Tutorial sheet 2

Question 1

1. (a) What assumptions are implicit in the definition of aggregate expenditure?

Answer 1

F – Firms adjust output, not prices
I – Investment is fixed/autonomous (not income-based)
R – Resources (like labor, capital) are underused
E – Exports are fixed, Imports rise with income
U – Unchanging prices (in the short run)
P – Public spending (gov’t) is fixed, not reactive