Transcript Unit 5—Aggregate Models

Unit 5—Aggregate
Models
Chapters 9, 10 and focus on 11
Time Period: 3 weeks
Graphs: 6
Chapter 9—Building the
Aggregate Expenditures
Model
Aggregate means TOTAL
(aggregate expenditure means total
spending)
Consumption and Saving


What can a person do with DI?
What is not spent is called savings

DI – C = S
LOOK AT THE GRAPH ON PAGE 160
C & DI Graph

The reference line is a 45° line




Green dots = C
When the green dot falls short of the reference
line, savings has occurred


Each point is equidistant from the axes
C = DI
Again, DI – C = S
As DI increases both C and S increase


Direct relationship to the level of income
Household C most of their DI
C Schedule

Page 161 shows a hypothetical C schedule



Households spend a larger proportion of a small
income than of a large income
See graph on Page 162
C Schedule Graph



45° reference line
Shows C and S
Shows DISSAVINGS = occurs at low levels of
income where C exceeds DI & people must borrow
Average Propensities to C & S



Measures the average C (APC) or S (APS) at
any level of disposable income
APC = C / DI
APS = S / DI


C%  and S%  as DI 
APC + APS = 1
Marginal Propensities to C & S

(marginal means extra)
Proportion of any change in income C is called MPC
or income S is called MPS
MPC = ∆ C / ∆ DI
MPS = ∆ S / ∆ DI

MPC + MPS = 1




The only choice people have is to C or to S. An additional
dollar in income must result in a change in C and/or a
change in S.
Practice worksheet
Investment




Spending on new plants, capital equipment,
machinery, construction, etc.
Investment decision weighs mb & mc
The expected rate of return = mb
The interest rate = mc
Expected Rate of Return

Found by comparing the expected economic
profit (total revenue minus total cost) to cost of
investment to get expected rate of return


Example in text (page 166)
Woodworker wants to buy equipment for $1,000.
He expects a $100 profit. The expected rate of
return in 10%. In order to make a profit, the
woodworker would not want to pay more than
10% interest on the investment.
The Real Interest Rate

The real interest rate, i, is the cost of the
investment



Real interest rate = nominal rate - inflation
Interest rate is either the cost of borrowed
funds or the cost of investing your own funds,
which is income forgone.
If i exceeds the expected rate of return, r, the
investment should not be made
Shifts in the Investment Demand
Curve—IDC or DIgC


Movement occurs with a change in the interest
rate
Shifts occur due to these determinates:

1. acquisition, maintenance and operating costs



When cost falls, the r from prospective investment
project rises, shifts the IDC to the right
Higher electricity costs = shift to the left
2. business taxes

in taxes = shift to the left
Shifts Continued

3. technological change


Development stimulates investment
(shifts to the right)
4. stock of capital goods on hand

When firms are overstocked, the r declines
(shifts to the left)


There is little incentive to invest in new capital
when there is excess production
When firms are under stocked, the r increases
(shifts to the right)
Shifts continued again . . .

5. Expectations
Optimistic about future sales, the curve will
shift to the right
 Pessimistic outlook = shift to the left

Instability of Investment




1. capital goods are durable so spending can
be postponed
2. innovation occurs irregularly
3. profits vary considerably
4. expectations can be easily changed
Classwork! Yeah!







Page 179
Number 2
Number 3
Number 4
Number 5—complete the table only—and part
b (refer to table 9.1)
Number 6
 Due today -- or homework if not
finished
Equilibrium GDP




Equilibrium level of GDP is the level at which
the total quantity of goods produced (GDP) =
the total quantity of goods purchased
GDP = C + Ig (in a closed economy)
Savings and investment are equal
Savings represents a “leakage” from spending
and causes C to be less than GDP
Table 9.4




See table on page 173
See line 8, GDP is $510 billion
C + Ig = 500 billion (disequilibrium)
Businesses have $10 billion of unplanned
inventory investment on top of what was
already planned

Unplanned portion is a business expenditure
Table 9.4




See line 5, GDP = $450 billion
Consumer spending is $435 billion
$20 billion is planned investment
Businesses have experienced a $5 billion
unplanned decline in inventory because of
unexpected sales
Self Assessment


See graph on page 175
Quick quiz on page 175—work with a partner
or on your own  for your own assessment of
understanding
Says Vs Keynes


Read page 177
Do question 16 on page 180—this will be
turned in. You need to actually draw a PPF
and label efficiency for both men.