Transcript PRESENTATION 2 Aggregate Expenditures

AGGREGATE EXPENDITURES
Frederick
University
2014
Aggregate Demand (AD)
AD – the quantity of GDP,
which the economic agents are
planning to buy at
every
price level, ceteris paribus
(Y = const)
Aggregate Expenditures
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АЕ – the expenditures that economic
decision makers are planning to make
at every level of income, ceteris paribus
Planned Spending
Real GDP = Nominal GDP
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AE = C + I + G + X - M
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Consumption Spending (С)
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С – the expenditures that households
are planning to make at every level of
income, ceteris paribus
Consumption Spending (С)
Y
0
C
S
Consumption Spending (С)
Y
0

C
500
S
500 – consumption spending which
does
not
depend
on
income,
autonomous consumption – С0 (Ca, a)
Consumption Spending (С)
Y
C
S
0
500
-500
Consumption Spending (С)
Y
0
500
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C
500
S
-500
C = C0 + (Δ C /ΔY) x Y
Δ C /ΔY – the increase in consumption
spending, caused by the increase in income –
marginal propensity to consume – MPC
(mpc, b)
C = C0 + MPC x Y
Consumption Spending (С)
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C = C0 + MPC x Y
MPC = ¾ = 0,75
If income rises by $100,households increase their
consumption spending by $75 and increase their
savings by $25
If income rises by $500, С rises by 5 х $75 = $375
C = 500 + 375 = 500 + 0.75 x 500
Y
C
S
0
500
875
-500
500
Savings (S)
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Marginal propensity to save – the increase in savings,
caused by the increase in income:
MPS = Δ S /ΔY
If income rises by $100, and households raise
their consumption spending by $75, savings
increase by $25
MPC + MPS = 1
C+S=Y
S = Y – C = Y – (C0 + MPC x Y) = Y - C0 - MPC x Y
= - C0 + Y - MPC x Y = - C0 + Y(1 - MPC)
S = - C0 + MPS x Y
Consumption Spending (С)
and Savings (S)
Y
C
S
0
500
-500
500
875
- 375
Consumption Spending (С)
and Savings (S)
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Y = 1000
C = 500 + 0.75 x 1000
Y
C
S
0
500
-500
500
875
-375
1000
1250
-250
Consumption Spending (С)
and Savings (S)
Y
C
S
0
500
-500
500
875
-375
1000
1250
-250
1500
1625
-125
2000
2000
0
2500
2375
125
3000
2750
250
Consumption Spending (С)
2000
Y
C
S
C
0
500
-500
500
875
-375
1000
1250
-250
875
1500
1625
D
-125
500
B
375
500
A
2000
2000
0
2500
2375
125
3000
2750
250 0
450
500
2000
Y
Factors determining C
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Households’ income
Indirect taxation
Propensity to buy imported goods and services
Direct taxation
Consumers’ expectations
Availability of consumer credit
Income distribution
Living standards
Efficiency of market institutions
Investment spending
I = Gross Private Domestic Investment
 I – Depreciation = Net Investment
 Net investment = Purchases of New Equipment +
Change in Inventories
 Fixed Investment = Depreciation + Purchases of New
Equipment
 Net Fixed Investment = Purchases of New Equipment
 Inventories =

Raw Material
 + Unfinished Production
 + Finished Goods
Factors determining Investment Spending (I)
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Interest rate (i)
Expected future profits (π)
Risk
Excess capacity
Capital-output ratio (α)
Technological changes
Cost of production
Competitiveness of markets
Depreciation policies
Efficiency of market institutions
AE
D
2000
C
B
875
375
500
500
A
450
0
500
2000
Y
AE
AE
3500
3000
2500
2000
1500
1000
500
0
0
1000
2000
Y
3000
4000
Injections
imports
М
exports
Х
Leakages
Government purchases
G
Expenditures on final goods and services
Investment
І
Macroeconomic
Equilibrium
I+G+X=
S+T+M
(I - S) =
(T - G) + (M - X)
taxes
Т
AE
Final goods and
services
savings
S
HOUSEHOLDS
FIRMS
Production factors
Primary Income
The Circular Flow
Macroeconomic Equilibrium
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Y < AE
Reduction of inventories
Y
Y = AE
Y > AE
Increase in inventories
Y
Y = AE
The simple multiplier
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Y 2005 = C2005 + Inj2005
Y2004 = C2004 + Inj2004
Δ Y = ΔC + ΔInj
ΔY = C0 2005 +MPCY2005 – C02004 – MPCY2004 + ΔInj
ΔY = MPC ΔY + ΔInj
ΔY - MPC ΔY = ΔInj
ΔY (1-MPC) = ΔInj
ΔY = Δ Inj x1/(1-MPC)
1/(1-MPC) = multiplier = К
If МРС = 0.5, К = 2
If МРС = 0.75, К = 4
The complete multiplier
1
K=
MPS + t x MPC + MPI
Multiplier Constraints
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Factors of production bottlenecks
Limited productive capacity
Institutions
Deriving the Complete
Multiplier
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Y 2005 = C2005 + (I + G + X)2005 - M2005
Y2004 = C2004 + (I + G + X)2004 - M2004
Δ Y = ΔC + ΔInj - ΔM
ΔY = C0 2005 +MPC x (Y2005 – t x Y2005) - C02004 – MPC x (Y2004 – t
x Y2004) + ΔInj - M0 2005 – MPI x (Y2005 – t x Y2005) - M02004 – MPI x
(Y2004 – t x Y2004) + ΔInj
ΔY = MPC x Y2005 ( 1– t x) – MPC x Y2004 ( 1 - t) - MPI x Y2005 (
1– t) – MPI x Y2004 (1– t)
ΔY = MPC ( 1 - t) x ΔY – MPI x ΔY + ΔInj
ΔY - MPC ( 1 - t) ΔY + MPI x ΔY = ΔInj
ΔY [(1-MPC + MPC x t) + MPI] = ΔInj
ΔY = Δ Inj :1/(1-MPC + MPC x t + MPI)
K = 1/(1-MPC + MPC x t + MPI) = 1/ (MPS + MPT + MPI)