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Chapter 23: Problem 1

Explain the difference between aggregate expenditure and aggregate demand.

Short Answer

Expert verified
The key differences between aggregate expenditure and aggregate demand are that aggregate expenditure refers to the actual spending in an economy, while aggregate demand refers to the desired amount of goods and services to be bought at different prices. Also, aggregate expenditure is measured at a specific income and price level, while aggregate demand changes with price levels.

Step by step solution

01

Define Aggregate Expenditure

Aggregate Expenditure is the total spending in an economy at different price levels within a specific period of time, for a specific level of income. It includes all purchases made by households (consumer spending), businesses (investment), and the government (government spending), as well as net exports.
02

Define Aggregate Demand

Aggregate Demand (AD) on the other hand, represents the total quantity of all goods and services demanded by the economy at different price levels. AD is a macroeconomic concept that depicts the total demand for all goods and services in an economy.
03

Explaining The Difference

The main difference between aggregate expenditure and aggregate demand lies in the fact that aggregate expenditure is the actual expenditure incurred by all sectors of the economy, while aggregate demand is the desired expenditure under different scenarios of price levels. Aggregate expenditure is a static concept, i.e., it is measured for a specific level of income and price. Conversely, aggregate demand is a dynamic concept that changes with changes in price levels.

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Most popular questions from this chapter

An article in the Wall Street Journal stated that at the beginning of May \(2017,\) inventories of pickup trucks were "touching 97 days' supply as of the beginning of May, or a \(12 \%\) increase in actual vehicles on dealer lots compared with the prior year.... That number is far above the industry norm for inventory." Why might U.S. automakers find that their inventories of pickup trucks are unexpectedly rising? How are these automakers likely to react to the increase in inventories?

What are the three main determinants of net exports? How would an increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) affect U.S. net exports?

What is the multiplier effect? Use a \(45^{\circ}\) -line diagram to illustrate the multiplier effect of a decrease in government purchases

(Related to the Chapter Opener on page 776) Suppose that Intel is forecasting demand for its computer chips during the next year. How will the forecast be affected by each of the following? a. A survey shows a sharp rise in consumer confidence that income growth will be increasing. b. Real interest rates are expected to increase. c. The value of the U.S. dollar is expected to increase in exchange for foreign currencies. d. Planned investment spending in the economy is expected to decrease.

Explain whether you agree with the following statement: "The reason the aggregate demand curve slopes downward is that when the price level is higher, people cannot afford to buy as many goods and services."
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