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The Short-Run Macro Model
ECONOMICS: Principles and Applications 3e
HALL & LIEBERMAN
© 2005 Thomson Business and Professional Publishing
Figure 1 U.S. Consumption and
Disposable Income, 1985–2002
Real Consumption Spending
($ Billions)
7,000
2000
6,000
1995
5,000
1990
1985
4,000
3,000
3,000
4,000
5,000
6,000
7,000
Real Disposable
Income ($ Billions)
Table 1 Hypothetical Data on Disposable
Income and Consumption
Real Consumption Spending
($ Billions)
Figure 2 The Consumption
Function
8,000
7,000
The consumption function shows the (linear)
relationship between real consumption
spending and real disposable income
Consumption
Function
6,000
5,000
600
4,000
3,000
2,000
1,000
1,000
The vertical intercept ($2,000
billion) is autonomous
consumption spending . . .
and the slope of the line
(0.6) is the marginal
propensity to consume.
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
Real Disposable
Income ($ Billions)
Table 2 The Relationship Between
Consumption and Income
Figure 3 The Consumption–
Income Line
ConsumptionIncome
Line
B
A
Real Consumption
Spending ($ Billions)
2. The line has the same
slope as the consumption
function in Figure 2 . . .
5,600
5,000
4,000
3,000
2,000
1. To draw the consumptionincome line, we measure
real income (instead of real 1,000
disposable income) on the
horizontal axis.
600
1,000
3. but a different
vertical intercept.
2,000
4,000
6,000
8,000
Real Income
($ Billions)
Figure 4 A Shift in the
Consumption–Income Line
Real 8,000
Consumption
Spending ($ 7,000
Billions) 6,000
Consumption-Income Line
When Net Taxes = 500
5,000
4,000
3,000
Consumption-Income Line
When Net Taxes = 2,000
2,000
1,000
2,000
4,000
6,000
8,000
Real Income
($ Billions)
Table 3 Changes in Consumption Spending
and the Consumption–Income Line
Table 4 The Relationship Between
Income and Aggregate Expenditure
Figure 5 Deriving the Aggregate
Expenditure Line
8,000
Real
Aggregate
Expenditure 7,000
($ Billions)
6,000
5. to get the aggregate expenditure line.
4. and net exports (NX) . . .
C + IP + G + NX
C + IP + G
C + IP
C
5,000
4,000
3,000
3. government purchases (G) . . .
2,000
2. then add planned investment (IP) . . .
1,000
1. Start with the
consumptionincome line,
2,000
4,000
6,000
8,000
Real GDP
($ Billions)
Figure 6 Using a 45° to Translate
Distances
1. Using a 45-degree line . . .
A
3. into an equal
vertical distance
(BA).
2. we can translate
any horizontal
distance (such
as 0B) . . .
45°
0
B
Figure 7 Determining Equilibrium
Real GDP
Increase in Inventories
Real Aggregate
Expenditure 9,000
($ Billions) 8,000
A
C + IP + G + NX
H
7,000
E
6,000
5,000
Decrease in
Inventories
K
Total
Output
4,000
J
3,000
2,000
1,000
Total
Output
45°
Aggregate
Expenditure
Aggregate
Expenditure
Real GDP
($ Billions)
9,000
2,000 4,000 6,000 8,000
Figure 8 Equilibrium GDP Can Be
Less than Full-Employment GDP
Aggregate
Expenditure
($ Billions)
When the aggregate
expenditure line is
low . . .
Real GDP
($ Billions)
Aggregate
Production
Function
AELOW
F
$7,000
$7,000
E
$6,000
equilibrium
output ($6,000)
is less than
potential output,
45°
$7,000
$6,000
B
Real GDP
($ Billions)
Potential GDP
A
cyclical
unemployment
= 25 million
100
Million
75
Million
Number of
Workers
Full Employment
and equilibrium employment is
less than full employment.
Figure 9 Equilibrium GDP Can Be
Greater than Full-Employment GDP
When the aggregate
Aggregate expenditure line is high . . . Real GDP
Expenditure
($ Billions)
($ Billions)
AEHIGH
E'
$8,000
$7,000
$7,000
F
equilibrium output ($8,000) is
greater than potential output,
$7,000
Potential GDP
$8,000
H
B
Aggregate
Production
Function
and equilibrium employment is greater than full
employment.
Real GDP
($ Billions)
Number of
Workers
135
Million
100
Million
Full Employment
Table 5 Cumulative Increases in Spending When
Investment Spending Increases by $1,000 Billion
Figure 10 The Effect of a Change
in Investment Spending
2,500
Increase
in
Annual
GDP
2,176
2,306
1,960
1,600
1,000
Initial
Rise in
IP
After
Round
2
After
Round
3
After
Round
4
After
Round
5
…
After
All
Rounds
Figure 1 1 A Graphical View of
the Multiplier
Real Aggregate
9,000
Expenditure
($ Billions)
8,000
AE2
F
AE1
7,000
6,000
E
5,000
4,000
Increase in
Equilibrium GDP
3,000
2,000
$2,500
Billion
1,000
45°
2,000
4,000
6,000
8,000 9,000
Real GDP ($ Billions)
Table 6 The Recession of 2001
Table 6 The Recession of 2001