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The Aggregate Expenditures Model

10. C H A P T E R. The Aggregate Expenditures Model. o. 45. EQUILIBRIUM GDP. (C + I g = GDP). C + I g. $530 510 490 470 450 430 410 390 370. Equilibrium. C. I g = $20 Billion. Private spending, C + I g (billions of dollars). C =$450 Billion. o.

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The Aggregate Expenditures Model

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  1. 10 C H A P T E R The Aggregate Expenditures Model

  2. o 45 EQUILIBRIUM GDP (C + I g = GDP) C + Ig $530 510 490 470 450 430 410 390 370 Equilibrium C Ig = $20 Billion Private spending, C + I g (billions of dollars) C =$450 Billion o 370 390 410 430 450 470 490 510 530 550 Real domestic product, GDP (billions of dollars)

  3. CHANGES IN EQUILIBRIUM GDP AND THE MULTIPLIER Equilibrium GDP at Ig0leveEquilibrium GDP at Ig1level of investmentl of investment o 45 510 490 470 450 430 (C + Ig ) 1 (C + Ig ) 0 Increases in the level of C + Ig Private spending (billions of dollars) o 430 450 470 490 510 Real domestic product, GDP (billions of dollars)

  4. INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES Net Exports Positive if exports > imports Negative if imports > exports Net Exports and Aggregate Expenditures C + Ig + ( X – M ) Xn = ( X – M ) C + Ig + Xn

  5. o 45 INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES Aggregate Expenditures with Positive Net Exports 510 490 470 450 430 C + Ig + Xn1 C + Ig Private spending (billions of dollars) o 430 450 470 490 510 Real domestic product, GDP (billions of dollars) +5 0 -5 Net Exports, Xn (billions of dollars) Real GDP 430 450 470 490 510

  6. o 45 INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES Aggregate Expenditures with Negative Net Exports 510 490 470 450 430 C + Ig C + Ig + Xn2 Private spending (billions of dollars) o 430 450 470 490 510 Real domestic product, GDP (billions of dollars) +5 0 -5 Net Exports, Xn (billions of dollars) Real GDP 430 450 470 490 510

  7. INTERNATIONAL ECONOMIC LINKAGES • Prosperity Abroad • Tariffs • Exchange Rates

  8. o 45 ADDING THE PUBLIC SECTOR Government Purchases and Equilibrium GDP C + Ig + Xn + G Government Spending of $20 Billion C + Ig + Xn C Aggregate Expenditures (billions of dollars) o 470 550 Real domestic product, GDP (billions of dollars)

  9. o 45 ADDING THE PUBLIC SECTOR Lump-Sum Tax and Equilibrium GDP $15 Billion Decrease in Consumption from a $20 Billion Increase in Taxes C + Ig + Xn + G Ca + Ig + Xn + G Aggregate Expenditures (billions of dollars) o 490 550 Real domestic product, GDP (billions of dollars)

  10. o 45 FULL-EMPLOYMENT GDP Recessionary Gap AE0 530 510 490 AE1 Recessionary Gap = $5 Billion Aggregate Expenditures (billions of dollars) Full Employment o 490 510 530 Real domestic product, GDP (billions of dollars)

  11. o 45 FULL-EMPLOYMENT GDP Inflationary Gap AE2 Inflationary Gap = $5 Billion AE0 530 510 490 Aggregate Expenditures (billions of dollars) Full Employment o 490 510 530 Real domestic product, GDP (billions of dollars)

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