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Understanding Aggregate Expenditure and Equilibrium GDP in AP Economics

This chapter outlines key concepts in aggregate expenditure and equilibrium GDP (Gross Domestic Product). It explains how equilibrium GDP occurs when total spending (Aggregate Expenditure) equals Real GDP and covers the implications of changes in imports and net exports on equilibrium. The chapter introduces the multiplier effect, detailing how small changes in spending can lead to larger shifts in GDP. It further contrasts equilibrium GDP with full employment GDP and discusses recessionary and inflationary gaps, highlighting key factors such as consumer spending and government expenditures.

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Understanding Aggregate Expenditure and Equilibrium GDP in AP Economics

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  1. AP Economics Chapter 10 Notes

  2. I. Aggregate Expenditure A. Will add X and G to calc. GDP 1. Equil. GDP is when spending (AE) = Real GDP a. 1. 2. 3.

  3. B. How can we lose Equil.? 1. Ex. Originally we are at Equil. Imports increase and net Exports (Xn) decline. a.

  4. II. Multiplier Effect A. Determine the “ripple effect” change on Equil. GDP when any of the 4 spending categories change. B. A small change in C, Ig, Xn, or G can trigger a larger change in GDP 1. ex. Extra dollar spent by Andy (c) is received by Bob who spends it and it is received by Chuck…

  5. C. Formulas to determine the Multiplier: 1. M = __I__ MPS 2. M = ___I___ I – MPC 3. Change in Real GDP ÷ Initial Change in Spending.

  6. D. Example: * MPC is .5 * Ig increases by 10 billion * C + Xn + G stays same * How much will Equil. GDP increase? E.

  7. III. Adding Xn and G to Equilibrium GDP A. Remember  Equilibrium GDP is where GDP = C + I + G + Exports – Imports 1. The questions will ask you to find equil GDP by using a combination of above B. a $50 tax cut will increase C and GDP, but not as much as a $50 G and I increase in spending. Why?

  8. IV. Equilibrium GDP vs. Full Employment GDP A. Review > F.E. GDP is reached when we are a peak economically (i.e. Unemployment is around 5.5%) B. Sometimes, Equil. GDP is above or below the F.E. GDP: 1. Recessionary Gap > When Equil. GDP is below F.E. GDP, we are in a recession. a. See p.214 graph (a)

  9. 2. Inflationary Gap > when Equil. GDP is above F.E. GDP, inflation has caused overspending. a. See p. 214 graph (b)

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