Aggregate Expenditures Model Overview
Public Debt
Accumulation of federal deficits and surpluses.
Cyclically Adjusted Budget
Adjusts for cyclical deficits in budget.
Monetary Policy Effects
Affects real GDP and price level through various channels
Immediate-short-run AS curve
Assumes fixed input and output prices, horizontal at current price
Short-run Aggregate Supply Curve
Assumes fixed nominal wages and input prices.
Built-in Stabilizers
Automatic budget changes during cycles.
Federal Reserve Structure
Board of Governors, 12 Federal Reserve Banks, commercial banks, and thrift institutions
Demand-Pull Inflation
Caused by increases in aggregate demand.
Recessions
Caused by leftward shifts in AD curve.
Multiplier effect
Change in real GDP exceeding initial investment change
Per-unit Production Costs
Costs that rise as real output expands.
M1
Currency, checkable deposits, and liquid deposits
M1 Money Supply
Currency, checkable deposits, liquid deposits.
Aggregate Demand
Determined by factors influencing consumption, investment, net exports, and government spending
Aggregate Supply
Determined by input prices, productivity, and legal-institutional environment
Equilibrium Interest Rate
Determined by total demand for money and money supply, inversely related to bond prices
Inflationary expenditure gap
Excess aggregate spending causing demand-pull inflation
Productivity
Factor affecting per-unit production costs.
Advantages of Monetary Policy
Flexibility and political acceptability, used for stabilization and recovery
Fiscal Policy
Government changes in spending or taxes.
Money Supply Backing
Government's guarantee based on stable value and effective money supply management
Interest-rate effect
Higher price level increasing interest rates and reducing investments
Aggregate Supply Curve
Horizontal line at fixed output prices.
Real-balances effect
Inflation reducing purchasing power and consumer spending
Functions of the Federal Reserve
Issue currency, hold reserves, lend money, collect checks, act as fiscal agent, supervise banks, regulate money supply
M2
M1 + small-denominated time deposits and money market mutual fund balances
M2 Money Supply
M1 plus time deposits and money market balances.
Money
Medium of exchange, unit of account, store of value.
Input Prices
One of the determinants of aggregate supply.
Tools of Monetary Policy
Open-market operations, administered rates, forward guidance
Equilibrium GDP
Output level where aggregate spending equals real output
Investment schedule
Planned investment levels at each GDP level
Full-Employment Output Level
Point where AS curve is relatively steep.
Fractional Reserve System
Portion of checkable deposits backed by currency, influencing money creation
Foreign purchases effect
Price level increase reducing net exports in aggregate demand
Sticky prices
Prices that do not adjust immediately to changes in demand
Fed's Dual Mandate
Pursue full employment and inflation targets, may lead to conflicts in policy decisions
Real GDP
Quantity of goods demanded and supplied.
Limitations of Monetary Policy
Recognition and operational lags, effectiveness limited in severe recessions
Legal-Institutional Environment
Regulations impacting production costs.
Net export schedule
Relates net exports to equilibrium GDP
Cost-Push Inflation
Results from increases in production costs.
Equilibrium Price Level
Set by intersection of AD and AS curves.
Recessionary expenditure gap
Shortfall in aggregate spending at full-employment GDP
Aggregate demand (AD)
Shows demanded real output at each price level
Aggregate supply (AS)
Shows real output levels at different price levels
Aggregate expenditures model
Total spending determining real GDP with fixed price level
Long-run Aggregate Supply Curve
Vertical at full-employment output level.
