aggregate expenditure and equilibrium output---bagus.ppt

8/10/2019 Aggregate Expenditure and Equilibrium Output---BAGUS.ppt

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Aggregate Expenditure

and Equilibrium Output


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The Core of Macroeconomic Theory


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2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 3 of 31

Aggregate Output andAggregate Income (Y)

Aggregate ou tputis the totalquantity of goods and servicesproduced (or supplied) in aneconomy in a given period.

Aggregate incomeis the totalincome received by all factors

of production in a given period.


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Aggregate Output andAggregate Income (Y)

Aggregate ou tpu t (income) (Y)isa combined term used to remindyou of the exact equality betweenaggregate output and aggregateincome.

When we talk about output (Y), we

mean real ou tpu t, or the quantitiesof goods and services produced,not the dollars in circulation.


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Income, Consumption,and Saving (Y, C, and S)

A household can do two, and only two,things with its income: It can buy goodsand servicesthat is, it can consumeor it

can save.

Saving (S)is the part of its income that ahousehold does not consume in a givenperiod. Distinguished from savings, which

is the current stock of accumulated saving.

S Y C The triple equal sign means this is an

ident i ty, or something that is always true.


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Explaining Spending Behavior

All income is either spent on consumptionor saved in an economy in which there areno taxes.

Saving/Aggregate Income Consumption


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Household Consumption and Saving

Some determinants of aggregateconsumption include:

1. Household income2. Household wealth

3. Interest rates

4. Households expectations about thefuture

In The General Theory, Keynesargued that household consumption

is directly related to its income.


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The relationship betweenconsumption and income iscalled the consumpt ion

funct ion.

For an individualhousehold, the consumptionfunction shows the level of

consumption at each levelof household income.


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The slope of the

consumption function (b) iscalled the marginalpropens i ty to consume

(MPC),or the fraction of achange in income that isconsumed, or spent.

C a bY =

0 1b C+ Iaggregate output > planned aggregate expenditure

inventory investment is greater than planned

actual investment is greater than planned investment

Disequilibria:

C+ I > Yplanned aggregate expenditure > aggregate output

inventory investment is smaller than planned

actual investment is less than planned investment

aggregate output/Yplanned aggregate expenditure/AE/C

+ I

equilibrium: Y=AE, or Y= C+ I


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Equilibrium AggregateOutput (Income)


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C Y 100 75. I 25Deriving 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= 100 + .75Y.

(1) (2) (3) (4) (5) (6)

AGGREGATE

OUTPUT

(INCOME) (Y)

AGGREGATE

CONSUMPTION (C)

PLANNED

INVESTMENT (I)

PLANNED

AGGREGATE

EXPENDITURE (AE)

C+ I

UNPLANNED

INVENTORY

CHANGE

Y (C+I)

EQUILIBRIUM?

(Y= AE?)

100 175 25 200 100 No

200 250 25 275 75 No

400 400 25 425 25 No

500 475 25 500 0 Yes

600 550 25 575 + 25 No

800 700 25 725 + 75 No

1,000 850 25 875 + 125 No


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Y Y 100 75 25.

Y C I (1)

C Y 100 75.(2)

I 25(3)

By substituting (2) and(3) into (1) we get:

There is only one value of Yfor which this statement is

true. We can find it byrearranging terms:

Y Y 100 75 25.

Y Y .75 100 25

Y Y .75 125.25 125Y

Y 125

25

500

.


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The Saving/InvestmentApproach to Equilibrium

If planned investment is exactly equal to saving, thenplanned aggregate expenditure is exactly equal to

aggregate output, and there is equilibrium.


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The S= IApproach to Equilibrium

Aggregate output will be equal toplanned aggregate expenditure onlywhen saving equals planned

investment (S= I).


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The Multiplier

The mult ip l ieris the ratio of the change inthe equilibrium level of output to a changein some autonomous variable.

An autonomous var iab leis a variable that isassumed not to depend on the state of theeconomythat is, it does not change when theeconomy changes.

In this chapter, for example, we considerplanned investment to be autonomous.


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The Multiplier

The multiplier of autonomousinvestment describes the impact ofan initial increase in planned

investment on production, income,consumption spending, andequilibrium income.

The size of the multiplier depends onthe slope of the planned aggregateexpenditure line.


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The Multiplier Equation

MPSS

Y

D

D

MPSI

Y

D

D

Because DSmust be equal to DIforequilibrium to be restored, we cansubstitute DIfor DSand solve:

therefore, D DY IMPS

1

multiplier

MPS

1 , or multiplier

MPC

1

1

The marginal propensity to save may beexpressed as:


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The Multiplier

After an increase inplanned investment,equilibrium output is

four times theamount of theincrease in plannedinvestment.

Th Si f th M lti li


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The Size of the Multiplierin the Real World

The size of the multiplier in theU.S. economy is about 1.4.

For example, a sustainedincrease in autonomousspending of $10 billion into theU.S. economy can be expected

to raise real GDPover time by$14 billion.


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The Paradox of Thrift

When householdsbecome concernedabout the future and

decide to save more,the correspondingdecrease inconsumption leads toa drop in spendingand income.

Households end up consuming less, butthey have not saved any more.


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aggregate expenditure and equilibrium output---bagus.ppt

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