Transcript Aggregate expenditures

1. DETERMINING THE LEVEL
OF CONSUMPTION
Learning Objectives
1. Explain and graph the consumption function and the
saving function, explain what the slopes of these curves
represent, and explain how the two are related to each
other.
2. Compare the current income hypothesis with the
permanent income hypothesis, and use each
consumption.
3. Discuss two factors that can cause the consumption
function to shift upward or downward.
1.1 Consumption and
Disposable Personal Income
•
A consumption function is the relationship between
consumption and disposable personal income.
Plotting a Consumption
Function
Point on curve
A
B
C
D
E
Δyd(billions)
$0
500
1,000
1,500
2,000
ΔC(billions)
$300
700
1,100
1,500
1,900
Consumption per period (billions
of dollars)
2000
D
1500
C
1000
500
E
ΔC=$400
B
ΔYd=$500
A
500
1000
1500
C=$300 billion+0.8Yd
EQUATION 1.1
0
0
EQUATION 1.2
2000
MPC= ΔC/ Δyd
=400/500=0.8
Disposable personal income per period (billions of dollars)
•
The marginal propensity to consume is the ratio of the
change in consumption (ΔC) to the change in disposable
personal income (ΔYd).relationship between consumption
and disposable personal income.
Consumption and Personal
Saving
•
Personal saving is the disposable personal income not spent on
consumption during a particular period.
EQUATION 1.3
Pers
sav

dis
pe
in
–
c
n
•
•
Saving function is the relationship between personal saving
in any period and disposable personal income in that period.
Marginal propensity to save is the ratio of the change in
personal saving (ΔS) to the change in disposable personal income
(ΔYd).
EQUATION 1.4
S
MPS

Yd
EQUATION 1.5
MPC

MPS

1
Consumption and Personal
Saving
Point on curve
A
B
C
D
E
Δyd(billions)
$0
500
1,000
1,500
2,000
ΔC(billions)
$300
700
1,100
1,500
1,900
ΔC(billions)
-$300
-200
-100
0
100
Consumption, saving per period (billions $
3000
2500
E
2000
D
1500
1000
C
ΔC=$400
B
ΔYd=$500
500 A
45Ο
0
C’
500
E’
D’
ΔS=$100
B’
-500 A’
0
Consumption
function
ΔYd=$500
1000
1500
2000
Disposable personal income per period (billions $)
Saving
function
1.2 Current Versus
Permanent Income
•
•
•
The current income hypothesis states that
consumption in any one period depends on
income during that period.
Permanent income is the average annual income
people expect to receive for the rest of their lives.
The permanent income hypothesis states that
consumption in any period depends on permanent
income.
1.3 Other Determinants of
Consumption
•
•
Changes in real wealth
Changes in expectations
C2
Consumption per year
C1
Disposable personal income per year
Decrease in level of
consumption
C1
C2
Consumption per year
Increase in level of
consumption
Disposable personal income per year
2. THE AGGREGATE
EXPENDITURES MODEL
Learning Objectives
1. Explain and illustrate the aggregate expenditures model
and the concept of equilibrium real GDP.
2. Distinguish between autonomous and induced aggregate
expenditures and explain why a change in autonomous
expenditures leads to a multiplied change in equilibrium
real GDP.
3. Discuss how adding taxes, government purchases, and
net exports to a simplified aggregate expenditures model
affects the multiplier and hence the impact on real GDP
that arises from an initial change in autonomous
expenditures.
2. THE AGGREGATE
EXPENDITURES MODEL
• The aggregate expenditures model is a
model that relates aggregate expenditures
to the level of real GDP.
• Aggregate expenditures are the sum of
planned levels of consumption,
investment, government purchases, and
net exports at a given price level.
2.1 The Aggregate Expenditures
Model: A Simplified View
•
•
Planned investment is the level of investment firms
intend to make in a period.
Unplanned investment is investment during a period
that firms did not intend to make.
EQUATION 2.1
•
•
I
Ip
I
U
Autonomous aggregate expenditures are expenditures
that do not vary with the level of real GDP.
Induced aggregate expenditures are expenditures that
vary with real GDP.
Autonomous and Induced
Aggregate Expenditures
Autonomous and Induced
Consumption
C

C

C
a
i
•
RECALL THE FOLLOWING FROM
PREVIOUS SLIDES
EQUATION 2.2
EQUATION 2.3
C

$
300
billion
a
C
0
.8
Y
i
Plotting the Aggregate Expenditure
Curve
•
The aggregate expenditure function is the relationship
of aggregate expenditure to the value of real GDP.
EQUATION 2.4
I
$
1
,
100
billion
p
EQUATION 2.5
EQUATION 2.6
AE

