Economics // Chapter 8 Content // Aggregate Expenditures

NOTES

GDP = AE = C+ I+ G + (X - M)

withdrawals

activities that remove spending from the economy, including saving, taxes, and imports

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aggregate expenditures are equal to consumption plus business investment (AE = C + I). At equilibrium aggregate expenditures, income, and output are all equal; what is demanded is supplied (AE = Y). At equilibrium, I = S

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annual saving is equal to the vertical difference between the 45 degree reference line and annual consumption

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at equilibrium, all injection of spending into the economy must equal all withdrawals/ Spending injections increase aggregate income while spending withdrawals reduce it

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at equilibrium, what people withdraw from the economy (saving) is equal to what others are willing to inject into the spending system (investment)

aggregate expenditures

consist of consumer spendings, business investment spending, government spendings, and net foreign spending (exports minus imports) GDP = C + I + G + (X - M)

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consumption is relatively stable, but investment is volatile and especially sensitive to expectations about conditions in the economy

balanced budget multiplier

equal changes in government spending and taxation (a balanced budget) lead to an equal change in income (the balanced budget multiplier is equal to 1)

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how much people will actually save depends on equilibrium income, or how much the economy is generating

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if consumers decide to increase their saving to guard against the possibility of job loss, they may inadvertently make the recession worse

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in the full aggregate expenditures model, it does not matter whether these injections came from investment alone or from investment and government spending together. The key is spending

Keynesian macroeconomic equilibrium

in the simple model, the economy is at rest; spending injections (investment) are equal to withdrawals (saving), or I = S, and there are no net inducements for the economy to change the level of output or income. In the full model, all injections of spending must equal all withdrawals at equilibrium: I + G + X = S + T + M

NOTES

income is the principle determinant of consumption and saving, but other factors can shift the saving and consumption schedules. These factors include the wealth of a family, their expectations about the future of prices and income, family debt, and taxation

injections

increments of spending, including investment, government spending, and exports

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investment levels depend mainly on the rate of return on capital

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k = 1 / (1 - MPC) k = 1 / MPS

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saving and investment will always be equal when the economy is in equilibrium

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savings (and by extension, consumption) and investment are determined by interest rates

investment

spending by businesses that adds to the productive capacity of the economy. Investment depends on factors such as its rate of return, the level of technology, and business expectations about the economy

consumption

spending by individuals and households on both durable goods (autos, appliances, electronics) and nondurable goods (food, clothes, entertainment)

multiplier

spendings changes alter equilibrium income by the spending change time the multiplier. One person's spending becomes another's income, and that second person spends some (the MPC), which becomes income for another person, and so on, until income has changed by 1/(1 - MPC) = 1 / MPS. The multiplier operates in both directions

marginal propensity to consume

the change in consumption associated with a given change in income (change in C / change in Y)

marginal propensity to save

the change in saving associated with a given change in income (change in S / change in Y)

saving

the difference between income and consumption; the amount of disposable income not spent

NOTES

the multiplier works in both directions

average propensity to consume

the percentage of income that is consumed (C/Y)

average propensity to save

the percentage of income that is saved (S/Y)

paradox of thrift

when investment is positively related to income and households intend to save more, they reduce consumption, income, and output, reducing investment so that the result is that consumers actually end up saving less

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when taxes are increased, money is withdrawn from the economy's spending stream