McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Transcription

1 The Aggregate Expenditures Model McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Assumptions and Simplifications Use the Keynesian aggregate expenditures model Prices are fixed GDP = DI Begin with private, closed economy Consumption spending Investment spending LO1 11-2

3 Consumption and Investment Investment Demand Curve Investment Schedule r and i (percent) 8 20 Investment demand curve 20 Investment (billions of dollars) (a) Investment demand curve ID Investment (billions of dollars) 20 Investment schedule 20 I g Real domestic product, GDP (billions of dollars) (b) Investment schedule LO1 11-3

4 Equilibrium GDP Determination of the Equilibrium Levels of Employment, Output, and Income: A Private Closed Economy (1) Possible Levels of Employment, Millions (2) Real Domestic Output (and Income) (GDP = DI),*Billio ns (3) Consumption (C), (4) Saving (S), (5) Investment (I g ), (6) Aggregate Expenditure (C+I g ), (7) Unplanned Changes in Inventories, (+ or -) (8) Tendency of Employment, Output, and Income (1) 40 $370 $375 $-5 $20 $395 $-25 Increase (2) Increase (3) Increase (4) Increase (5) Increase (6) Equilibrium (7) Decrease (8) Decrease (9) Decrease (10) Decrease * If depreciation and net foreign factor income are zero, government is ignored and it is assumed that all saving occurs in the household sector of the economy, then GDP as a measure of domestic output is equal to NI,PI, and DI. Household income = GDP LO1 11-4

5 Equilibrium GDP Aggregate expenditures, C + I g (billions of dollars) Equilibrium point Aggregate expenditures 45 (C + I g = GDP) C + I g Real domestic product, GDP (billions of dollars) C I g = $20 billion C = $450 billion LO1 11-5

6 Other Features of Equilibrium GDP Saving equals planned investment Saving is a leakage of spending Investment is an injection of spending No unplanned changes in inventories Firms do not change production LO2 11-6

7 Changes in Equilibrium GDP Aggregate expenditures (billions of dollars) Increase in investment Real domestic product, GDP (billions of dollars) (C + I g ) 1 (C + I g ) 0 (C + I g ) 2 Decrease in investment LO3 11-7

8 Adding International Trade Include net exports spending in aggregate expenditures Private, open economy Exports create production, employment, and income Subtract spending on imports X n can be positive or negative LO4 11-8

9 The Net Export Schedule Two Net Export Schedules (in ) (1) Level of GDP (2) Net Exports, X n1 (X > M) (3) Net Exports, X n2 (X < M) $370 $+5 $ LO4 11-9

10 Net Exports and Equilibrium GDP Aggregate expenditures (billions of dollars) Aggregate expenditures with positive net exports C + I g +X n1 C + I g C + I g +X n2 Aggregate expenditures with negative net exports 430 Net exports, X n (billions of dollars) Real domestic product GDP (billions of dollars) Positive net exports Negative net exports X n1 X n2 Real GDP LO

11 International Economic Linkages Prosperity abroad Can increase U.S. exports Exchange rates Depreciate the dollar to increase exports A caution on tariffs and devaluations Other countries may retaliate Lower GDP for all LO

12 Global Perspective Source: World Trade Organization, LO

13 Adding the Public Sector Government purchases and equilibrium GDP Government spending is subject to the multiplier Taxation and equilibrium GDP Lump sum tax Taxes are subject to the multiplier DI = GDP LO

14 Government Purchases and Eq. GDP The Impact of Government Purchases on Equilibrium GDP (1) Real Domestic Output and Income (GDP=DI), (2) Consumption (C), (3) Saving (S), (4) Investment (I g ), (5) Net Exports (X n ), Exports (X) Imports (M) (6) Government Purchases (G), (7) Aggregate Expenditures (C+I g +X n +G), (2)+(4)+(5)+(6) (1) $370 $375 $-5 $20 $10 $10 $20 $415 (2) (3) (4) (5) (6) (7) (8) (9) (10) LO

15 Government Purchases and Eq. GDP Aggregate expenditures (billions of dollars) Government spending of $20 billion C + I g + X n + G C + I g + X n C Real domestic product, GDP (billions of dollars) LO

16 Taxation and Equilibrium GDP Determination of the Equilibrium Levels of Employment, Output, and Income: Private and Public Sectors (1) Real Domestic Output and Income (GDP=DI), (2) Taxes (T), (3) Disposable Income (DI),, (1)-(2) (4) Consumption (C), (5) Saving (S), (6) Investment (I g ), Export s (X) Import s (M) (7) Net Exports (X n ), (8) Government Purchases (G), (9) Aggregate Expenditures (C+I g +X n +G), (4)+(6)+(7) +(8) (1) $370 $20 $350 $360 $-10 $20 $10 $10 $20 $400 (2) (3) (4) (5) (6) (7) (8) (9) (10) LO

17 Taxation and Equilibrium GDP Aggregate expenditures (billions of dollars) C + I g + X n + G C a + I g + X n + G $15 billion decrease in consumption from a $20 billion increase in taxes Real domestic product, GDP (billions of dollars) LO

18 Equilibrium versus Full-Employment 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 GDP Decrease G and/or increase T LO

19 Equilibrium versus Full-Employment Aggregate expenditures (billions of dollars) Full employment Real GDP (a) Recessionary expenditure gap AE 0 AE 1 Recessionary expenditure gap = $5 billion LO

20 Equilibrium versus Full-Employment Aggregate expenditures (billions of dollars) Inflationary expenditure gap = $5 billion AE 2 AE 0 Full employment Real GDP (b) (billions of dollars) LO

21 Application: The Recession of December 2007 recession began Aggregate expenditures declined Consumption spending declined Investment spending declined Recessionary expenditure gap LO

22 Application: The Recession of Federal government undertook Keynesian policies Tax rebate checks $787 billion stimulus package LO

23 Say s Law, Great Depression, Keynes Classical economics Say s Law Economy will automatically adjust Laissez-faire Keynesian economics Cyclical unemployment can occur Economy will not correct itself Government should actively manage macroeconomic instability 11-23

24 Say s Law Supply creates its own demand. By producing goods and services, firms create a total demand for goods and services equal to what they have produced. Say s law apparently rules out the possibility of a widespread glut of goods.

25 The Classical view Market industrialized economies are inherently stable and tend automatically to full employment. Government policies that aim to improve the performance of the economy do more harm than good. Laissez-faire.

26 The Keynesian View Market, industrialized economies are inherently unstable and do not automatically tend to full employment. Private spending (and most importantly, investment spending) is volatile causing business cycle fluctuations. The economy needs to be stabilized, the economy can be stabilized, the economy should be stabilized. Keynesian economics is an attack on the Classical theory. J.M. Keynes