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Real InCome In the Economy

Essay by   •  May 15, 2011  •  Essay  •  973 Words (4 Pages)  •  2,413 Views

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1. Describe the difference between autonomous expenditure and induced expenditure. Which sectors of the economy are assumed to have both types of spending and which are not? Explain your answers.

According to Farnham, the level of real income in the economy distinguish autonomous and induced expenditures. Autonomous expenditures do not vary with the level of real income in the economy. Induced expenditures vary with the level of real income in the economy (Farnham, 2010).

According to Farnham, there are four macroeconomic sectors that influence spending behavior. The four macroeconomic sectors of the economy are household, business, government, and foreign. The household sector is made of personal consumption, the business sector is made of private domestic investment, the government sector is made of government consumption and gross investment, and the foreign sector is made of net exports minus import expenditures (Farnham, 2010, p. 305).

Autonomous expenditures do not depend on income or production of the four macroeconomic sectors. Autonomous expenditures are affected by expenditure determinants. The expenditure determinants that affect autonomous expenditures are interest rates, consumer confidence, fiscal policy, and foreign currency exchange rates (http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=autonomous+expenditures).

Induced expenditures depend on the income or production of the four macroeconomic sectors. Induced expenditures are affected by the four macroeconomic sectors. The four macroeconomic sectors are household, business, government, and foreign (http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=induced+expenditures).

All four of the macroeconomic sectors have both autonomous components and induced components. The household sector is affected by autonomous expenditures. Amosweb reported household expenditures have autonomous sectors. They are affected by interest rates, consumer confidence, and wealth (http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=autonomous+expenditures). Induced expenditures are affected by household expenditures also. Induced expenditures are affected by household income.

The business sector is affected by autonomous expenditures and induced expenditures. Autonomous expenditures are affected by interest rates, technological innovations, and expectations. Most investment expenditures are autonomous.

Induced expenditures also affect the business sector. An increase in gross domestic product usually increases profits. An increase in income affects induced expenditures because the increase in profits are used in the businesses sector for capital investment.

Most government expenditures are autonomous. Autonomous expenditures depend on fiscal policy and politics. Amosweb stated, autonomous government expenditures are a tool to stabilize the businesses cycle. A small amount of government expenditures are induced. When the economy is doing well, state and local taxes rise and stat and local government increase their purchases.

All exports are autonomous because net exports depend on the foreign exchange rates, the global economic conditions, and foreign political activity. A significant portion of net exports also have an induced component. Induced expenditures are income related. Amousweb reported, income has a negative inducement on net exports.

Autonomous expenditures and induced expenditures affect all four sectors of the economy. Autonomous expenditures do not vary with the level of real GDP. Induced expenditures vary with the level of real GDP.

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