Download A given price level

Macro
McEachern
2011
ECON
10
2010-
CHAPTER Aggregate
Designed by
Amy McGuire, B-books, Ltd.
Chapter 10
Expenditure and
Aggregate
Demand
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Aggregate Expenditure and
Income
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A dollar spent (expenditure)
A dollar earned (income)
Aggregate expenditure components
Consumption, C – varies with income
Investment, I – autonomous
Government purchases, G – autonomous
Net exports, (X-M) - autonomous
Government budget: balanced
G = Net taxes
LO1
Chapter 10
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Aggregate Expenditure and
Income
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AE = C + I + G + (X – M)
Aggregate expenditure line
Planned spending
At each level of real GDP
(aggregate output; aggregate
income)
Given price level
Slope of AE line = MPC
LO1
Chapter 10
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Aggregate Expenditure and
Income
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Income – Expenditure model
AE line, given price level
45-degree line
Spending = real GDP
Aggregate output demanded (real GDP)
AE = real GDP
LO1
Chapter 10
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Aggregate Expenditure and
Income
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If spending > real GDP
Decrease inventories
Increase
Production and employment
Income and spending
If real GDP > spending
Unsold goods: increase inventories
Decrease
Production and employment
Income and spending
LO1
Chapter 10
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Exhibit 1
LO1
Aggregate expenditure (trillions of dollars)
Deriving the Real GDP Demanded
for a Given Price Level
d
15.0
C + I + G + (X - M)
14.8
c
e
14.0
13.2
b
13.0
a
Real GDP demanded for a
given price level is found where
aggregate expenditure equals
aggregate output – that is,
where spending equals the
amount produced, or real GDP.
This occurs at point e, where
the aggregate expenditure line
intersects the 45-degree line.
45°
0
Chapter 10
13.0
14.0
15.0
Real GDP
(trillions of dollars)
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
LO2
Exhibit 2
Aggregate expenditure (trillions of dollars)
Effect of an Increase in Investment on
Real GDP Demanded
C+I’+G+(X-M)
e’
14.5
A $0.1 trillion increase in
investment shifts the AE line up
vertically by $0.1 trillion.
Real GDP increases until it equals
spending at point e’.
As a result of the $0.1 trillion
increase in investment, real GDP
demanded increases by $0.5
trillion, to $14.5 trillion.
The economy is initially at point e,
where spending=real GDP
demanded = $14.0 trillion.
j
h
k
i
f
14.1
g
14.0
e
0.1
45°
0
14.014.1
Chapter 10
C+I+G+(X-M)
14.5
Real GDP
(trillions of dollars)
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
LO2
Simple Spending Multiplier
 Simple spending multiplier
 The larger the MPC
 The larger the simple spending
multiplier
Chapter 10
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
The Aggregate Demand
Curve
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•
•
•
•
•
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•
LO3–
Chapter 10
Each price level
Unique AE line
Unique real GDP demanded
Higher price level
Decreased C
Higher interest rate; decreased I
Decreased (X – M)
Reduced aggregate spending
AE shifts down
Decrease real GDP demanded
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
The Aggregate Demand
Curve
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–
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Lower price level
Increase: C, I, (X – M)
Increased aggregate spending
AE line shifts up
Increase real GDP demanded
Aggregate demand curve
Various price levels
Quantities of real GDP demanded
LO3
Chapter 10
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
The Aggregate Demand
Curve
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–
•
•
•
•
•
•
•
LO3•
Chapter 10
A given price level
AE line
Spending plans
Income (real GDP)
Change in price level
Shifts AE line
Changes real GDP demanded
Movement along AD curve
A given price level
For changes in spending: shift AD curve
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Exhibit 5
LO3
C+I’+G+(X-M)
Aggregate expenditure
(trillions of dollars)
(a)
e’
C+I+G+(X-M)
0.1
e
A shift of the AE line at a given price level
shifts the AD curve.
45°
(b)
14.0
e
Price level
0
A Shift of the
Aggregate Expenditure
Line That Shifts the
Aggregate Demand
Curve
130
14.5
Real GDP
(trillions of dollars)
e’
AD
0
14.0
Chapter 10
14.5
AD’
In (a), an increase in investment of $0.1
trillion, with the price level constant at 130,
causes the aggregate expenditure line to
increase from C+I+G+(X-M) to C+I’+G+(XM).
As a result, real DGP demanded increases
from $14.0 trillion to $14.5 trillion. In (b), the
aggregate demand curve has shifted from
AD to AD’. At the prevailing price level of
130, real GDP demanded has increased by
$0.5 trillion.
Real GDP (trillions of dollars)
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved