Aggregate Expenditures Model
The Aggregate Expenditures Model is an economic framework that examines the total spending in an economy, including consumption, investment, government spending, and net exports. It is based on the idea that total spending drives the level of economic output and income. The model helps to analyze the relationship between aggregate expenditures and the level of real GDP.
5 Key excerpts on "Aggregate Expenditures Model"
eBook - ePubEconomic Principles and Problems
A Pluralist Introduction
- Geoffrey Schneider(Author)
- 2021(Publication Date)
- Routledge(Publisher)
...It explains how each sector fits into Keynesian model and how changes in the components of aggregate expenditure work with the multiplier. One of the key insights from the Keynesian model is that prices often play a relatively unimportant role in determining national income. Instead, the interplay between various components of aggregate expenditure is the primary determinant. The chapter begins by describing the consumption and savings functions, which form the basis for the aggregate expenditure model. Then, we add in each additional sector of macroeconomic spending, including investment, government spending, and net exports (exports minus imports). And we incorporate net taxes (taxes minus transfers) into the model. This gives us a comprehensive model of the macroeconomy that can help us to analyze how changes in any of the model’s components will affect real gross domestic product (GDP). The chapter concludes with a brief discussion regarding economic debates over the Keynesian aggregate expenditure model and the mainstream aggregate demand and supply model...
eBook - ePubMacroeconomic Theory: A Short Course
A Short Course
- Thomas R. Michl(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...The multiplier is the basic analytical tool for understanding how fiscal policy works in the short run. An increase in autonomous consumption spending or an increase in investment spending also has a multiplier effect on GDP. This is also the basic analytical tool for understanding economic fluctuations. Changes in consumption spending and especially changes in investment spending lead to corresponding changes in GDP, but of larger magnitude. Investment spending is more important in practice in this regard because it is the most volatile element of spending in modern economies. In a sense, with its multiplier effects, investment spending is like the tail that wags the dog. 3.6 The Keynesian cross We can visualize the basic Keynesian model of aggregate demand by means of a diagram. Figure (3.1) shows the level of output (aka income) on the horizontal axis and the level of aggregate demand on the vertical axis. The 45-degree ray through the origin graphs the equilibrium condition, Equation (3.5). The equilibrium level of GDP must lie along this ray. Figure 3.1: The Keynesian cross diagram shows the equilibrium level of output where aggregate demand just equals output. At levels above the equilibrium, output exceeds demand so inventories will accumulate. At levels below the equilibrium, demand exceeds output so inventories will be drawn down. These changes in inventories provide signals to managers to adjust the level of output. To pin down where along the ray the equilibrium GDP lies, we graph the aggregate demand function, Equation (3.4). Notice that the vertical intercept for this function is autonomous spending, [ c 0 − c 1 T + I ¯ + G ], while the slope of the function is the marginal propensity to consume. That reflects the fact that consumption is the only kind of spending that responds to changes in income under the assumptions we maintain. The equilibrium level of GDP, Y*, occurs where the aggregate demand curve intersects the 45-degree ray...
eBook - ePub- Ola Olsson(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...Part III Macroeconomic Policy 11 IS—MP, Aggregate Demand, and Aggregate Supply DOI: 10.4324/9780203139936-14 In this third part of the book, we will now shift our focus in order to analyze the effects of macroeconomic policy. Most of this chapter will be based on the IS—MP model of the goods and money markets. This model is not micro-founded since it is not based on optimizing household behavior. Instead, it follows in the Keynesian tradition of assuming certain behaviors of variables at the macro level. Only the specifications of aggregate supply will rely on micro foundations. The analysis in this chapter is therefore quite different from the analysis in most other chapters. We start off with the traditional Keynesian framework where we discuss aggregate expenditure and multipliers. We then derive the aggregate demand function from equilibria in the goods and money markets. We also elaborate on the properties of the aggregate supply function under varying assumptions of price and wage stability and provide an overview of the Lucas critique of traditional Keynesian economic policy. After that, we present a new model that introduces financial intermediation into the standard IS—MP framework. Finally, we also present some of the main ideas in the so-called new Keynesian paradigm. 11.1 Aggregate Expenditure and the Multiplier The traditional Keynesian model focuses to a great extent on aggregate demand. The typical starting point is an equation describing the user side of the economy. Let total output be Y, then total expenditure in a closed economy model (we assume away exports X and imports M) is E t = C t + I t + G t. In equilibrium, we should have that total expenditure equals total output so that E t = Y t...
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...An economy is in equilibrium when aggregate demand equals aggregate supply. The aggregate demand curve shows the total amount of real output that buyers will purchase at alternative price levels during a given year. Movements along an aggregate demand curve are caused by changes in the price level of the economy. Shifts in the aggregate demand curve are caused by changes in non-price factors that affect household consumption expenditures, business investment, government expenditures, and net exports of goods and services. According to the multiplier effect, a change in any one of the components of aggregate demand (consumption, investment, government spending, or net exports) will have a magnified impact on national output and income. The size of the multiplier depends on the spending and saving habits of consumers and businesses. The aggregate supply curve shows the relationship between the level of prices and amount of real output that will be produced by the economy in a given year. The aggregate supply curve is horizontal when the economy is in deep recession or depression, upward-sloping when the economy approaches full employment, and vertical when the economy achieves full employment. Changes in factors such as resource prices, resource availability, and the level of technology will cause the aggregate supply curve to shift. The model of aggregate demand and aggregate supply can be applied to the problems of recession and inflation. According to this model, decreases in aggregate demand or aggregate supply can push the economy into recession; inflation may be the result of increases in aggregate demand or decreases in aggregate supply...
eBook - ePubFoundations of Macroeconomics
Its Theory and Policy
- Frederick S. Brooman(Author)
- 2017(Publication Date)
- Routledge(Publisher)
...However, National Expenditure cannot be used in place of aggregate demand, since they are quite distinct concepts and are equal only when the economy is in equilibrium. The total of National Expenditure is necessarily identical with National Product, because nothing can be sold without being bought; such an identity can therefore tell us nothing about the conditions of equilibrium. But the total of aggregate demand need not be equal to National Product, just as demand need not equal supply in the market for a single commodity; there is no reason why buyers should always wish to buy exactly the quantity that sellers wish to sell, and indeed the two sides of the market will find that their respective intentions are mutually compatible only when equilibrium exists. For the equilibrium of the whole economy, then, aggregate demand is the significant magnitude, not National Expenditure. Nevertheless, this does not mean that the attention given to National Expenditure in the previous chapter was wasted. When aggregate demand is submitted to more precise definition, it must fall into the same mold as the details of total “Expenditure on National Product” or Na-tional Expenditure were found to do. Just as it was necessary to eliminate expenditures on intermediate products and to count only purchases of final goods and services, so also in the case of demand double counting must be eliminated by including only “final” demands in the total. The demand for fixed capital formation can be taken as gross or net, according to whether it is made to include or exclude depreciation, just as actual expenditure may be gross or net. The classification of demand into categories – consumers’ demand, government demand for goods and services, and so on – follows logically exactly the same pattern as that adopted for expenditure. If statistics of demand were available, they could be tabulated in a form precisely similar to that of Table 2.2 (p...
