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KEYNESIAN EQUILIBRIUM: The state of the macroeconomy in which aggregate expenditures are equal to aggregate output. This is illustrated using the income-expenditure model, or Keynesian cross, as the intersection of the aggregate expenditures line and the 45-degree line. The aggregate expenditures line is the summation of consumption expenditures, investment expenditures, government purchases, and net exports. The 45-degree line represents all combinations in which aggregate expenditures equal aggregate output. Keynesian equilibrium is also represented by the saving-investment, or injection-leakage, model as the intersection between the injection line (investment expenditures, government purchases, and exports) and the leakage line (saving, taxes, and imports).

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Lesson 11: Circular Flow | Unit 2: Financial Markets Page: 10 of 22

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  • The main function of financial markets, which is to divert national income from household consumption to business investment.
  • The difference between the real or physical side of the economy (the production of goods that satisfy wants and needs) and the paper or financial side (legal claims on or ownership of physical resources, goods, and production).
  • How income is diverted from legal-claim buyer to legal-claim seller through the financial markets.
  • Why saving can be thought as a nonconsumption use of income, as making a loan, or as supplying income to the financial markets in exchange for a legal claim.
  • Two basic reasons to save: (1) in return for an interest payment or (2) to accumulate income that can be spent later.
  • Investment, which is business sector expenditures on gross domestic product for capital goods.
  • How the business sector borrows income through financial markets and uses this income flow to finance capital investment.
  • Why adding saving, investment, and financial markets does not change the total volume of the circular flow.
  • That imbalances between saving and investment trigger economic stability, business cycles, unemployment, and inflation.

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PERFECT COMPETITION, LONG-RUN EQUILIBRIUM CONDITIONS

The long-run equilibrium of a perfectly competitive industry generates six specific equilibrium conditions, including: (1) economic efficiency (P = MC), (2) profit maximization (MR = MC), (3) perfect competition (MR = AR = P), (4) breakeven output (P = AR = ATC), (5) minimum production cost (MC = ATC), and (6) minimum efficient scale (MC = ATC = LRAC = LRMC).

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BROWN PRAGMATOX
[What's This?]

Today, you are likely to spend a great deal of time looking for the new strip mall out on the highway seeking to buy either a T-shirt commemorating next Thursday or a birthday gift for your uncle. Be on the lookout for letters from the Internal Revenue Service.
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This isn't me! What am I?

The word "fiscal" is derived from a Latin word meaning "moneybag."
"When you play, play hard; when you work, don't play at all. "

-- Theodore Roosevelt, 26th US president

EEH
Explorations in Economic History
A PEDestrian's Guide
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