Aggregate Expenditure And Output Of The Short Run Essay

Aggregate expenditure and output in the short run. In principle, an economy is in equilibrium when the main macroeconomic variables tend to remain stable over time without external shocks. However, the conditions that this balance must fulfill differ according to the period in which we are analyzing the economy. In any economy, output, income, and aggregate expenditure coincide. However, this cannot be the equilibrium condition, since it is an identity. In order to be able to say that the economy has reached the equilibrium, the condition that is required is that the production and the rent are equal to the planned expenditure. The difference between planned expenditure and actual expenditure is unplanned inventory investment, which is also part of aggregate demand. Therefore, another way of defining equilibrium is that the unplanned investment in stocks equals zero. If for example, the planned aggregate expenditure was lower than the output of the companies, they would see their stocks rise above what they had anticipated. As this accumulation of inventories is computed within the total expenditure, it would be fulfilled that the GDP is equal to the demand, but the level of production would not be of equilibrium. In fact, in the following periods, the companies would adjust their production downwards to give rise to the unwanted increase in inventories. The balance would be reached when production ended up at a level equal to the planned expenditure. 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