1. The Aggregate Expenditures Model 11 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Assumptions and Simplifications Not at full-employment Prices are fixed GDP = DI Begin with private, closed economy No government No trade LO1

3. Investment Schedule (I g ) Shows the amount that businesses plan to invest at different levels of GDP Assume investment (I g ) is independent of GDP => investment is constant at all GDP levels LO1

4. Leakages/Injections Leakages – Income not used to buy domestically produced goods and services Injections – Spending in addition to consumption expenditures on domestically produced goods and services GDP, output, income are the same LO1

5. Aggregate Expenditures The amount of goods and services produced and therefore the level of employment depend directly on the level of aggregate expenditures LO1

6. Equilibrium GDP TABLE 28.2 Determination of the Equilibrium Levels of Employment, Output, and Income: A Private Closed Economy (1) Possible Levels of Employment, Millions (2) Real Domestic Output (and Income) (GDP = DI),*Billio ns (3) Consumption (C), Billions (4) Saving (S), Billions (5) Investment (I g ), Billions (6) Aggregate Expenditure (C+I g ), Billions (7) Unplanned Changes in Inventories, (+ or -) (8) Tendency of Employment, Output, and Income (1) 40 $370$375$-5$20$395$-25Increase (2) 45 390 0 20 410 -20Increase (3) 50 410 405 5 20 425 -15Increase (4) 55 430 420 10 20 440 -10Increase (5) 60 450 435 15 20 455 -5Increase (6) 65 470 450 20 470 0Equilibrium (7) 70 490 465 25 20 485 +5Decrease (8) 75 510 480 30 20 500 +10Decrease (9) 80 530 495 35 20 515 +15Decrease (10) 85 550 510 40 20 530 +20Decrease * If depreciation and net foreign factor income are zero, government is ignored and it is assumed that all saving occurs in the household sector of the economy, then GDP as a measure of domestic output is equal to NI,PI, and DI. Household income = GDP LO1

7. Planned vs. Actual Investment LO4 Actual investment includes planned investment (I g ) and unplanned changes in inventories. As a result, actual investment equals savings at all GDP levels.

8. Multiplier Effect LO4 A change in spending changes real GDP more than the initial change in spending Multiplier = change in real GDP initial change in spending Change in GDP = multiplier x initial change in spending

9. Multiplier & Marginal Propensities LO4 Multiplier and MPC directly related Multiplier and MPS inversely related Multiplier = 1 1- MPC Multiplier = 1 MPS

10. Adding International Trade Include net exports spending in aggregate expenditures Private, open economy X n can be positive or negative Net exports are independent of GDP => net exports are constant at all GDP levels LO4

11. Adding the Public Sector Government purchases do not impact private spending Taxes are personal Lump sum tax LO4

12. Government Purchases and Eq. GDP TABLE 28.4 The Impact of Government Purchases on Equilibrium GDP (1) Real Domestic Output and Income (GDP=DI), Billions (2) Consumption (C), Billions (3) Saving (S), Billions (4) Investment (I g ), Billions (5) Net Exports (X n ), Billions (6) Government Purchases (G), Billions (7) Aggregate Expenditures (C+I g +X n +G), Billions (2)+(4)+(5)+(6) Exports (X) Imports (M) (1) $370$375$-5$20$10 $20$415 (2) 390390 0 20 10 20 430 (3) 410405 5 20 10 20 445 (4) 430420 10 20 10 20 460 (5) 450435 15 20 10 20 475 (6) 470450 20 10 20 490 (7) 490465 25 20 10 20 505 (8) 510480 30 20 10 20 520 (9) 530495 35 20 10 20 535 (10) 550510 40 20 10 20 550 LO4

13. Taxation and Equilibrium GDP TABLE 28.5 Determination of the Equilibrium Levels of Employment, Output, and Income: Private and Public Sectors (1) Real Domestic Output and Income (GDP), Billions (2) Taxes (T), Billions (3) Disposable Income (DI), Billions, (1)-(2) (4) Consump- tion (C a ), Billions (5) Saving (S a ), Billions (6) Invest- ment (I g ), Billions (7) Net Exports (X n ), Billions (8) Govern- ment Pur- chases (G), Billions (9) Aggregate Expendi- tures (C a +I g +X n +G), Billions (4)+(6)+(7) +(8) Export s (X) Import s (M) (1) $370$20$350$360$-10$20$10 $20$400 (2) 39020370375 -5 20 10 20 415 (3) 41020390 0 20 10 20 430 (4) 430204104055 20 10 20 445 (5) 4502043042010 20 10 20 460 (6) 4702045043515 20 10 20 475 (7) 4902047045020 10 20 490 (8) 5102049046525 20 10 20 505 (9) 5302051048030 20 10 20 520 (10) 5502053049535 20 10 20 535 LO4