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Aggregate Expenditure
Aggregate Expenditure
Aggregate income is the total income received by all factors of production in a given period.
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S Y C
The triple equal sign means this is an identity, or something that is always true.
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2. Household wealth
3. Interest rates 4. Households expectations about the
future
In The General Theory, Keynes argued that household consumption is directly related to its income.
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C = a bY
The slope of the consumption function (b) is called the marginal propensity to consume (MPC), or the fraction of a change in income that is consumed, or spent.
0 b<1
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MPC+MPS 1
Once we know how much consumption will result from a given level of income, we know how much saving there will be. Therefore,
S Y C
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C 100 .75Y
AGGREGATE INCOME, Y (BILLIONS OF DOLLARS) 0 80 100 200 400 400 800 1,000 AGGREGATE CONSUMPTION, C (BILLIONS OF DOLLARS) 100 160 175 250 400 550 700 850
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C 100 .75Y
At a national income of zero, consumption is $100 billion (a). For every $100 billion increase in income (DY), consumption rises by $75 billion (DC).
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C 100 .75Y S Y C
Y C = S
AGGREGATE SAVING (Billions of Dollars) -100 -80
-75 -50
AGGREGATE AGGREGATE INCOME CONSUMPTION (Billions of (Billions of Dollars) Dollars) 0 100 80 160
100 200 175 250
400
600 800 1,000
400
550 700 850
0
50 100 150
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AE C I
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Disequilibria:
Y>C+I
aggregate output > planned aggregate expenditure inventory investment is greater than planned actual investment is greater than planned investment
C+I>Y
planned aggregate expenditure > aggregate output inventory investment is smaller than planned actual investment is less than planned investment
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(1)
(2)
(3)
(4)
(5)
(6)
PLANNED UNPLANNED AGGREGATE AGGREGATE INVENTORY OUTPUT AGGREGATE PLANNED EXPENDITURE (AE) CHANGE EQUILIBRIUM? (INCOME) (Y) CONSUMPTION (C) INVESTMENT (I) C+I Y (C + I) (Y = AE?)
100
200 400
175
250 400
25
25 25
200
275 425
100
75 25
No
No No
500
600 800
475
550 700
25
25 25
500
575 725
0
+ 25 + 75
Yes
No No
1,000
850
25
875
+ 125
No
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Y C I C 100 .75Y
Y 100 .75Y 25
There is only one value of Y for which this statement is true. We can find it by rearranging terms:
I 25
If planned investment is exactly equal to saving, then planned aggregate expenditure is exactly equal to aggregate output, and there is equilibrium.
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The Multiplier
The multiplier is the ratio of the change in the equilibrium level of output to a change in some autonomous variable.
An autonomous variable is a variable that is
assumed not to depend on the state of the economythat is, it does not change when the economy changes.
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The Multiplier
The multiplier of autonomous investment describes the impact of an initial increase in planned investment on production, income, consumption spending, and equilibrium income.
The size of the multiplier depends on the slope of the planned aggregate expenditure line.
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The Multiplier
After an increase in planned investment, equilibrium output is four times the amount of the increase in planned investment.
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