The Aggregate Expenditures Model
assumptions of AE model
"stuck price model"= prices stay the same GDP=DI begin with private, closed economy (C + Ig)
what is the slope of the C+Ig curve
= MPC
multiplier
1/MPS change GDP/change spending
what is on the x axis
GDP
what can the AE model be used to explain
SR adjustments in private and public spending
when level of GDP is below equilibrium how do businesses respond to unplanned decreases in inventories
increase Q and employment
what do you do when there is a recessionary expenditure gap
increase government spending or decreases taxes (or a combo of both) how much we have to change spending to reduce gap
recessionary expenditure gap
insufficient aggregate spending since spending is below full employment GDP ** production>spending
what is a replacement for leakage of savings
investment
how is investment an injection of spending?
investment is added stimulation to the economy
equilibrium output
level of GDP when total quantity of goods produced=total quantity of goods purchased
what do you assume with taxes and equilibrium GDP
lump-sum tax, taxes are subject to the multiplier but not the full one, and DI=GDP
private economy
no government spending
are there unplanned changes in inventories at equilibrium GDP
no, firms do not have to change level of production at equilibrium
a caution on tariffs and devaluations:
other countries may retaliate, lower GDP for all
how is savings leakage?
savings is leakage of spending because it is money pulled out of what could potentially be spent to stimulate the economy
what does an increase in investment do to the C+Ig curve
shift out
what is the first thing you draw on the AE model
the 45 degree reference line
what must be done to prevent overstating the value of domestic production
the amount spent on imported goods in the US must be subtracted from export spending because such spending generates production and income abroad
public sector
the part of the economy that involves the transactions of the government
what does AE reflect
the total amount that will e spent at each possible output/input level
what does the multiplier effect mean
there is a bigger change in equilibrium GDP than the change in AE
inflationary expenditure gap
too much aggregate spending since spending exceeds full employment GDP ** spending>production
-Xn
trade deficit (X<M)
+Xn
trade surplus (X>M)
what is on the y axis
AE
who created the AE model
Keynes
what is a limiting assumption?
Xn is independent of GDP. Xn is constant at all levels of GDP and causes parallel shifts of C+Ig
lump-sum tax
a tax that is the same amount for every person
savings
a withdrawal of spending from the economy's circular flow of income and expenditures
open economy
an economy that participates in trade
closed economy
an economy with no trade
what are exports?
an injection of spending because exports create production, employment, and income
equilibrium GDP
at equilibrium, savings=planned investment (S=Ig)
what happens when the dollar depreciated relative to other currencies
enables people abroad to obtain more dollars with each unit of own currency
why is it undesirable for GDP to be below equilibrium?
because f unplanned decline in business inventories
prosperity abroad
can increase U.S exports
change in spending
change in GDP/multiplier
MPC
change in consumption/change in DI
tax multiplier
change in government spending change in taxes=reduced multiplier MPC/1-MPC or MPC/MPS
MPS
change in savings/change in DI
what do you do when there is a inflationary expenditure gap
decrease government spending, increase taxes (combo)
exchange rates
depreciate the dollar to increase exports
