Macroeconomics - ECO 2013
2004 Summer Term B
June 21 – July 30, 2004
Lecture 9:
Monday, July 12th
Review Quiz 3 on Chapters 7 & 8
Review Mid-term Progress Reports
Class Attendance
Extra Credit: Attend FTAA Debate
Chapter 9: Building the Aggregate
Expenditures Model
Chapter 10: Aggregate Expenditures
Next Class on Wednesday, July 14th
Review Quiz 3 on Chapters 7
&8
Worth 20 points
> 15 points: 16 students
10 – 15 points: 4 students
< 10 points: 3 students
Range 1.5 – 29.50
Review Mid-term Progress
Reports
70 points to date
% Points not weighed exactly as in Final
Grade calculation, an estimate based on
#points you could have accumulated to date
Some still have not submitted Article Summaries
>
>
>
>
<
87
75
60
50
50
%
%
%
%
%
:
:
:
:
:
A (8)
B (7); Half are B+
C (4)
D (2)
F (5 – 7)
Class Attendance
Extra Credit Attend FTAA Debate
Thursday, July 15th
3:30 – 7:00 PM
FIU University Park Campus: MARC
Pavilion Center
Cost: $15
Chapter 9: Building the
Aggregate Expenditures Model
Simplifying Assumptions for Private Closed
Economy





For now, we ignore government expenditures,
taxes, exports & imports
All savings = personal savings
Depreciation, Net Foreign Factor Income are zero
Aggregate spending consists of Consumption &
Investment
GDP, NI, PI, & DI are equal
Tools of Aggregate
Expenditures Model
Amount of goods & services produced, level
of employment depend directly on level of
aggregate expenditures (total spending)
Businesses will produce only a level of output
that they think they can profitably sell
Begin with excess production capacity and
unemployed labor  increase in aggregate
expenditures will increase total output &
employment but not raise price level
Assume inflation is zero
Consumption & Saving
Personal Savings means Not Spending
Personal Savings = Disposable Income (DI) –
Consumptions (C)
Most important determinant of Consumption
is Income, Disposable Income
DI is also determinant of Saving
Break-Even Income: Income level at which
households plan to consume their entire
income
Average Propensities
Average Propensity to Consume (APC) =
Consumption / Income
Average Propensity to Save (APS) =
Savings / Income
APC + APS = 1
Highest APC countries are Canada & U.S.
Marginal Propensities
Marginal Propensity to Consume (MPC)
=  Consumption /  Income
Marginal Propensity to Save (MPS) =
 Savings /  Income
Nonincome Determinants of
Consumption & Savings
Wealth: real & financial assets

Wealthier households consume more
Expectations on future prices & income

Expected inflation triggers current spending, less
savings
Taxation
Household Debt


Increase in debt means increased current
consumption
High debt triggers consumption reduction to pay
off loans
Investment
Business will invest in all projects for which
the expected rate of return exceeds interest
rate
Expected ROR (r):

Investment spending is guided by profit motive
Real Interest Rate


Financial cost of borrowing money “capital”
Apply the interest rate (i) to borrowed amount
Firm undertakes profitable projects only when
ri

Real interest rate is less inflation
Investment Demand Curve
Shows the total monetary amounts that will
be invested by a economy at various possible
real interest rates
Shifts are caused by:





Cost of acquiring, operating, & maintaining capital
goods
Business Taxes
Technology
Stock of Capital goods on hand
Business Expectations
Investment Schedule
Investment v. Real GDP
Ig
Shows the amount of investment at each
level of GDP
Investment Schedule is Unstable
Factors:


Durability of Capital & Variability of Expectations
Irregularity of Innovation
Equilibrium GDP
In closed economy, aggregate expenditures
(GDP) consist only of consumption (C) +
investment (Ig)

Total level of goods produced = C + Ig
Equilibrium Output: Output whose
production creates total spending just
sufficient to purchase that output
No overproduction
 No excess of total spending
At Equilibrium GDP, C + Ig = GDP

Disequilibrium
At levels of GDP below equilibrium,
economy wants to spend at higher
levels

Greater output will increase employment &
total income
At levels of GDP above equilibrium,
economy wants to spend less, cut
production, decline output  fewer
jobs, decline in total income
Say’s Law
Act of producing goods generates
income equal to the value of the goods
produced
Production of any output automatically
provides the income needed to buy that
output
Supply creates its own demand
Chapter 10: Aggregate
Expenditures
Net Exports
Government
International Trade &
Equilibrium Output
In an open economy, Net Exports = Exports –
Imports
GDP = C + Ig + Xn
GDP = C + Ig + (X – M)
Positive Net Exports increases aggregate
expenditures & GDP beyond what they would
be in closed economy
Negative Net Exports reduced aggregate
expenditures & GDP below what they would
be in closed economy
International Economic
Linkages
Prosperity Abroad

Rising incomes among foreign trading partner
allows U.S. to sell more goods abroad, raising U.S.
exports
Tariffs


When other countries restrict their imports to
stimulate their economies, they are reducing U.S.
exports, depressing U.S. economy
U.S. can retaliate by imposing own trade barriers
on foreign products
Exchange Rates

Depreciation of the dollar relative to other
currencies enables people abroad to obtain more
$/ unit of own currencies
Government
Add government spending and taxes to
model
Simplifying Assumptions



Levels of investment & net exports are
independent of level of GDP
Gov’t purchases can’t affect private spending
Gov’t tax revenues




Disposable Income < Personal Income
GDP, NI, PI remain equal
Fixed taxes are collected
No inflation
Next Class
on Wednesday, July 14th
Chapters 11, 12 & 16
Review Progress Reports
Third Article Summaries Due