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AGGREGATE EXPENDITURE LINE: A line representing the relation between aggregate expenditures and gross domestic product used in the Keynesian cross. The aggregate expenditure line is obtained by adding investment expenditures, government purchases, and net exports to the consumption line. As such, the slope of the aggregate expenditure line is largely based on the slope of the consumption line (which is the marginal propensity to consume), with adjustments coming from the marginal propensity to invest, the marginal propensity for government purchases, and the marginal propensity to import. The intersection of the aggregate expenditures line and the 45-degree line identifies the equilibrium level of output in the Keynesian cross.

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Lesson 12: Business Cycles | Unit 2: A Simple Cycle Page: 7 of 26

Topic: Contraction <=PAGE BACK | PAGE NEXT=>

Contractions generally last about a year, but some have persisted for 1 1/2 years and some end after six months.
  • A contraction, also termed recession, is the decline of real GDP, from A to B.
  • A contraction is officially designated as at least six months of declining economic activity.
  • The 1930s Great Depression had two contractions, one lasting 43 months.
  • A contraction takes the economy from above the long-run trend to below the long-run trend. The long-run trend is full-employment production.
  • Below the long-run trend resources are not fully employed, unemployment increases.

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AGGREGATE DEMAND INCREASE, SHORT-RUN AGGREGATE MARKET

A shock to the short-run aggregate market caused by an increase in aggregate demand, resulting in and illustrated by a rightward shift of the aggregate demand curve. An increase in aggregate demand in the short-run aggregate market results in an increase in the price level and an increase in real production. The level of real production resulting from the shock can be greater or less than full-employment real production.

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North Carolina supplied all the domestic gold coined for currency by the U.S. Mint in Philadelphia until 1828.
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