Download Chapter 11

chapter
eleven
Output and Expenditure
in the Short Run
Prepared by: Fernando & Yvonn Quijano
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 11: Output and Expenditure
in the Short Run
Output and Expenditure in the Short Run
Aggregate expenditure (AE) The
total amount of spending in the
economy: the sum of consumption,
planned investment, government
purchases, and net exports.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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1 LEARNING OBJECTIVE
CHAPTER 11: Output and Expenditure
in the Short Run
The Aggregate Expenditure Model
Aggregate expenditure model A
macroeconomic model that focuses on
the relationship between total spending
and real GDP, assuming the price level
is constant.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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The Aggregate Expenditure Model
CHAPTER 11: Output and Expenditure
in the Short Run
Aggregate Expenditure
 Consumption (C)
 Planned Investment (I)
 Government Purchases (G)
 Net Exports (NX)
AE  C  I  G  NX
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 11: Output and Expenditure
in the Short Run
The Aggregate Expenditure Model
The Difference between Planned Investment and Actual
Investment
Inventories Goods that have been produced, but not yet
sold.
Macroeconomic Equilibrium
Aggregate Expenditure = GDP
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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2 LEARNING OBJECTIVE
CHAPTER 11: Output and Expenditure
in the Short Run
Determining the Level of
Aggregate Expenditure in the Economy
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Components of Aggregate
Expenditure, 2004
EXPENDITURE CATEGORY
Consumption
EXPENDITURE
(BILLIONS OF 2000 DOLLARS)
$7,589
Investment
1,810
Government
1,952
Net Exports
-601
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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Determining the Level of
Aggregate Expenditure in the Economy
CHAPTER 11: Output and Expenditure
in the Short Run
THE CONSUMPTION FUNCTION
Consumption function The relationship between
consumption spending and disposable income.
Marginal propensity to consume (MPC) The
slope of the consumption function: the amount by
which consumption spending increases when
disposable income increases.
Change in consumptio n
C
MPC 

Change in disposable income YD
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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Graphing Macroeconomic Equilibrium
CHAPTER 11: Output and Expenditure
in the Short Run
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Macroeconomic Equilibrium
on the 45E-Line Diagram
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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5 LEARNING OBJECTIVE
CHAPTER 11: Output and Expenditure
in the Short Run
The Multiplier Effect
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The Multiplier Effect
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 11: Output and Expenditure
in the Short Run
The Multiplier Effect
Autonomous expenditure Expenditure
that does not depend on the level of GDP.
Multiplier The increase in equilibrium real
GDP divided by the increase in autonomous
expenditure.
Multiplier effect The process by which an
increase in autonomous expenditure leads to a
larger increase in real GDP.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 11: Output and Expenditure
in the Short Run
The Multiplier Effect
A Formula for the Multiplier
1
1  MPC
Change in equilibriu m real GDP
1
Multiplier 

Change in autonomous expenditur e 1  MPC
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 11: Output and Expenditure
in the Short Run
The Multiplier Effect
Summarizing the Multiplier Effect
1.
The multiplier effect occurs both when autonomous expenditure
increases and when it decreases.
1.
The multiplier effect makes the economy more sensitive to changes in
autonomous expenditure than it would otherwise be.
1.
The larger the MPC, the larger the value of the multiplier.
1.
The formula for the multiplier,
1
, is oversimplified because it
1  MPC
ignores some real world complications, such as the effect that an
increasing GDP can have on imports, inflation, and interest rates.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 11: Output and Expenditure
in the Short Run
The Aggregate Demand Curve
Aggregate demand curve (AD) A
curve showing the relationship between the
price level and the level of planned
aggregate expenditure in the economy,
holding constant all other factors that affect
aggregate expenditure.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 11: Output and Expenditure
in the Short Run
Aggregate demand curve
(AD)
Aggregate expenditure (AE)
Aggregate expenditure
model
Autonomous expenditure
Cash flow
Consumption function
Inventories
Marginal propensity to
consume (MPC)
Marginal propensity to save
(MPS)
Multiplier
Multiplier effect
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 11: Output and Expenditure
in the Short Run
Appendix 11A:
The Algebra of Macroeconomic Equilibrium
1. C  C  MPC (Y )
2.
I 1
Consumption function
Investment function
3. G  G
Government spending function
4. NX  N X
Net export function
5. Y  C  I  G  NX
Equilibrium condition
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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