decrease in aggregate demand will lead to an excess
supply of resources, which will lead to a decline in resource prices. Unemployment will increase,
prices will go down and output will be reduced. Over a longer period of time, lower resource
costs will cause a shift to the right in aggregate supply. The economy will move to producing a
level of output consistent with full employment (as was the case before the decrease in aggregate
demand), but at a lower price level.
An unanticipated increase in aggregate demand will, in the short-run, lead to an output level that
is greater than what is consistent with full employment. This occurs because price levels are
different that what was anticipated by resource providers. There will be less unemployment than
the "natural rate" of unemployment. There will be upward pressure on resource prices and
interest rates, which will, over the long-run, result in a decrease in aggregate demand. Resource
providers will make adjustments to the new price levels and output will decline to what is
consistent with full employment. New market equilibrium will occur at a higher price level. So
in the long-run, inflation (higher prices) will be the major effect of the increase in aggregate
demand.
In the short-run, an unanticipated decrease in SAS will lower the availability of resources. This
will lead to an increase in resource prices, which will in turn cause the aggregate supply curve of
goods and services to shift up and to the left. A reduced level of output will be produced at higher
prices. If the cause of the unanticipated decrease in SAS is temporary, then there should be no
changes in prices or output over the long-run. If the cause is more important, then the long-run
supply curve will shift to the left. The economy would produce a lower level output at higher
prices.
An unanticipated increase in aggregate supply will, in the short-run, lead to a shift to the right in
SAS. Output and income will expand beyond what is consistent with full employment at a lower
price level. If what produced the increase in aggregate supply is only temporary, the SAS curve
will return to normal levels and prices and output will be as before. If what produced the change
is permanent, then both SAS and LAS will shift to the right. There will be a greater amount of
output, at lower prices.