The Aggregate Expenditures Model
22
Copyright 2008 The McGraw-Hill Companies 9-1 Consumption a nd Investment Equilibrium G DP Equilibrium G DP and the Mu ltiplier International Trade Government Sp ending and GD P Lump-Sum Tax Increase and GDP Recessionary Expenditure G ap Inflationary Expenditure G ap Last Word Key Terms End Show 9 The Aggregate Expenditures Model O 9.1
-
Upload
bernadine-wolf -
Category
Documents
-
view
47 -
download
0
description
O 9.1. 9. The Aggregate Expenditures Model. Chapter Objectives. Economists Combine Consumption and Investment to Depict an Aggregate Expenditures Schedule for a Private Closed Economy Three Characteristics of the Equilibrium Level of Real GDP in a Private Closed Economy AE = Output - PowerPoint PPT Presentation
Transcript of The Aggregate Expenditures Model
Copyright 2008 The McGraw-Hill Companies9-1
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
9The Aggregate ExpendituresModel
O 9.1
Copyright 2008 The McGraw-Hill Companies9-2
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Chapter Objectives• Economists Combine Consumption and
Investment to Depict an Aggregate Expenditures Schedule for a Private Closed Economy
• Three Characteristics of the Equilibrium Level of Real GDP in a Private Closed Economy– AE = Output– Saving = Investment– No Unplanned Changes in Inventories
• How Changes in Equilibrium Real GDP Occur and Relate to Multiplier
• Integrate Government and Foreign Sectors into AE
• Recessionary and Expansionary Expenditure Gaps
Copyright 2008 The McGraw-Hill Companies9-3
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Consumption and Investment• Simplifications
–Private Closed Economy–Planned Investment–Investment Schedule
r a
nd
i (
pe
rce
nt)
Investment (billions of dollars)
ID
20
8
Real GDP (billions of dollars)
20
Inve
stm
ent
(bil
lio
ns
of
do
llar
s)
Ig
Investment Demand Curve Investment Schedule
2020
Investment Demand Curve
Investment Schedule
Copyright 2008 The McGraw-Hill Companies9-4
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Consumption and Investment• Equilibrium GDP:
C + Ig = GDP
• Real Domestic Output• Aggregate Expenditures
–Aggregate Expenditures Schedule
• Equilibrium GDP• Disequilibrium
W 9.1
Copyright 2008 The McGraw-Hill Companies9-5
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Consumption and Investment
(1) 40
(2) 45
(3) 50
(4) 55
(5) 60
(6) 65
(7) 70
(8) 75
(9) 80
(10) 85
$375
390
405
420
435
450
465
480
495
510
$-5
0
5
10
15
20
25
30
35
40
20
20
20
20
20
20
20
20
20
20
$395
410
425
440
455
470
485
500
515
530
$-25
-20
-15
-10
-5
0
+5
+10
+15
+20
Increase
Increase
Increase
Increase
Increase
Equilibrium
Decrease
Decrease
Decrease
Decrease
$370
390
410
430
450
470
490
510
530
550
(2)Real
DomesticOutput
(andIncome)
(GDP=DI)
(3)Con-
sump-tion(C)
(4)Saving (S)
(1-2)
(5)Investment
(Ig)
(6)Aggregate
Expenditures(C+Ig)
(7)UnplannedChanges inInventories
(+ or -)
(8)Tendency ofEmploymentOutput and
Income
(1)Employ-
ment
Graphically…
…in Billions of Dollars
Copyright 2008 The McGraw-Hill Companies9-6
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
530
510
490
470
450
430
410
390
370
45°
370 390 410 430 450 470 490 510 530 550
Disposable Income (billions of dollars)
Co
nsu
mp
tio
n (
bill
ion
s o
f d
olla
rs)
Consumption and InvestmentEquilibrium GDP
C
Ig = $20 Billion
AggregateExpenditures
C = $450 Billion
C + Ig(C + Ig = GDP)
EquilibriumPoint
G 9.1
Copyright 2008 The McGraw-Hill Companies9-7
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Equilibrium GDP
• Other Features…
–Saving Equals Planned Investment
•Leakage
• Injection
–No Unplanned Changes in Inventories
Copyright 2008 The McGraw-Hill Companies9-8
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
510
490
470
450
430
45°
430 450 470 490 510
Real GDP (billions of dollars)
Ag
gre
gat
e E
xpen
dit
ure
s (b
illio
ns
of
do
llars
)
Changes in Equilibrium GDP…and the Multiplier
Increase inInvestment
(C + Ig)0
Decrease inInvestment
(C + Ig)2
(C + Ig)1
Copyright 2008 The McGraw-Hill Companies9-9
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
International Trade• Net Exports and Aggregate
Expenditures• Net Exports Schedule• Net Exports and Equilibrium
GDP– Positive Net Exports– Negative Net Exports
• International Economic Linkages– Prosperity Abroad– Tariffs– Exchange Rates
Copyright 2008 The McGraw-Hill Companies9-10
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End ShowRealGDP
+5
0
-5
Net
Exp
ort
s X
n(b
illio
ns
of
Do
llars
)
Real GDP (billions of dollars)
Ag
gre
gat
e E
xpen
dit
ure
s(b
illio
ns
of
do
llars
)
510
490
470
450
43045°
430 450 470 490 510
International TradeNet Exports and Equilibrium GDP
AggregateExpenditureswith PositiveNet Exports
C + Ig
AggregateExpenditureswith NegativeNet Exports
C + Ig+Xn2
C + Ig+Xn1
Xn1
Xn2
Positive Net Exports
Negative Net Exports
450 470 490
