Lecture Macroeconomics (19/e) - Chapter 11: The aggregate expenditures model

After reading this chapter, you should be able to: Illustrate how economists combine consumption and investment to depict an aggregate expenditures schedule for a private closed economy, discuss the three characteristics of the equilibrium level of real GDP in a private closed economy, analyze how changes in equilibrium real GDP can occur in the aggregate expenditures model and describe how those changes relate to the multiplier,...

Model 11

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expenditures model

C

I g = $20 billion

Aggregate expenditures

C = $450 billion

C + I g (C + I g = GDP)

Equilibrium point

spending

Increase in investment

(C + I g ) 0

Decrease in investment

(C + I g ) 2 (C + I g ) 1

aggregate expenditures

employment, and income

Aggregate expenditures with positive

net exports

C + I g

Aggregate expenditures with negative net

exports

C + I g +X n2

C + I g +X n1

X n1

X n2

Positive net exports Negative net exports

450 470 490

exports

equilibrium GDP

the multiplier

C

Government spending

of $20 billion

C + I g + X n

C + I g + X n + G

45°

490 550

$15 billion decrease in consumption from a

$20 billion increase

in taxes

C a + I g + X n + G

C + I g + X n + G

GDP

Real GDP (a) Recessionary expenditure gap

510 490

45°

490 510 530

AE 0

AE 1

Full employment

Recessionary expenditure gap = $5 billion

AE 0

AE 2

Full employment

Inflationary expenditure gap = $5 billion