aggregate expenditure Flashcards
aggregate expenditure
total spending in the economy
aggregate expenditure model
short-run relationship between total spending and real gdp, assuming that price level is constant
difference between AE and GDP
uses planned investment rather than actual
planned vs actual investment
planned: doesn’t include the build-up of inventories
planned = actual - unplanned change in inventories
macroeconomic equilibrium
spending = output produced (AE = GDP)
planned investment = actual investment
relationship between AE and GDP (3)
AE = GDP -> inventories are unchanged = equilibrium
AE < GDP -> inventories rose = GDP and employment decrease
AE > GDP -> inventories fell = GDP and employment rises
determinants of consumption
disposable income
household wealth
expected future income
price level
interest rate
net exports, investment and gov spending
constant
consumption function
relationship between consumption spending and disposable income
C + MPC(Y)
marginal propensity to consume
amount that is spent with additional income
(slope of consumption function)
estimating MPC
change in consumption / change in disposable income
national income
= disposable income (consumption +saving) + net taxes
= GDP
marginal propensity to save
portion of saving with additional income
MPC and MPS
1 = MPC + MPS
determinants of planned investment
expectations of future profitability
the interest rate
taxes
cash flow
net exports are affected by
price level in US vs price level in other countries
US growth rate vs growth rate in other countries
US dollar exchange rate
determinant of net exports: price level (2)
PL rises faster than foreign PL: net exports decrease (e - M)
PL rises slower than foreign PL: net exports increase (E - m)
determinant of net exports: gdp growth (2)
gdp grows faster than foreign gdp: nx decrease (e - M)
gdp grows slower than foreign gdp: nx increase (E - m)
determinant of net exports: dollar value
dollar rises relative to other currencies: nx decrease (e - M)
dollar falls relative to other currencies: nx increase (E - m)
AE and Consumption
resulting consumption function tells us how much consumers will spend when they have a particular income (real gdp)
where we would like the macro equilibrium to occur
at potential gdp growth
autonomous expenditures
I, G and NX
expenditures not dependent on the level of gdp
multiplier effect (2)
real gdp increases by more than the change in autonomous expenditure
change in real gdp / change in investment spending = 1 / 1- MPC
(each $1 dollar increase in planned investment increases equilibrium by $?)
total change in equilibrium real GDP
= MPC ^ nb of rounds (x 100 billion)
solving general aggregate expenditure equations
equilibrium gdp expenditure x multiplier
