Download Aggregate Expenditure Model and the Multiplier

 Disposable
is your net income
• Your save or spend that income
 Marginal
Propensity to Consume (MPC)
• Is the increase in consumer spending when
disposable income rises by $1
• Calculated by
consumer spending/
Disposable income.
 Marginal
Propensity to Save (MPS)
• Is the increase in household savings when
disposable income rises by $1
•
savings/
disposable income
 You
can only spend or save that
additional dollar so
• MPC + MPS = 1
 Assumptions
• Changes in overall spending lead to changes in
Aggregate output.
• Interest rates are fixed
• Exports and imports are all zero.
Consumption function (C)
• Shows how a household’s
consumer spending varies
with the households current
disposable income (YD)
•
Autonomous consumer spending
(A)
• the amount a household
would spend it current
income was 0.
What will change Autonomous
Consumer spending
• Changes in expected Future
YD
• Changes in Aggregate
wealth
•
Aggregate consumer spending
•
Slope of the C function
Is your MPC.
Real GDP
Investment (I)
• Business plan to spending
which includes unsold
Items. OR Inventory

Change in Autonomous
Investment expenditure
• It is how much a
business (I) is going
to change their
Planned Expenditure
initially
Aggregate planned Investment expenditure

I planned ‘
I
I Planned
Real GDP
AE = Aggregate
Planned exp.
Slope of AE = MPC = rise/run
Of AGG expenditure model.
AE = aggregate planned
expenditure = C+I planned
C = consumption expenditur
C+I=
I = Planned investment
expenditure
Real GDP = Y or income
•
Planned aggregate spending can be different
from Real GDP if there is unplanned Inventory
Investment.
• Negative unplanned investment = smaller than expected
inventories (produced to little) Consumers bought more
than expected
• Positive unplanned investment = greater than expected
inventories (produced to much)Consumers
• Firms can correct inventories issues by increasing or
decreasing production. Which will eliminate unplanned
inventories. So increase I Planned or Decrease I Planned
to bring Inventories to equilibrium.
Real GDP
YD=
C=
Disposable A+(MPC x
Income
YD)
I Planned
AE planned I
unplanned
0
0
300
500
800
800
500
500
600
500
1100
600
1000
1000
900
500
1400
400
1500
1500
1200
500
1700
200
2000
2000
1500
500
2000
0
2500
2500
1800
500
2300
-200
3000
3000
2100
500
2600
-400
3500
3500
2400
500
2900
-600
MPC = .6
Aggregate planned expenditure
Income and expenditure
equilibrium
45 degree line all possible places
Where planned aggregate spending is
Equal to Real GDP
3k
•
2.6k
2k
1.4k
1k
•
•
1K
2K
Real GDP
3K
At 1k of real GDP we have 1.4k AE
planned
• 400 unplanned inventories
AT 2k of real GDP we have 2k of
AE Planned.
• 0 unplanned inventories
At 3k of real GDP we have 2.6k of
AE planned
• -400 unplanned inventories
 Aggregate
Planned Expenditure is <
Real GDP. National inventories are
decreasing or negative unplanned
inventories
• Autonomous (I) expenditure will increase

Aggregate Planned Expenditure > Real
GDP National inventories are increasing
or positive unplanned inventories.
• Autonomous (I) expenditure will decrease.
 A change in autonomous expenditure by business will
cause Real GDP to increase multiple times due the
multiplier
 1/1-MPC or 1/MPS ex.
 Autonomous Investment exp. increases 2million and MPC is
.2: How much can GDP increase by?
 $2million * 1/1-mpc = 2mm * 1/1-.2 = 2mm *1/.8 = 2mm
*1.25=

Government
Expenditure (G)
• Governments Plan to
spend according to a
budget.
Change in Autonomous
Government
expenditure
• How much a
Government is going
to change their
expenditure initially
Aggregate Government Expenditure

G’= Change Aut .Gov. Exp
G = Autonomous Government Exp.
Real GDP
Aggregate planned expenditure
45 degree line
Income and expenditure
equilibrium
3k
2.6k
2k
1.4k
1k
1K
2K
Real GDP
3K
 A change in autonomous expenditure by government
will cause Real GDP to increase multiple times due
the multiplier
 1/1-MPC or 1/MPS ex.
 Autonomous Investment exp. increases 2million and MPC is
.2: How much can GDP increase by?
 $2million * 1/1-mpc = 2mm * 1/1-.2 = 2mm *1/.8 = 2mm
*1.25=
 Tax Multiplier –MPC/MPS. EX.
 MPC IS .6 TAXES INCREASES BY 100MM
 -.6/.4 = - 1.5 X 100MM real GDP decreases by 150mm.
 MPC IS .6 TAXES BY DECREASE BY 100MM
 -.6/.4 = -1.5 X -100M REAL GDP WILL INCREASE BY 150MM