Download C+I

Spring 2010
Aisha Khan
Section L & M
ECO 121
MACROECONOMICS
Lecture Eight
Recap

Aggregate Model

Consumption schedule
 Upward

Saving schedule
 Upward

sloping with a slope = MPC
sloping with a slope = MPS
Investment Demand curve
 Downward
sloping
Next?

We have consumption and investment schedules

Can now put them together to find GDP– true?

GDP = C + I

Therefore by the identity we can find the total
output/income
Equilibrium GDP
Employment levels
GDP = DI
C
S
I
C+I
Unplanned  in
inventories
Tendency of
income/output
40
370
375
-5
20
395
-25

45
390
390
0
20
410
-20

50
410
405
5
20
425
-15

55
430
420
10
20
440
-10

60
450
435
15
20
455
-5

65
470
450
20
20
470
0
~
70
490
465
25
20
485
5

75
510
480
30
20
500
10

80
530
495
35
20
515
15

85
550
510
40
20
530
20

Graphical Analysis
C+I
C+I = GDP
Aggregate
expenditure
C+ I
C
Aggregate Expenditure
I = $20 billion
C = $450 billion
45
GDP
Other features of GDP
1.
Savings = planned Investment

2.
Savings is a “leakage” from spending stream
No unplanned changes in inventory

Look at table again
Aggregate Expenditures


We examine now why real GDP might be unstable
and subject to cyclical fluctuations
We revise the model slowly towards a more realistic
model
Changes in Equilibrium GDP

Equilibrium GDP changes in response to changes in
consumption and investment schedules
 (remember

GDP = C + I)
Since consumption is more stable, this chapter
focuses on the unstable investment spending and
how its changes affect eq GDP
Investment changes

Suppose that investment spending rises by $5 billion
 Due
rate
to profit expectations or changes in the interest
C+I = GDP
Aggregate
expenditure
C+ I
(C+I)1
(C+I)0
(C+I)2
45
450
470
490
GDP
Multiplier Effect


A $5 billion change in investment causes a $20
billion change in GDP  multiplier effect
Multiplier = in real GDP / initial  in spending



Initial change in spending is usually associated with
investment spending because its so volatile
The initial change refers to an upward/downward
shift in aggregate spending due to a change in one
of its components
Multiplier works in both directions
Multiplier and MPC



The size of the mpc and the multiplier are directly
related
The size of the mps and the multiplier are inversely
related
Multiplier =1/(1-mpc) = 1/mps
International Trade and Equilibrium
Output

NX affect aggregate expenditures

Exports expand spending on domestic output
Imports contract spending on domestic output

Net export schedule

 Independent
of GDP, can be positive or negative

Positive NX  ( exports > imports )
 Expand
spending
 Expansionary effect
 Again multiplier effect

Negative NX  ( imports > exports )
 Contract
spending
 Contractionary effect
C+I = GDP
Aggregate
expenditure
C+ I
(C+I)1 +NX1
(C+I)0
(C+I)2 +NX2
45
450
470
490
GDP
International economic leakages

Prosperity abroad generally raises our exports

Trade barriers

Depreciation of dollar  lowers cost of US goods
to foreigners  discouraging our exports
Adding the Public Sector

Simplifications
 Government
purchases don’t impact private spending
 Net tax revenues as personal taxes
 GDP = NI = PI
 Tax collections are independent of GDP levels
 Price level is assumed to be constant


Increase in government spending boosts aggregate
expenditure
Government expenditure is subject to the multiplier
(C+I)1 +NX1 + G
C+I = GDP
Aggregate
expenditure
C+ I
(C+I) +NX
C
45
GDP

Taxes reduce DI  consumption and saving lowered
at each level of GDP

Therefore the sum of leakages = sum of injections

S+M+T=I+X+G