28
The Aggregate Expenditures
Model
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Assumptions and Simplifications
• Use the Keynesian aggregate
•
•
•
LO1
expenditures model
Prices are fixed
GDP = DI
Begin with private, closed economy
• Consumption spending
• Investment spending
28-2
Aggregate expenditures, C + Ig (billions of dollars)
Equilibrium GDP
530
C + Ig
(C + Ig = GDP)
510
490
470
450
Equilibrium
point
Aggregate
expenditures
C
Ig = $20 billion
430
410
390
C = $450 billion
370
45°
370 390 410 430 450 470 490 510 530 550
Real domestic product, GDP (billions of dollars)
LO1
28-3
Other Features of Equilibrium GDP
• Saving equals planned investment
• Saving is a leakage of spending
• Investment is an injection of
•
LO2
spending
No unplanned changes in inventories
• Firms do not change production
28-4
Aggregate expenditures (billions of dollars)
Changes in Equilibrium GDP
(C + Ig)1
(C + Ig)0
(C + Ig)2
510
490
Increase in
investment
470
Decrease in
investment
450
430
45°
430
450
470
490
510
Real domestic product, GDP (billions of dollars)
LO3
28-5
Adding International Trade
• Include net exports spending in
•
•
•
LO4
aggregate expenditures
• Private, open economy
Exports create production,
employment, and income
Subtract spending on imports
Xn can be positive or negative
28-6
Net Exports and Equilibrium GDP
C + Ig+Xn1
C + Ig
C + Ig+Xn2
Aggregate expenditures
(billions of dollars)
510
Aggregate expenditures
490 with positive
net exports
Aggregate expenditures
with negative net
exports
470
450
430
45°
Net exports, Xn
(billions of
dollars)
430
LO4
450
470
490
510
Real domestic product GDP (billions of dollars)
+5
0
-5
Positive net exports
450
470
Negative net exports
Xn1
490
Xn2
Real
GDP
28-7
International Economic Linkages
• Prosperity abroad
• Can increase U.S. exports
• Exchange rates
• Depreciate the dollar to increase
•
LO4
exports
A caution on tariffs and devaluations
• Other countries may retaliate
• Lower GDP for all
28-8
Adding the Public Sector
• Government purchases and
•
LO4
equilibrium GDP
• Government spending is subject to
the multiplier
Taxation and equilibrium GDP
• Lump sum tax
• Taxes are subject to the multiplier
• DI = GDP
28-9
Aggregate expenditures (billions of dollars)
Government Purchases and Eq. GDP
C + Ig + Xn + G
C + Ig + X n
C
Government spending
of $20 billion
45°
470
550
Real domestic product, GDP (billions of dollars)
LO4
28-10
Aggregate expenditures (billions of dollars)
Taxation and Equilibrium GDP
C + Ig + Xn + G
Ca + Ig + Xn + G
$15 billion
decrease in
consumption
from a
$20 billion
increase
in taxes
45°
490
550
Real domestic product, GDP (billions of dollars)
LO4
28-11
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
LO5
28-12
Aggregate expenditures
(billions of dollars)
Equilibrium versus Full-Employment
AE0
AE1
530
510
Recessionary
expenditure
gap = $5 billion
490
Full
employment
45°
490
510
530
Real GDP
(a)
Recessionary expenditure gap
LO5
28-13
Aggregate expenditures
(billions of dollars)
Equilibrium versus Full-Employment
AE2
530
Inflationary
expenditure
gap = $5 billion
AE0
510
490
Full
employment
45°
490
510
530
Real GDP
(b)
(billions of dollars)
LO5
28-14