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6: Aggregate Expenditure and Aggregate Demand

  • Page ID
    45489
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    The state of the Canadian economy was very much in the news in the early summer of 2016. Economic growth in the first quarter of the year was just 0.7 percent and, by early estimates, was negative in the second quarter. Some commentators said the economy was heading into a 'recession' as defined by two consecutive quarters of negative growth. Others were more positive. Earlier forecasts had called for a short drop in growth after the fall in crude oil prices, offset shortly by increased consumer spending and exports. The Bank of Canada lowered its interest rate in January 2015 and again in July 2015 to support the economy. The earlier fall in the foreign exchange rate had lowered the US dollar price of the Canadian dollar, lowering prices for Canadian goods and services in foreign countries. It was hoped these changes in economic conditions and policy would support increased economic growth. Things had not yet worked out that way.

    The Liberal government of Justin Trudeau had been elected in October 2015 on a platform of fiscal stimulus. Short run budget deficits to finance major infrastructure projects were a key shift away for the previous government's policy focused on balanced budgets. But the inevitable lag in the timing and impact of increased government spending meant the effects of fiscal stimulus were small at best in the final two quarters of 2016. Early 2017 indicators like job creation reports suggest the economy may be stronger in 2017.

    Forecasting the effects of changes in economic conditions or government policy shifts is complicated by the complex system of interdependencies and feedback effects in the macro economy. In Chapter 5, differences in output, employment and prices were the results of different aggregate demand and supply conditions. The challenge is to sort out how an event like a change in a commodity price or a shift in household expectations of future employment prospects or a change in business expectations of future markets would affect aggregate demand and supply conditions.

    This chapter introduces a basic short-run model of the economy as a first step in explaining changes in aggregate demand that can change economic performance.


    6: Aggregate Expenditure and Aggregate Demand is shared under a CC BY-NC-SA license and was authored, remixed, and/or curated by Douglas Curtis and Ian Irvine (Lyryx) .

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