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INFLATIONARY EXPECTATIONS, AGGREGATE DEMAND DETERMINANT: One of several specific aggregate demand determinants assumed constant when the aggregate demand curve is constructed, and that shifts the aggregate demand curve when it changes. An increase in the inflationary expectations causes an increase (rightward shift) of the aggregate curve. A decrease in the inflationary expectations causes a decrease (leftward shift) of the aggregate curve. Other notable aggregate demand determinants include interest rates, federal deficit, and the money supply.

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Lesson 15: Aggregate Market | Unit 4: Self Correction Page: 16 of 22

Topic: Short Run <=PAGE BACK | PAGE NEXT=>

The aggregate market, which is typically at or near short-run equilibrium, is persistently motivated to seek out the long-run equilibrium.
  • This motivation comes from an imbalance in the labor market created by rigid wages, temporarily tapping into frictional and structural unemployment, and misperceptions about the real wage.
  • The imbalance is temporary. The macroeconomy will automatically move toward long-run equilibrium and full employment.
  • Wages are flexible in the long run, but rigid in the short run. This is the key to the self-correction mechanism of the aggregate market.

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INDUCED INVESTMENT

Business investment expenditures that depend on income or production (especially national income and gross domestic product). That is, changes in income induce changes in investment. Induced investment reflects the observation that the business sector is inclined to reinvest profits (boosted by a growing economy) in capital goods. It is measured by the marginal propensity to invest (MPI) and is reflected by the positive slope of investment line. The alternative to induced investment is autonomous investment, which does not depend on income.

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