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Chapter 12Spending by Individuals,Firms, and Governments onReal Goods and Services
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Framework for Macroeconomic AnalysisFocus on the Short RunAnalysis in Real Versus Nominal TermsTreatment of the Foreign Sector*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Outline for Macroeconomic Analysis*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
*Market andExpenditure forReal Goods andServices(Chapter 12)Money Market:Supply andDemand forMoney(Chapter 13)AggregateSupply Curve(Chapter 14)Model ofAggregateDemand andAggregateSupply(Chapter 14)AggregateDemand Curve(Chapter 14)Fixed Price AssumptionFlexible Price Assumption
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Aggregate ExpenditureThe sum of personal consumption expenditure, investment expenditure, government expenditure, and net export expenditure in a given period of time.
E = C + I + G + (X M)*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall *
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Personal Consumption ExpenditureThe amount of spending by households on durable goods, nondurable goods, and services in a given period of time.*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Consumption FunctionThe fundamental relationship in macroeconomics that assumes that household consumption spending depends primarily on the level of disposable income (net of taxes) in the economy, all other variables held constant.
C = f(Yd), whereYd = disposable, or after-tax income*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Marginal Propensity to Consume (MPC)The additional consumption spending generated by an additional amount of real income, assumed to take a value less than 1.
MPC = C/Yd or C/(Y - TP)*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Saving FunctionThe amount of disposable income that households do not spend on the consumption of goods and services.
S = Yd - C*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Marginal Propensity to Save (MPS)The additional household saving generated by an additional amount of real income, which equals 1 - MPC.
MPS = S/Yd or S/(Y TP) = 1 - MPC*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Other Factors Affecting the Level of Consumption SpendingPersonal taxesReal interest rateConsumer confidenceExisting stock of wealthAvailability of consumer creditStock of consumer debt outstanding*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Consumption Function - Graphical*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
*CYC0C2C1Y2Y1CY
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Gross Private Domestic Investment ExpenditureThe total amount of spending on nonresidential structures, equipment, and software; residential structures; and business inventories in a given period of time.*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Determinants of Gross Private Domestic InvestmentLevel of real income and output in the economyReal interest ratesBusiness taxesExpected Profits and Business ConfidenceCapacity utilization ratesResidential Investment SpendingInventory Investment*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Government ExpenditureThe total amount of spending by federal, state, and local governments on consumption outlays for goods and services, depreciation charges for existing structures and equipment, and investment capital outlays for newly acquired structures and equipment in a given period of time.*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Determinants of the Level of Government ExpendituresGovernment expenditure policy is determined by the legislative and executive institutions at all levels of government.*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Net Export ExpenditureThe difference between export spending on domestically produced goods and services by individuals in other countries and import spending on foreign produced goods and services by domestic residents in a given period of time.*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Determinants of the Level of Net Export ExpendituresRelative economic growth rates around the world.Currency exchange rates.Relative interest rates.*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Aggregate Expenditure Function*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
*E = E0 + (c1 + i1 - m1)YwhereE = aggregate expenditureE0 = sum of all autonomous expenditure componentsc1 = marginal propensity to consumei1 = marginal propensity to investm1 = marginal propensity to importY = real income
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Aggregate Expenditure Function Graphical Treatment*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall *EYEE0Slope = c1 + i1 m1
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Equilibrium Level of Income and OutputThe equilibrium level of income and output is that level of income at which the desired spending by all sectors of the economy just equals the value of the aggregate output produced and the income received from that production.E = Y*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall *
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Equilibrium Level of Income and Output - Graphical*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
*Equilibrium is that level of realincome,YE, where the aggregateexpenditure line, E1 , crosses the 45 line.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Disequilibrium Level Income and Output Adjustment*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Relationship of E to YInventoriesOutput AdjustmentE > YUnexpected decrease in inventoriesOutput increasesE = Y Inventories are at expected levelOutput equilibriumE < YUnexpected increase in inventoriesOutput decreases
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
The MultiplierThe multiple change in income and output that results from a change in autonomous expenditure.
m = Y E = 1 1- MPC*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Interest Rates and Aggregate ExpendituresThe interest-related expenditure (IRE) function shows planned consumption and investment spending as a function of the real interest rate, all else held constant.*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Interest Rates and Aggregate Expenditures*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall *
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall