Ch.8 Aggregate Expenditure and Equilibrium Output
Aggregate Output = Aggregate Income = Y
Total expenditure on goods and services
Aggregate income received by all factors of all production in a giving period
Income
Consumption
*Raise in consumption will be less than full raise of income*
Consumption (C) =a+bY
C
C=a+bY
C
Y
Slope= C = b =MPC
Y
*MPC = Marginal Propensity to Consume
Aggregate Saving (S) = Part of aggregate income that is not consumed
Y= C+S
S=-a+b(1-b)Y
MPS = Marginal Propensity to Save
MPS+MPC=1
MPS =
S/ Y
APC = Marginal Propensity to Consume =
C
Y
S
APS = Marginal Propensity to Save = Y
APC + APS =1
Other determinants of consumption
Wealth
Interest Rate
Consumption Function shift upward
Consumption Function shift downward
Expenditure of Future
Consumption Function shift upward
Planned Investment (I)= Investment that firm plan to make: assume that I is fix
I
Actual Investment= Planed Investment+ Unplanned Change in Investment
Planned Aggregate Expenditure (AE) =Consumption + Planned Investment
Y=AE
Y=C+I
Increase in Planed Investment (I)
I
product
hire labor
hire labor
income
income
consumption
consumption
Multiplier
1
1
Planned Investment Multiplier (M) = 𝑀𝑃𝑆 =1−𝑀𝑃𝐶
demand for output
firm
Ch.9 Government and Fiscal Policy (add T and G)
Government (G) Net Tax (T)
𝐺 > 𝑇 =budget deficit
𝐺 < 𝑇 = budget surplus
Disposable income (Yd) = Y-T
Yd = C+S
Y = C+S+T
AE = C+I+G
S+T = I+G
C = a+b(Y-T)
S = -a+(1-b)(Y-T)
1
1
Government Spending Multiplier (M) =𝑀𝑃𝑆 =1−𝑀𝑃𝐶
∆ Equilibrium GDP (∆Y)= ∆Govt. Spending × Government Spending Multiplier (M)
Tax Multiplier =
−𝑀𝑃𝐶
𝑀𝑃𝑆
∆ Equilibrium GDP (∆Y)= ∆𝑇𝑎𝑥 × Tax Multiplier
Closed Economy
AE = C+I+G
Y = AE
C+S+T = C+I+G
S+T =I+G
G >T
Govt. budget deficit
G <T
Govt. budget surplus
G =T
Govt. budget balance
Opened Economy
AE = C+I+G+(EX+IM)
Y = AE
C+S+T = C+I+G+(EX+IM)
S+T =I+G+X
Two types of policy
1. Expansionary Fiscal Policy
Decrease Tax and Increase Govt. Spending
2. Contractionary Fiscal Policy
Increase Tax and Decrease Govt. Spending