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Effects of the Collapse in Spending on Durables


Powerpoint Version

Falling Spending on Durables Reduces the Equilibrium Level of Real GDP

The mechanism by which falling spending on durables--either investment goods or consumption goods--by businesses and households leads to declines in real GDP can be read off of the income-expenditure diagram in chapter 9. The terror attack on the World Trade Center created fear and uncertainty. These led to declines in the baseline level of consumption spending in the consumption function, C0, and in the baseline level of investment spending, I0, two key components of autonomous spending A, which determines where the planned-expenditure line meets the y-axis.

Thus the planned-expenditure function is shifting downward. As it shifts downward, its intersection with the 45-degree inventory-balance equilibrium condition line shifts leftward by a multiple of the downward shift in planned expenditure. Equilibrium real GDP and national income falls because of the decline in autonomous spending. This process is not over all at once. It takes time--and we are now living through its beginnings.

Previous Handouts

2001-10-28: What Kind of Stimulus (Chapter 13: Stabilization Policy. Chapter 9: Income-Expenditure and the Multiplier.)
2001-10-21: Federal Reserve Reaction to the Terror Attack on the World Trade Center (Chapter 13: Stabilization Policy. Chapter 10: The IS Curve.)
2001-10-14: Why a Stimulus Package Might Be Desireable (Chapter 13: Stabilization Policy. Chapter 10: The IS Curve.)

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