CHAPTER12Aggregate Expenditure andOutput in the Short RunChapterOutlineandLearningObjectives12.1TheAggregateExpenditureModel12.2DeterminingtheLevelofAggregateExpenditureintheEconomyIntel12.3 GraphingMacroeconomicEquilibrium12.4 The Multiplier Effect12.5TheAggregateDemandCurveAppendix:TheAlgebra ofMacroeconomicEguilibrium
1 Chapter Outline and Learning Objectives 12.1 The Aggregate Expenditure Model 12.2 Determining the Level of Aggregate Expenditure in the Economy 12.3 Graphing Macroeconomic Equilibrium 12.4 The Multiplier Effect 12.5 The Aggregate Demand Curve Appendix: The Algebra of Macroeconomic Equilibrium CHAPTER 12 CHAPTER Aggregate Expenditure and Output in the Short Run
TheAggregateExpenditureModel12.1LEARNINGOBJECTIVEUnderstandhowmacroeconomicequilibriumis determined intheaggregateexpendituremodel@2015PearsonEducafion,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 2 The Aggregate Expenditure Model 12.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model
AggregateExpenditureModelIn this chapter, we will build up a simple mathematical model of theeconomy known as the aggregate expenditure model.Aggregate expenditure model: A macroeconomic model thatfocuses on the short-run relationship between total spending and reaGDP, assuming that the price level is constant.Aggregate expenditure (AE): Total spending in the economy: thesum of consumption,planned investment,government purchases,and net exports.This model will focus on short-run determination of total output in aneconomy.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 3 Aggregate Expenditure Model In this chapter, we will build up a simple mathematical model of the economy known as the aggregate expenditure model. Aggregate expenditure model: A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant. Aggregate expenditure (AE): Total spending in the economy: the sum of consumption, planned investment, government purchases, and net exports. This model will focus on short-run determination of total output in an economy
FourComponents of Aggregate ExpenditureThe four components in our model will be the same four that weintroduced in a previous chapter as the components of GDP:: Consumption (C): Spending by households on goods and services: Planned investment (): Planned spending by firms on capitalgoods, and by households on new homesGovernment purchases (G): Spending on all levels of governmentongoodsandservicesNet exports (NX): The value of exports minus the value of importsAggregate expenditure is the sum of these:AE=C+I+G+NX@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 4 Four Components of Aggregate Expenditure The four components in our model will be the same four that we introduced in a previous chapter as the components of GDP: • Consumption (C): Spending by households on goods and services • Planned investment (I): Planned spending by firms on capital goods, and by households on new homes • Government purchases (G): Spending on all levels of government on goods and services • Net exports (NX): The value of exports minus the value of imports Aggregate expenditure is the sum of these: AE = C + I + G + NX
Planned Investmentys.ActuallnvestmentOur aggregate expenditure model uses planned investment, ratherthan actual investment; in this way, the definition of aggregateexpenditures is slightly different from GDP.The difference is that planned investment spending does not includethe build-up of inventories: goods that have been produced but notyet sold:Plannedinvestment=Actualinvestment-unplannedchangeininventoriesAlthough the Bureau of Economic Analysis measures actualinvestment, we will assume that their measurement is close enoughto planned investment to use in our estimates of aggregateexpenditures.2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 5 Planned Investment vs. Actual Investment Our aggregate expenditure model uses planned investment, rather than actual investment; in this way, the definition of aggregate expenditures is slightly different from GDP. The difference is that planned investment spending does not include the build-up of inventories: goods that have been produced but not yet sold: Planned investment = Actual investment – unplanned change in inventories Although the Bureau of Economic Analysis measures actual investment, we will assume that their measurement is close enough to planned investment to use in our estimates of aggregate expenditures