In this chapter, students will be able to understand: Illustrate how economists combine consumption and investment to depict an aggregate expenditures schedule for 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, identify and describe the nature and causes of recessionary expenditure gaps and inflationary expenditure gaps.
28 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 28-2 Equilibrium GDP (C + Ig = GDP) Equilibrium point Aggregate expenditures C + Ig C Ig = $20 billion C = $450 billion LO1 28-3 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 28-4 Changes in Equilibrium GDP (C + Ig)1 (C + Ig)0 (C + Ig)2 Increase in investment Decrease in investment LO3 28-5 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 28-6 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 28-7 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 28-8 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 28-9 Government Purchases and Eq. GDP C + Ig + X n + G C + Ig + Xn C Government spending of $20 billion LO4 28-10 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 28-11 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 28-12 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 28-13 Equilibrium versus FullEmployment AE2 Inflationary expenditure gap = $5 billion AE0 Full employment LO5 28-14 ...Assumptions and Simplifications • Use the Keynesian aggregate • • • LO1 expenditures model Prices are fixed GDP = DI Begin with private, closed economy • Consumption spending • Investment spending 2 8-2 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 2 8-7 International Economic Linkages... • Inflationary expenditure gap • Too much aggregate spending • Spending exceeds full-employment LO5 GDP • Decrease G and/or increase T 2 8-1 2 Aggregate expenditures (billions of dollars) Equilibrium versus FullEmployment