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Fiscal and Monetary Policy
Macroeconomics - ECO 102
1. Describe the four components of aggregate expenditure.
* Consumption: consists of purchases of final goods and services by households during the year. Consumption is the largest spending category, averaging about two-thirds of U.S. GDP during the last decade. Alone with services like dry cleaning, haircuts, and air travel, consumption includes nondurable goods, like soap and soup, and durable goods, like furniture and kitchen appliances. Durable goods are expected to last at least three years.
* Investment: consists of spending on new capital goods and on net additions to inventories. The most important investment is physical capital, such as new buildings and new machinery. Investment also includes new residential construction. Although it fluctuates from year to year, investment averaged about one-sixth of U.S. GDP during the last decade. More generally investment consists of spending on current production that is not used for current consumption. A net increase to inventories also counts as investment because it represents current production not used for current consumption. Inventories are stocks of goods in process, such as computer parts, and stocks of finished goods, such as new computers awaiting sale. Inventories help manufacturers cope with unexpected changes in the supply of their resources or in the demand for their products. Although investment includes purchasing a new residence, it excludes purchase of existing buildings and machines and purchases of financial assets, such as stocks and bonds. Existing buildings and machines were counted in GDP when they were produced. Stocks and bonds are not investments themselves but simply indications of ownership.
* Government include government spending for goods and services from clearing snowy roads to clearing court dockets, from buying library books to paying librarians. Government purchases averaged a bit less than one-fifth of...