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IMPORTS LINE: A graphical depiction of the relation between imports bought from the foreign sector and the domestic economy's aggregate level of income or production. This relation is most important for deriving the net exports line, which plays a minor, but growing role in the study of Keynesian economics. An imports line is characterized by vertical intercept, which indicates autonomous imports, and slope, which is the marginal propensity to import and indicates induced imports. The aggregate expenditures line used in Keynesian economics is derived by adding or stacking the net exports line, derived as the difference between the exports line and imports line, onto the consumption line, after adding investment expenditures and government purchases.

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Lesson 16: Aggregate Shocks | Unit 1: Instability Page: 2 of 21

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

Our goal is to explain business cycle fluctuations.
  • The real GDP path the economy would take with long-run equilibrium--at full employment--is the straight, green upward-sloping line.
  • The actual real GDP path, the jagged red line, tends to be less smooth.
  • The business cycle is the movement above and below the long-run trend.
  • When the actual is below the long-run equilibrium line, we get unemployment.
  • When the actual is above the long-run equilibrium line, we get inflation.
  • Ceteris paribus factors are what create fluctuations away from the long-run trend.
  • Aggregate demand determinants are the main cause.

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INFLATIONARY GAP, KEYNESIAN MODEL

The difference between equilibrium aggregate production achieved in the Keynesian model and full-employment aggregate production that occurs when equilibrium aggregate production is greater than full-employment aggregate production. An inflationary gap, also termed an expansionary gap, is associated with a business-cycle expansion. The prescribed Keynesian remedy for an inflationary gap is contractionary fiscal policy. This is one of two alternative output gaps that can occur when equilibrium generates production that differs from full employment. The other is a recessionary gap.

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Paper money used by the Commonwealth of Massachusetts prior to the U.S. Revolutionary War, which was issued against the dictates of Britain, was designed by patriot and silversmith, Paul Revere.
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