Question

AE (aggregate expenditures) are an estimation of how much stuff is purchased. Income (Y) is an estimation of how much stuff is made. Expenditure equilibrium is when AE=Y. A surplus occurs when AE < Y and a shortage occurs when AE > Y. Would there be a shortage ore a surplus during a recession? An inflationary period? What situation do you believe Canada is in right now? provide support for your answer.

Answer 1

AE = C + I + [ G + NX]

If G & NX is cinstant then,

AE = C+I

C contribute for 61% in AE and play an important role.

GDP = C + I + G + NX

An economy is said to be at equilibrium when aggregate expenditure is equal to the aggregate supply (production) in the economy. AE (aggregate expenditures) are an estimation of how much stuff is purchased. Income (Y) is an estimation of how much stuff is made. Expenditure equilibrium is when AE=Y. A surplus occurs when AE < Y and a shortage occurs when AE > Y. When aggregate expenditures intersects output at potential GDP, the economy is at full employment . If a situation such as a decline in consumption or increase in taxes causes aggregate expenditures to fall, the economy will experience below full employment equilibrium, causing a recessionary gap. Recessionary gap means real output (GDP) is below than the potential output. It happens due to decreasing AD. During the recession the AD decrease rapidly that decraese output (real GDP) and price level. During the recession people consume and invest less due to decreasing income, future uncertainty about the economy. These factors decrease the confidence level of consumers and investors that decrease AD. During the recession AS (production or Y) is greater than AD (AE). So during the recession AEAS so, AE>Y.

Canada’s real GDP declined 12.3% in the second quarter of 2020. Economic production measured on an industry basis decreased 12.4%. Household consumption spending was down 14.4% and total business investment spending decreased by 16.4% in the second quarter. Economy is facing recession and AE