C

I
p
AE

$
1
,
400

0
.
8
Y
Plotting the Aggregate Expenditure
Curve
Point on curve
A
B
C
D
E
F
ΔY (billions)
$0
2,000
4,000
6,000
8,000
10,000
ΔAE(billions)
$1,400
3,000
4,600
6,200
7,800
9,400
Aggregate expenditures per year (billions of
dollars)
10000
Aggregate
expenditure
8000
E
F
D
6000
C
4000
2000
ΔAE=$1,600
B
A
Slope= ΔAE /ΔY=0.8
ΔY=$2,000
0
0
2000
4000
6000
Real GDP (billions of dollars) per year
8000
10000
Determining Equilibrium in the
Aggregate Expenditures Model
Adjusting to Equilibrium Real GDP
A Change in Autonomous Aggregate
Expenditures Changes Equilibrium Real
GDP
The Multiplied Effect of an increase in
Autonomous Aggregate Expenditures
Round of spending
Increase in real GDP (billions of dollars)
1
$300
2
240
3
192
4
154
5
123
6
98
7
79
8
63
9
50
10
40
11
32
12
26
Subsequent rounds
Total increase in real GDP
+103
$1,500
Computation of The Multiplier
•
The multiplier is the number by which we multiply an
initial change in aggregate demand to get the full amount
of the shift in the aggregate demand curve.
EQUATION 2.7
ΔY
eq
Multiplier

ΔA
Computation of The Multiplier
•
The marginal propensity to consume and the multiplier
ΔY

Δ
A

MPC
ΔY
eq
eq
EQUATION 2.8
Subtract the MPC ΔYeq term from both sides of the equations.
ΔY

MPC
ΔY

Δ
A
eq
eq
Factor out the ΔYeq term on the left:
ΔY
(
1

MPC
)

Δ
A
eq
Finally, solve for the multiplier
ΔY
1
eq

EQUATION 2.9
Δ
A(
1

MPC
)
1
EQUATION 2.10
Multiplier

MPS
We can rearrange equation 2.9 to compute the impact of a change in autonomous
aggregate expenditure.
Δ
A
EQUATION 2.11
ΔY

eq
1

MPC
2.2 The Aggregate Expenditures
Model in a More Realistic Economy
•
•
Taxes and the aggregate expenditure function
The addition of government purchases and net exports
3. AGGREGATE EXPENDITURES
AND AGGREGATE DEMAND
Learning Objectives
1. Explain and illustrate how a change in the price level
affects the aggregate expenditures curve.
2. Explain and illustrate how to derive an aggregate demand
curve from the aggregate expenditures curve for different
price levels.
3. Explain and illustrate how an increase or decrease in
autonomous aggregate expenditures affects the
aggregate demand curve.
3.1 Aggregate Expenditures
Curves and Price Levels
• The wealth effect is the tendency for price
level changes to change real wealth and
consumption.
• The interest rate effect is the tendency
for a higher price level to reduce the real
quantity of money, raise interest rates, and
reduce investment.
• The international trade effect is the
impact of different price levels on the level
of net exports.
12,000
C
10,000
AEp=0.5
AEp=1.0
8,000
B
6,000
AEp=1.5
4,000
A
2,000
Aggregate expenditures (billions of
$)
Aggregate expenditures (billions
of $)
From Aggregate Expenditures
to Aggregate Demand
0
0
2,000 4,000 6,000 8,000 10,000 12,000
Axis Real GDP (billions of base period $) per year
2.0
1.5
A’
1.0
B’
Aggregate
demand
0.5
C’
0.0
0
2,000
4,000
6,000
8,000 10,000 12,000
Axis Real GDP (billions of base period $) per year
3.2 The Multiplier and Changes
in Aggregate Demand
2.0
Aggregate expenditures (billions of $)
10,000
AEp=1.0
AEp=1.0
8,000
AEp=1.5
E
$1,000
AEp=1.5
6,000
B
4,000
D
2,000
Aggregate expenditures (billions of $)
12,000
D’
1.5
A’
1.0
E’
$2,000
B’
$2,000
0.5
AD2
Aggregate
demand
AD1
0.0
$1,000
A
0
0
2,000
4,000
6,000
8,000
10,000 12,000
Axis Real GDP (billions of base period $) per year
Axis Real GDP (billions of base period $) per year