Copyright 2008 The McGraw-Hill Companies9-11
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show -700 200 150 100 50 0 50 100 150 200 250
International Trade
Net Exports of Goods - Select Nations, 2004
Positive Net ExportsNegative Net Exports
Canada
France
Germany
Italy
Japan
United Kingdom
United States
+37
+195
+111
-17
-2
-117
-707
Source: World Trade Organization
GLOBAL PERSPECTIVE
Copyright 2008 The McGraw-Hill Companies9-12
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Adding the Public Sector
(1) $370
(2) 390
(3) 410
(4) 430
(5) 450
(6) 470
(7) 490
(8) 510
(9) 530
(10) 550
$375
390
405
420
435
450
465
480
495
510
$-5
0
5
10
15
20
25
30
35
40
$20
20
20
20
20
20
20
20
20
20
10
10
10
10
10
10
10
10
10
10
20
20
20
20
20
20
20
20
20
20
$415
430
445
460
475
490
505
520
535
550
10
10
10
10
10
10
10
10
10
10
(1)Level ofOutput
andIncome
(GDP=DI)
(2)Consump-
tion(C)
(3)Saving (S)
(4)Investment
(Ig)
(5)Net Exports
(Xn) (6)Government
(G)
(7)Aggregate
Expenditures(C+Ig+Xn+G)
(2)+(4)+(5)+(6)
Exports(X)
Imports(M)
Government Purchases and GDP
…in Billions of Dollars
Copyright 2008 The McGraw-Hill Companies9-13
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
45°
470 550
Real GDP (billions of dollars)
Ag
gre
gat
e E
xpen
dit
ure
s (b
illio
ns
of
do
llars
)
Adding the Public SectorGovernment Spending and GDP
C
GovernmentSpending of$20 Billion
C + Ig + Xn
C + Ig + Xn + G
$20 Billion Increasein GovernmentSpending Yields an$80 Billion IncreaseIn GDP
Copyright 2008 The McGraw-Hill Companies9-14
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
45°
490 550
Real GDP (billions of dollars)
Ag
gre
gat
e E
xpen
dit
ure
s (b
illio
ns
of
do
llars
)
Adding the Public SectorLump-Sum Tax Increase and GDP
$15 Billion DecreaseIn Consumption Froma $20 Billion (MPC=.75)Increase inTaxes
Cd + Ig + Xn + G
C + Ig + Xn + G
$20 Billion Increasein Taxes Yields a$60 Billion DecreaseIn GDP
Copyright 2008 The McGraw-Hill Companies9-15
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Adding the Public Sector
Cd + Ig + Xn + G = GDP
• Leakages
• Injections
• No Planned Inventory Changes
Sd + M + T = Ig + X + GG 9.2
W 9.2
Copyright 2008 The McGraw-Hill Companies9-16
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Equilibrium Versus Full-Employment GDP
Recessionary Expenditure Gap
Real GDP (billions of dollars)
Ag
gre
gat
e E
xpen
dit
ure
s(b
illio
ns
of
do
llars
)550
530
510
490
47045°
490 510 530
AE0
AE1
FullEmployment
RecessionaryExpenditureGap = $5 Billion
$5 BillionGap Yields$20 Billion
GDPChange
Copyright 2008 The McGraw-Hill Companies9-17
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Equilibrium Versus Full-Employment GDP
Inflationary Expenditure Gap
Real GDP (billions of dollars)
Ag
gre
gat
e E
xpen
dit
ure
s(b
illio
ns
of
do
llars
)550
530
510
490
47045°
490 510 530
AE0
AE2
FullEmployment
InflationaryExpenditureGap = $5 Billion $5 Billion
Gap Yields$20 Billion
GDPChange
Copyright 2008 The McGraw-Hill Companies9-18
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Equilibrium Versus Full-Employment GDP
• Application:–U.S. Recession of 2001
• Inflationary Expenditure Gap–U.S. Inflation in the Late
1980s–Full-Employment Output
with Large Negative Net Exports• Negative Net Exports
W 9.3
Copyright 2008 The McGraw-Hill Companies9-19
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Equilibrium Versus Full-Employment GDP
• Limitations of the Model– Does Not Show Price Level
Changes– Ignores Premature Demand-Pull
Inflation– Limits Real GDP to the Full-
Employment Level of Output– Does Not Deal with Cost-Push
Inflation– Does Not Allow for “Self-
Correction”
Copyright 2008 The McGraw-Hill Companies9-20
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Say’s Law - The Great Depression and Keynes
• Classical School – Automatic Self-Adjustment to Full Employment – Mill, Ricardo
• Views Based Upon “Say’s Law” - J.B. Say (1767-1832) – Supply Creates its Own Demand
• Great Depression Caused Questions• Keynes Answered in his General Theory
of Employment, Interest, and Money• Income and Saving Discrepancies• Volatility in Investment Spending• Cyclical Unemployment Can Occur• Government Should Be Active in the
Recovery Process
Last
Word
O 9.2
Copyright 2008 The McGraw-Hill Companies9-21
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Key Terms• planned investment• investment schedule• aggregate expenditures schedule• equilibrium GDP• leakage• injection• unplanned changes in inventories• net exports• lump-sum tax• recessionary-expenditure gap• inflationary-expenditure gap
Copyright 2008 The McGraw-Hill Companies9-22
Consumption and InvestmentEquilibrium GDPEquilibrium GDP and the MultiplierInternational TradeGovernment Spending and GDPLump-Sum Tax Increase and GDPRecessionary Expenditure GapInflationary Expenditure GapLast Word
Key Terms
End Show
Next Chapter Preview…
Aggregate Demand andAggregate Supply
