Chapter 8 Aggregate Expenditure and Equilibrium Output. Kazu Matsuda IBEC 203 Macroeconomics
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1 Chapter 8 Aggregate Expenditure and Equilibrium Output Kazu Matsuda IBEC 203 Macroeconomics
2 AGGREGATE OUTPUT AND AGGREGATE INCOME (Y)( = The total quantity of goods and services produced (or supplied) in an economy in a given period. = The total income received by all factors of production in a given period.
3 INCOME, CONSUMPTION, AND SAVING (Y, C,, AND S) FIGURE 8.2
4 EXPLAINING SPENDING BEHAVIOR Household Consumption and Saving How do households decide how much to consume?
5 FIGURE 8.3 A Consumption Function for a Household
6 FIGURE 8.4 An Aggregate Consumption Function
7 Numerical Example AGGREGATE INCOME, Y (BILLIONS OF DOLLARS) AGGREGATE CONSUMPTION, C (BILLIONS OF DOLLARS) ,000 FIGURE 8.5 An Aggregate Consumption Function Derived from the Equation C = Y
8 Y - C = S AGGREGATE CONSUMPTIO N (Billions of Dollars) AGGREGATE INCOME (Billions of Dollars) , AGGREGATE SAVING (Billions of Dollars) FIGURE 8.6 Deriving a Saving Function from a Consumption Function
9 PLANNED INVESTMENT (I)( What Is Investment?
10 Actual versus Planned Investment We assume households have complete control over their consumption. A firm does not have complete control over its investment decision.
11 Planned, investment = Those additions to capital stock and inventory that are planned by firms. Actual investment Actual investment = The actual amount of investment that takes place; it includes items such as unplanned changes in inventories.
12 We will take the amount of investment that firms together plan to make each period (I) as fixed at some given level. FIGURE 8.7 The Planned Investment Function
13 PLANNED AGGREGATE EXPENDITURE (AE( AE) Planned aggregate expenditure (AE( AE) = The total amount the economy plans to spend in a given period. Equal to consumption plus planned investment: AE C + I.
14 EQUILIBRIUM AGGREGATE OUTPUT (INCOME) Equilibrium = Occurs when there is no tendency for change. In the macroeconomic goods market, equilibrium occurs when planned aggregate expenditure is equal to aggregate output. aggregate output Y planned aggregate expenditure AE C + I
15 EQUILIBRIUM AGGREGATE OUTPUT (INCOME) Equilibrium in the goods market is achieved only when aggregate output (Y) and planned aggregate expenditure (C + I) are equal, or when actual and planned investment are equal.
16 ABLE 8.1 Deriving the Planned Aggregate Expenditure Schedule and Finding Equilibrium (All Figures in Billions of Dollars) The Figures in Column 2 Are Based on the Equation C = Y. (1) (2) (3) (4) (5) (6) AGGREGATE OUTPUT (INCOME) (Y) AGGREGATE CONSUMPTION (C) PLANNED INVESTMENT (I) PLANNED AGGREGATE EXPENDITURE (AE) C + I UNPLANNE D INVENTOR Y CHANGE Y (C + I) EQUILIBRIUM? (Y = AE?) ,
17 FIGURE 8.8 Equilibrium Aggregate Output
18 THE SAVING/INVESTMENT APPROACH TO EQUILIBRIUM Aggregate income must either be saved or spent:
19 FIGURE 8.9 Planned Aggregate Expenditure and Aggregate Output (Income)
20 EQUILIBRIUM AGGREGATE OUTPUT (INCOME) FIGURE 8.10 The S = I Approach to Equilibrium
21 THE MULTIPLIER Multiplier = The ratio of the change in the equilibrium level of output to a change in some autonomous variable. Autonomous variable Autonomous variable = A variable that is assumed not to depend on the state of the economy that is, it does not change when the economy changes.
22 I increases from $25 billion to $50 billion and stays at $50 billion. FIGURE 8.11 The Multiplier as Seen in the Planned Aggregate Expenditure Diagram
23 THE MULTIPLIER EQUATION Equilibrium will be restored only when saving has increased by exactly the amount of the initial increase in I.
24 THE SIZE OF THE MULTIPLIER IN THE REAL WORLD As we relax these assumptions in the following chapters, you will see that most of what we add to make our analysis more realistic has the effect of reducing the size of the multiplier. In reality, the size of the multiplier is about 1.4. That is, a sustained increase in autonomous spending of $10 billion into the U.S. economy can be expected to raise real GDP over time by about $14 billion.
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