An analysis of the aggregate expenditure model and inflationary gaps.
Written in 2004; 1,705 words; 5 sources; MLA; $ 55.95
Paper Summary:
This paper uses an aggregate expenditure model to explain the impact of the housing boom on investment and consumption spending. The paper presents a multiplier analysis to explain the increase in GDP consequent upon the rise in spending. Assuming that the housing boom has created an inflationary gap, the paper explores the aggregate expenditure model to explain this gap and then explains how fiscal policy could be used to eliminate this gap.
From the Paper:
"In order to determine the relation between the housing boom and the rise of prices, which are probably caused by greater demand in the housing sector, all factors which may produce shifts in the production function must be analyzed. The model proposed by Keynes suggests that each monetary unit spent on something must be somebody's income. Therefore, the housing boom, which creates new jobs, not only in the construction industry, but also in related areas, such as the production of wood or steel, is bound to produce a corresponding rise in consumption demand, as a result of increased spending. A similar effect is incurred upon investment demand."
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