After reading this chapter, you should be able to: Illustrate how economists combine consumption and investment to depict an aggregate expenditures schedule for a private closed economy, discuss the three characteristics of the equilibrium level of real GDP in a private closed economy, analyze how changes in equilibrium real GDP can occur in the aggregate expenditures model and describe how those changes relate to the multiplier,...
11 TheAggregateExpenditures Model McGrawưHill/Irwin Copyrightâ2012byTheMcGrawưHillCompanies,Inc.Allrightsreserved AssumptionsandSimplifications Use the Keynesian aggregate • • • LO1 expenditures model Prices are fixed GDP = DI Begin with private, closed economy • Consumption spending • Investment spending 11-2 Equilibrium GDP (C + Ig = GDP) Equilibrium point Aggregate expenditures C + Ig C Ig = $20 billion C = $450 billion LO1 11-3 Other Features of Equilibrium GDP • Saving equals planned investment • Saving is a leakage of spending • Investment is an injection of • LO2 spending No unplanned changes in inventories • Firms not change production 11-4 Changes in Equilibrium GDP (C + Ig)1 (C + Ig)0 (C + Ig)2 Increase in investment Decrease in investment LO3 11-5 Adding International Trade • Include net exports spending in • • • LO4 aggregate expenditures • Private, open economy Exports create production, employment, and income Subtract spending on imports Xn can be positive or negative 11-6 Net Exports and Equilibrium GDP C + Ig+Xn1 C + Ig C + Ig+Xn2 Aggregate expenditures with positive net exports Aggregate expenditures with negative net exports Positive net exports 450 470 Negative net exports LO4 Xn1 490 Xn2 11-7 International Economic Linkages • Prosperity abroad • Can increase U.S exports • Exchange rates • Depreciate the dollar to increase • LO4 exports A caution on tariffs and devaluations • Other countries may retaliate • Lower GDP for all 11-8 Adding the Public Sector • Government purchases and • LO4 equilibrium GDP • Government spending is subject to the multiplier Taxation and equilibrium GDP • Lump sum tax • Taxes are subject to the multiplier • DI = GDP 11-9 Government Purchases and Eq. GDP C + Ig + X n + G C + Ig + Xn C Government spending of $20 billion LO4 11-10 Aggregate expenditures (billions of dollars) Taxation and Equilibrium GDP C + Ig + X n + G Ca + Ig + Xn + G $15 billion decrease in consumption from a $20 billion increase in taxes 45° 490 550 Real domestic product, GDP (billions of dollars) LO4 11-11 Equilibrium versus FullEmployment • Recessionary expenditure gap • Insufficient aggregate spending • Spending below full-employment GDP • Increase G and/or decrease T • Inflationary expenditure gap • Too much aggregate spending • Spending exceeds full-employment LO5 GDP • Decrease G and/or increase T 11-12 Aggregate expenditures (billions of dollars) Equilibrium versus FullEmployment AE0 AE1 530 510 Recessionary expenditure gap = $5 billion 490 Full employment 45° 490 510 530 Real GDP (a) Recessionary expenditure gap LO5 11-13 Equilibrium versus FullEmployment AE2 Inflationary expenditure gap = $5 billion AE0 Full employment LO5 11-14 ...Assumptions and Simplifications • Use the Keynesian aggregate • • • LO1 expenditures model Prices are fixed GDP = DI Begin with private, closed economy • Consumption spending • Investment spending 1 1-2 Equilibrium GDP... Ig C + Ig+Xn2 Aggregate expenditures with positive net exports Aggregate expenditures with negative net exports Positive net exports 450 470 Negative net exports LO4 Xn1 490 Xn2 1 1-7 International Economic Linkages... • Inflationary expenditure gap • Too much aggregate spending • Spending exceeds full-employment LO5 GDP • Decrease G and/or increase T 1 1-1 2 Aggregate expenditures (billions of dollars) Equilibrium versus FullEmployment