1 / 18

Aggregate Expenditures

Aggregate Expenditures. The four expenditure components of national income accounting were developed around the multiplier model. AE = C + I + G + (X - IM). Expenditures Function. AE = C + I + G + (X - IM) AE o = autonomous expenditures that don’t change as income changes.

calum
Télécharger la présentation

Aggregate Expenditures

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Aggregate Expenditures • The four expenditure components of national income accounting were developed around the multiplier model. AE = C + I + G + (X - IM)

  2. Expenditures Function • AE = C + I + G + (X - IM) • AEo = autonomous expenditures that don’t change as income changes. •  AE/  Y = those expenditures that change as income changes • We simplify the model for Econ 100: we pretend that only consumption changes when income changes.

  3. The Marginal Propensity to Consume • The mpc is the fraction spent from an additional dollar of income.

  4. Consumption and Income • Consumption depends on income. When income rises, consumption increases. • The marginal propensity to consume is the change in c divided by the change in y. • YD = C + S • MPC = C/YD • MPS = S/YD

  5. Consumption and Saving • The MPC plus the MPS equals one. • To see why, note that, if you receive an additional $100 in disposable income, you will spend part of the income or not spend part of the income, that is save it. • In algebra: • C + S = YD.

  6. Consumption Function

  7. Aggregate Expenditure Diagram

  8. Aggregate Expenditure Diagram

  9. The Marginal Propensity to Consume and AE • Since only consumption expenditures depend on income, in our simple model:

  10. AE = aggregate expenditures AEo = autonomous expenditures mpc = marginal propensity to consume Y = income Expenditures Function • The expenditures function is expressed as a mathematical function: AE = AEo + mpcY

  11. The Multiplier Equation • The multiplier is a number that reveals how much income will change in response to a change in autonomous expenditures. Multiplier = 1/(1 – mpc)

  12. Alternative Equation • By definition: mpc + mps = 1 • Alternatively expressed: mps = 1 - mpc multiplier = 1/mps

  13. The two equations Multiplier = 1/(1 – mpc) multiplier = 1/mps Because 1-mpc = mps What you don’t consume is what you save.

  14. Real expenditures AE1 $4,210 30 AE0 4,090 1,052.5 30 1,022.5 $120 0 $4,090 $4,210 Real income An Upward Shift of AE, Fig. 10-8a, p 248

  15. Aggregate production AE0 $4,152 AE1 30 4,062 30 1,412 1,382 $90 $4,062 $4,152 An Downward Shift of AE, Fig. 10-8b, p 248 Real expenditures 0 Real income

  16. An Example of the Multiplier • Suppose Investment rises by $ 100 million • the mpc is .8 so the mps is .2 • Multiplier = 1/(1 – mpc) = 1/(1-.8) = 1/.2 = 5 • multiplier = 1/mps = 1/.2 = 10/2 = 5 • Rise in Equilibrium Income 5 * $100 = $500

  17. Realistic Multipliers • Our simple model pretends that no one pays taxes and no one buys imports • We also assume that Investment and government spending don’t change when income changes. • The real multiplier is closer to 2 than to 5.

  18. Realistic Multipliers • Observe that the multiplier is calculated assuming prices are not changing. • The multiplier tells us how much the AD curve shifts to the right. • When AD shifts, prices change so the change in equilibrium income is even less than an accurate multiplier predicts.

More Related