Lecture Economics (19/e) - Chapter 28: The aggregate expenditures model

In this chapter, students will be able to understand: Illustrate how economists combine consumption and investment to depict an aggregate expenditures schedule for 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, identify and describe the nature and causes of recessionary expenditure gaps and inflationary expenditure gaps.

Model 28

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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