ch. 16 - deriving the aggregate expenditures...
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MACROECONOMICS - CLUTCH
CH. 16 - DERIVING THE AGGREGATE EXPENDITURES MODEL
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CONCEPT: AGGREGATE EXPENDITURES MODEL AND MACROECONOMIC EQUILIBRIUM
● Aggregate expenditures (AE) represent the total _________________ in an economy
□ The aggregate expenditures model describes the relationship between _____________ and ______________
> Key Assumption: Prices are _____________
> Key Idea: In any particular year, the level of _______ is determined by the level of aggregate expenditure
𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
𝐴𝐸 = _______________________________
Macroeconomic Equilibrium occurs when ________________________
□ In the AE model, think like this:
> AE = ________________
> GDP = ________________
AE =
Consumption
Investment
Government Purchases
Net Exports
EXAMPLE: Find macroeconomic equilibrium using the information in the following table:
Real GDP (Y)
Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)
Aggregate Expenditure
(AE)
Unplanned Changes in Inventories
$16,000 $12,400 $3,500 $3,200 – $1,000
$18,000 $13,700 $3,500 $3,200 – $1,000
$20,000 $15,000 $3,500 $3,200 – $1,000
$22,000 $16,300 $3,500 $3,200 – $1,000
$24,000 $17,600 $3,500 $3,200 – $1,000
□ If AE = GDP Inventories _________________ the economy is _________________
- Everything produced is purchased
□ If AE < GDP Inventories _________________ GDP and employment _________________
- Purchases are ___________ than production
□ If AE > GDP Inventories _________________ GDP and employment _________________
- Purchases are ___________ than production
MACROECONOMICS - CLUTCH
CH. 16 - DERIVING THE AGGREGATE EXPENDITURES MODEL
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CONCEPT: GRAPHING MACROECONOMIC EQUILIBRIUM
● The aggregate expenditures model describes the relationship between _____________ and ______________
□ In the AE model, think like this:
> AE = ________________
> GDP = ________________
AE =
Consumption
Investment
Government Purchases
Net Exports
Aggregate Expenditures Model
□ Macroeconomic Equilibrium occurs where the AE (C + I + G + NX) line crosses the _______________________
Amount (in billions)
Consumption 2 + 0.5Y
Investment 1
Government Purchases
0.5
Net Exports 0.5
C + I
C + I + G
C + I + G + NX
2 4 6 8 10
10
8
6
4
2
MACROECONOMICS - CLUTCH
CH. 16 - DERIVING THE AGGREGATE EXPENDITURES MODEL
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CONCEPT: AGGREGATE EXPENDITURES MODEL IN A PRIVATE CLOSED ECONOMY
● The aggregate expenditures model describes the relationship between _____________ and ______________
□ A private closed economy is a country that ______________ have government or international trade
□ In the AE model, think like this:
> AE = ________________
> GDP = ________________
AE =
Consumption
Investment
Government Purchases
Net Exports
Private Closed Economy
□ Macroeconomic Equilibrium occurs where the AE (C + I) line crosses the _______________________
Amount (in billions)
Consumption 2 + 0.5Y
Investment 1
C + I
2 4 6 8 10
10
8
6
4
2
MACROECONOMICS - CLUTCH
CH. 16 - DERIVING THE AGGREGATE EXPENDITURES MODEL
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CONCEPT: AGGREGATE EXPENDITURES MODEL IN A PRIVATE OPEN ECONOMY
● The aggregate expenditures model describes the relationship between _____________ and ______________
□ A private open economy is a country that ______________ have government
□ In the AE model, think like this:
> AE = ________________
> GDP = ________________
AE =
Consumption
Investment
Government Purchases
Net Exports
Private Open Economy
□ Macroeconomic Equilibrium occurs where the AE (C + I+ NX) line crosses the _______________________
Amount (in billions)
Consumption 2 + 0.5Y
Investment 1
Net Exports 0.5
C + I
C + I + NX
2 4 6 8 10
10
8
6
4
2
