Lecture Macroeconomics - Chapter 8: Building the aggregate expenditure model

Chapter 8 - Building the aggregate expenditure model. In this chapter you will learn: The factors that determine consumption expenditure and saving, the factors that determine investment spending, how equilibrium GDP is determined in a closed economy without a government sector, about the effects of the multiplier on changes in equilibrium GDP,…

Building the Aggregate Expenditure Model Chapter SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter In this chapter you will learn The factors that determine consumption expenditure and saving The factors that determine investment spending How equilibrium GDP is determined in a closed economy without a government sector About the effects of the multiplier on changes in equilibrium GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter In this chapter you will learn How international trade affects equilibrium output How adding the public sector affects equilibrium output The distinction between equilibrium and full-employment GDP The limitations of the aggregate expenditure model © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Chapter Topics Simplifications Tools of the Aggregate Expenditures Model Consumption & Saving Investment Equilibrium GDP Other Features of Equilibrium GDP Changes in Equilibrium GDP & the Multiplier International Trade & Equilibrium Output Adding the Public Sector Equilibrium vs Full-Employment GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Simplifications A private closed economy – – – No government No taxes No exports or imports All saving is personal – Depreciation is zero GDP=NDI=PI=DI © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Chapter Topics Simplifications Tools of the Aggregate Expenditures Model Consumption & Saving Investment Equilibrium GDP Other Features of Equilibrium GDP Changes in Equilibrium GDP & the Multiplier International Trade & Equilibrium Output Adding the Public Sector Equilibrium vs Full-Employment GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Tools of the AE Model the amount of goods & services produced & therefore the level of employment depend directly on the level of aggregate expenditures (total spending) assume excess production capacity & unemployed labour price level is constant © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Chapter Topics Simplifications Tools of the Aggregate Expenditures Model Consumption & Saving Investment Equilibrium GDP Other Features of Equilibrium GDP Changes in Equilibrium GDP & the Multiplier International Trade & Equilibrium Output Adding the Public Sector Equilibrium vs Full-Employment GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 8 Consumption & Saving The Consumption Schedule – higher income higher consumption The Saving Schedule – higher income higher saving S S == DI DI C C © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Consumption & Saving consumption APC = income APC APC ++ APS APS == 11 saving APS = income change in consumption MPC = change in income MPC MPC ++ MPS MPS == 11 change in saving MPS = change in income © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 10 Table 8-8 Equilibrium GDP GDP $370 T DI Ca $40 $330 $345 Sa Ig $ - 15 $20 X $40 Ma Xna $5 $35 G $40 390 40 350 360 - 10 20 40 10 30 40 410 40 370 375 -5 20 40 15 25 40 430 40 20 40 20 20 40 20 40 25 15 40 20 40 30 10 40 450 470 490 Government Government 390 390 40 spending 410 405 is spending is5 40 unchanged 430 420 10 unchanged 40 450 435 15 20 40 35 40 510 40 470 450 20 20 40 40 40 530 40 490 465 25 20 40 45 -5 40 550 40 510 480 30 20 40 50 - 10 40 © 2002 McGraw-Hill Ryerson Ltd AE Macroeconomics, Chapter 81 Table 8-8 Equilibrium GDP GDP $370 T DI Ca $40 $330 $345 Sa Ig $ - 15 $20 X $40 Ma Xna $5 $35 G AE $40 $440 390 40 350 360 - 10 20 40 10 30 40 450 410 40 370 375 -5 20 40 15 25 40 460 430 40 390 390 20 40 20 20 40 470 450 40 410 405 20 40 25 15 40 480 470 40 430 420 10 20 40 30 10 40 490 490 40 450 435 15 20 40 35 40 500 510 40 470 450 20 20 40 40 40 510 530 40 490 465 25 20 40 45 -5 40 520 550 40 510 480 30 20 40 50 - 10 40 530 © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 82 Figure 8-14 C + Ig + Xn + G Aggregate expenditures (billions of dollars) 550 510 470 o 45 o 470 510 550 GDP (billions of dollars) $40 billion lump sum personal taxes net effect: a reduction of $20 billion in AE © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 83 C + Ig + Xn + G Aggregate expenditures (billions of dollars) 550 Ca + Ig + Xna + G -20 510 -40 470 o 45 o 470 510 550 GDP (billions of dollars) equilibrium GDP reduced by $40 billion © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 84 Balanced Budget Multiplier equal increases in G & T increase equilibrium GDP government spending has a direct impact on AE taxes affect AE indirectly through DI the balanced budget multiplier is © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 85 Balanced Budget Multiplier increase G by $40 billion increase T by $40 billion equilibrium AE increases by $40 billion © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 86 Chapter Topics Simplifications Tools of the Aggregate Expenditures Model Consumption & Saving Investment Equilibrium GDP Other Features of Equilibrium GDP Changes in Equilibrium GDP & the Multiplier International Trade & Equilibrium Output Adding the Public Sector Equilibrium vs Full-Employment GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 87 Equilibrium vs Full-Employment GDP equilibrium GDP may or may not provide full employment © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 88 Figure 8-16 (Ca + Ig + Xna + G)0 Aggregate expenditures (billions of dollars) Recessionary Recessionary gap gap — — When When aggregate aggregate expenditures expenditures are are inadequate inadequate to to bring bring about about full full employment employment o 45 Full Employment GDP o 510 530 Real GDP (billions of dollars) © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 89 Figure 8-16 Aggregate expenditures (billions of dollars) Recessionary Recessionary gap gap — — When When aggregate aggregate expenditures expenditures are are inadequate inadequate to to bring bring about about full full employment employment (Ca + Ig + Xna + G)0 (Ca + Ig + Xna + G)1 Recessionary Gap = $20 billion 20 o 45 Full Employment GDP o 510 530 Real GDP (billions of dollars) © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 90 Aggregate expenditures (billions of dollars) Figure 8-16 Inflationary Inflationary gap gap — — When When aggregate aggregate expenditures expenditures are are greater greater than than the the full full employment employment level level causing causing demand-pull demand-pull inflation inflation (Ca + Ig + Xna + G)0 Full Employment GDP o 510 530 550 GDP (billions of dollars) © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 91 Aggregate expenditures (billions of dollars) Figure 8-16 Inflationary Inflationary gap gap — — When When aggregate aggregate expenditures expenditures are are greater greater than than the the full full employment employment level level causing causing demand-pull demand-pull inflation inflation (Ca + Ig + Xna + G)2 (Ca + Ig + Xna + G)0 Inflationary Gap = $20 billion 20 Full Employment GDP o 510 530 550 GDP (billions of dollars) © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 92 Applications of the Model The End of the Japanese Growth “Miracle” © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 93 Limitations of the Model The model does not show pricelevel changes The model does not deal with costpush inflation © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 94 Chapter Topics Simplifications Tools of the Aggregate Expenditures Model Consumption & Saving Investment Equilibrium GDP Other Features of Equilibrium GDP Changes in Equilibrium GDP & the Multiplier International Trade & Equilibrium Output Adding the Public Sector Equilibrium vs Full-Employment GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 95 ... adding the public sector affects equilibrium output The distinction between equilibrium and full-employment GDP The limitations of the aggregate expenditure model © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, ... © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Chapter Topics Simplifications Tools of the Aggregate Expenditures Model Consumption & Saving Investment Equilibrium GDP Other Features... © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Chapter Topics Simplifications Tools of the Aggregate Expenditures Model Consumption & Saving Investment Equilibrium GDP Other Features