Transcript Ch11-- Income and Expenditures Equilibrium

Income and Expenditures Equilibrium
Equilibrium Real GDP: mpc = .7, mpi = .1
(1)
Real
GDP
(Y)
(2)
(3)
Investment
(I)
(4)
Gov’t
Spending
(G)
(5)
Net
Exports
(X)
(6)
Aggregate
Expenditures
(AE)
(7)
Unplanned
Change in
Inventories
(8)
Change
in Real
GDP
Consumption
(C)
0
30
50
70
50
200
-200
Up
100
100
50
70
40
260
-160
Up
200
170
50
70
30
320
-120
Up
300
240
50
70
20
380
-80
Up
400
310
50
70
10
440
-40
Up
500
380
50
70
0
500
0
No chg
600
450
50
70
-10
560
40
Down
700
520
50
70
-20
620
80
Down
2
Movement to Equilibrium
o
45 line: AE = Y
700
Aggregate planned expenditure
Total Expenditure
600
Increase Output,
increase Employment
500
Reduce Output,
Reduce Employment
400
0
300
400
500
Real GDP (Output)
600
700
3
Leakages and Injections
4
Spending Multiplier

The spending multiplier measures the
change in equilibrium income (real GDP)
produced by change in autonomous
expenditures:
ΔY/ΔI = ΔY/ΔG = ΔY/ΔX
–
By how many dollars does real GDP change for
every dollar change in autonomous
expenditures?
1
1
Multiplier 

leakages MPS  MPI
5
Computing the Spending Multiplier:
Marginal propensity to save = mps = .3
Marginal propensity to import = mpi = .1
Multiplier 
1
1

leakages MPS  MPI
If MPS = 0.30 and MPI is 0.10, then
MPS + MPI = 0.40 = 4/10.
1/0.40 = 1/(4/10) = 10/4 = 2.5
The multiplier is 2.5.
NOTE: The spending multiplier would be larger in a
closed economy because MPI would be zero.
6
Multiplier at Work
7
Gaps: Recessionary Gap, GDP Gap
8
GDP Gap, Recessionary Gap
GDP gap = potential real GDP
– actual real GDP
– How much does real GDP have to
increase to generate full
employment?
 Recessionary gap

GDP gap
Recessiona ry gap 
spending multiplier
–
How much additional spending is
needed to achieve potential GDP
(to create full employment)?
9
Sequence of Expenditures
10
Sequence of Expenditures
11
From Aggregate
Expenditure
to
Aggregate
Demand
12
The Fixed-Price, Keynesian AS-AD Model
13
The Paradox of Thrift
14