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FALLACY OF DIVISION: The logical fallacy of arguing that what is true for the whole is also true for the parts. In the study of economics, this takes the form of assuming that what works for the aggregate, or macroeconomy, also works for parts of the economy, such as households or businesses. The contrasting fallacy that you should check out is the fallacy of composition.

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Lesson 15: Aggregate Market | Unit 4: Self Correction Page: 18 of 22

Topic: Inflationary Gap <=PAGE BACK | PAGE NEXT=>

The aggregate market can automatically reach long-run equilibrium by closing an inflationary gap.

Key points:

  • Short-run equilibrium is at the intersection of the AD and the SRAS (SRo) curves.
  • The initial short-run price level is Po, and real production is Qo.
  • Short-run equilibrium is to the right of the full employment production, Qf.
  • We have an inflationary gap.
  • As wages rise, production cost increases which decreases short-run aggregate supply.
  • The SRAS curves shift to reach the full employment level at the intersection of the LRAS and AD curves.

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INDUCED EXPENDITURES

Expenditures on aggregate production by the four macroeconomic sectors that depend on income or production (especially national income or even gross domestic product). That is, changes in income generate changes in these expenditures. Each of the four aggregate expenditures--consumption, investment expenditures, government purchases, and net exports--have an induced component. Induced expenditures are measured by the slope of the aggregate expenditures line. The alternative to induced expenditures are autonomous expenditures, expenditures which do not depend on income.

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