MACROECONOMICS - CLUTCH
CH. 16 - DERIVING THE AGGREGATE EXPENDITURES MODEL
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CONCEPT: AGGREGATE EXPENDITURES MODEL AND THE MULTIPLIER EFFECT
● The multiplier effect describes how an initial boost in spending leads to a much higher increase in __________
□ In the AE model, think like this:
> AE = ________________
> GDP = ________________
AE =
Consumption
Investment
Government Purchases
Net Exports
Aggregate Expenditures Model
Multiplier Effect
𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝐺𝐷𝑃 =1
1 − 𝑀𝑃𝐶∗ 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔 𝐵𝑜𝑜𝑠𝑡
Amount (in billions)
Consumption 2 + 0.5Y
Investment (old) 1
Government Purchases
0.5
Net Exports 0.5
C + I + G + NX (old)
Investment (new)
C + I + G + NX (new)
2 4 6 8 10
10
8
6
4
2
MACROECONOMICS - CLUTCH
CH. 16 - DERIVING THE AGGREGATE EXPENDITURES MODEL
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CONCEPT: COMPONENTS OF AGGREGATE EXPENDITURE
● The level of aggregate expenditures is determined by the level of each of C + I + G + NX
□ Determinants of Consumption:
Disposable Income (refer to Consumption Function videos)
Household wealth Expected future income
Price level Interest rate
□ Determinants of Planned Investment:
Expectations of Future Profitability
Interest Rate Taxes Cash Flow
□ Determinants of Government Purchases:
Government Policies and Decision Making (Fiscal Policy)
□ Determinants of Net Exports:
Price Level in USA vs. other countries GDP Growth in USA vs. other countries Exchange Rate between USD and
other currencies
High US Inflation more __________
Low US Inflation more __________
High US Growth ____________
Low US Growth ____________
USD value rises ______________
USD value falls ______________
MACROECONOMICS - CLUTCH
CH. 16 - DERIVING THE AGGREGATE EXPENDITURES MODEL
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CONCEPT: QUANTITATIVE ANALYSIS OF AGGREGATE EXPENDITURE MODEL
● We can use linear equations to solve for macroeconomic equilibrium where ____________________
□ Recall the calculation of Aggregate Expenditures:
AE =
Consumption
Investment
Government Purchases
Net Exports
□ Macroeconomic Equilibrium can be stated as the point where:
𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
□ The trickiest part of the solution is that the formula for consumption uses the variable for GDP (Y)
> Consumption, C = A + MPC(YD), is dependent on GDP (Y) because:
- Higher GDP leads to higher disposable income
- Higher disposable income leads to higher consumption
EXAMPLE: Use the following information to solve for macroeconomic equilibrium:
C = 2,000 + 0.65Y I = 3,200 G = 2,800 X = 500 M = 1,500
PRACTICE: Use the following information to solve for macroeconomic equilibrium (T is a lump-sum tax):
C = 1,500 + 0.75(Y-T) I = 3,400 G = 2,600 + T X = 750 M = 2,000 T = 500
MACROECONOMICS - CLUTCH
CH. 16 - DERIVING THE AGGREGATE EXPENDITURES MODEL
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CONCEPT: DERIVING THE MULTIPLIER ALGEBRAICALLY
● We can use a simplified aggregate expenditures model to show how the multiplier is derived:
□ The multiplier signifies the multiple increase in GDP based on an initial increase in spending
□ Recall the calculation of the multiplier:
𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 =1
1 −𝑀𝑃𝐶
□ To derive it algebraically we start with a private closed economy (no government and no international trade)
𝐴𝐸 = 𝐶 + 𝐼
𝐴𝐸 = 𝐴 +𝑀𝑃𝐶(𝑌𝐷) + 𝐼
Since there are no taxes or government transfers in this model, then GDP (i.e. national income) = Disposable Income
In equilibrium, GDP = AE
Rearrange the formula algebraically and solve for GDP
Analysis: A $1 increase in spending (from a change in A or I) will result a 1/(1-MPC) increase in equilibrium GDP
MACROECONOMICS - CLUTCH
CH. 16 - DERIVING THE AGGREGATE EXPENDITURES MODEL
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