1. Learning Objectives: Aggregate Expenditures LO4: See how government’s budget balance and the balance of trade both relate to national income LO5: Understand the multiplier and how it impacts the economy LO6: Derive aggregate demand from aggregate expenditures CHAPTER 6 6-1© 2012 McGraw-Hill Ryerson Limited

2. Table 6.5 Government Budget Function 6-2© 2012 McGraw-Hill Ryerson Limited LO4 National Income (Y) Tax Revenue (T) Government Spending (G) Budget Surplus (+)/ deficit (−) (T – G) 060160–100 10080160–80 200100160–60 300120160–40 400140160–20 500160 0 600180160+20 700200160+40 800220160+60 Autonomous taxes

3. Table 6.5 Government Budget Function 6-3© 2012 McGraw-Hill Ryerson Limited LO4 National Income (Y) Tax Revenue (T) Government Spending (G) Budget Surplus (+)/ deficit (−) (T – G) 060160–100 10080160–80 200100160–60 300120160–40 400140160–20 500160 0 600180160+20 700200160+40 800220160+60 Induced taxes > 20 > 100

4. Adding the Government Sector Tax function 6-4© 2012 McGraw-Hill Ryerson Limited LO4 T = 60 + 0.2Y National Income (Y) Tax Revenue (T) Government Spending (G) Budget Surplus (+)/ deficit (−) (T – G) 060160–100 10080160–80 200100160–60 Induced Taxes Autonomous Taxes Marginal Tax Rate

5. Government Spending, Taxation, and the Budget Line Chapter 6-5 Balanced Budget G,T 0 40 80 120 160 200 600 300 200 100 400 500 240 T = 60 + 0.2Y Budget Deficit Budget Surplus 600 300 200 100 400 500 700 0 +40 - 40 Budget Line (BL) National Income (Y) G = 160 - 80 Budget Balance Deficit Surplus Fig. 6.6 LO4

6. Table 6.6 Expenditures Equilibrium 6-6© 2012 McGraw-Hill Ryerson Limited LO4 National Income (Y) Tax (T) Dispos Income (Y D ) Cons (C) Saving (S) Invest (I) Govt Spending (G) Agg Expend (AE) (C+I+G) 060–60 5–6575160240 1008020 65–4575160300 200100 125–2575160360 300120180 185–575160420 400140260 245+1575160480 500160340 305+3575160540 600180420 365+5575160600 700200500 425+7575160660 800220580 485+9575160720 Y = AE

7. Self Test Given that T = 50 + 0.25Y and G = 200: What is the budget balance (T – G) at the following income levels? a)400 b)600 c)900 d)1200 6-7© 2012 McGraw-Hill Ryerson Limited LO4

8. Taxation Reduces Spending Consumer spending is related to Disposable Income Disposable income = Income – Taxes 6-8© 2012 McGraw-Hill Ryerson Limited LO4 Y D = Y - T = Y – (60 + 0.2Y) = Y – 60 – 0.2Y Y D = - 60 + 0.8Y C = 50 +.75 Y D = 50 +.75(- 60 + 0.8Y) = 50 – 45 + 0.6Y C = 5 + 0.6Y

9. Adding the Foreign Sector Spending on imports increases when Canadian incomes increase Spending on exports increases when foreign incomes increase; largely independent of Canadian incomes Marginal propensity to import: the ratio of the change in imports that results from a change in income 6-9© 2012 McGraw-Hill Ryerson Limited LO4

10. Table 6.7 Net Exports Function 6-10© 2012 McGraw-Hill Ryerson Limited LO4 National Income (Y) Exports (X) Imports (IM) Net Exports (X N ) (X – IM) 010040+60 100 50+50 20010060+40 30010070+30 40010080+20 50010090+10 600100 0 700100110–10 800100120–20

11. Adding the Foreign Sector Import function 6-11© 2012 McGraw-Hill Ryerson Limited LO4 IM = 40 + 0.1Y Induced Imports Autonomous Imports MPM National Income (Y) Exports (X) Imports (IM) Net Exports (X N ) (X – IM) 010040+60 100 50+50 20010060+40

12. 6-12© 2012 McGraw-Hill Ryerson Limited LO4

13. Net Exports Equal to difference between exports and imports Also called “balance of trade” 6-13© 2012 McGraw-Hill Ryerson Limited LO4 X N = X - IM

14. Determinants of Net Exports 1.Comparative price levels 2.The value of the exchange rate 3.Income levels abroad 4.Foreign tastes 6-14© 2012 McGraw-Hill Ryerson Limited LO4

15. Table 6.8 Expenditures Equilibrium: Full Model 6-15© 2012 McGraw-Hill Ryerson Limited LO4 (Y)(T)(Y D )(C)(S)(I)(G)(X)(IM)(X N ) (AE) (C+I+G+ X N ) 060–605–657516010040+60300 100802065–457516010050+50350 200100 125–257516010060+40400 300120180185–57516010070+30450 400140260245+157516010080+20500 160340305+357516010090+10550 600180420365+5575160100 0600 700200500425+7575160100110–10650 800220580485+9575160100120–20700

16. Aggregate Expenditure Function 6-16© 2012 McGraw-Hill Ryerson Limited LO4 Calculating AE Equilibrium AE = 300 + 0. 5Y Y = AE Y = 300 + 0.5 Y.5 Y = 300 Y = 300/.5 = 600 (Y)(T)(Y D )(C)(S)(I)(G)(X)(IM)(X N ) (AE) (C+I+G+ X N ) 060–605–657516010040+60300 100802065–457516010050+50350 200100 125–257516010060+40400

17. Aggregate Expenditure Function 6-17© 2012 McGraw-Hill Ryerson Limited LO4 Calculating AE Equilibrium At equilibrium, leakages = injections I + G + X = S + T + IM 75 + 160 + 100 = 55 + 180 + 100 = 335 (Y)(T)(Y D )(C)(S)(I)(G)(X)(IM)(X N ) (AE) (C+I+G+ X N ) 600180420365+5575160100 0600

18. Aggregate Expenditure Function 6-18© 2012 McGraw-Hill Ryerson Limited LO4 Deriving Aggregate Expenditures Add individual consumption, investment, government, and net export functions:

19. Self Test Assuming that the MPC, MTR, and MPM are constant and I, G, and X are all autonomous: a)Fill in the table. b)Calculate the value of expenditures equilibrium 6-19© 2012 McGraw-Hill Ryerson Limited LO4 YTYDYD CSIGXIMXNXN AE 020 — 30 — 50 —— 10 —— 100—60102——70——–2— 20060———— — 20——— 300—220246–26———— —

20. Self Test Assuming that the MPC, MTR, and MPM are constant and I, G, and X are all autonomous: a)Fill in the table. 6-20© 2012 McGraw-Hill Ryerson Limited LO4 YTYDCSIGXIMXNAE 020305010 1006010270–2 2006020 300220246–26

21. Self Test Assuming that the MPC, MTR, and MPM are constant and I, G, and X are all autonomous: b)Calculate the value of expenditures equilibrium 6-21© 2012 McGraw-Hill Ryerson Limited LO4

22. Self Test Find the value of MPE, given that: MPCD = 0.9; MTR = 0.25; MPM = 0.075 a)MPE 6-22© 2012 McGraw-Hill Ryerson Limited LO4