Aggregate expenditure and equilibrium output. 28.2 The Aggregate Expenditures Model 2022-10-26
Aggregate expenditure and equilibrium output
Aggregate expenditure is the total amount of money that households, firms, and the government spend on goods and services in an economy. This includes consumer spending, investment spending by firms, and government spending. Equilibrium output, also known as full employment output or potential output, is the level of output produced by an economy when all of its resources are being used efficiently and there is no excess capacity.
In economics, the relationship between aggregate expenditure and equilibrium output is analyzed using the aggregate demand (AD) curve. The AD curve shows the relationship between the price level of goods and services and the quantity of goods and services demanded by households, firms, and the government. As the price level increases, the quantity of goods and services demanded decreases, and vice versa.
The intersection of the AD curve and the aggregate supply (AS) curve determines the equilibrium output of an economy. The AS curve shows the relationship between the price level and the quantity of goods and services that firms are willing and able to produce. When the AD curve intersects the AS curve at a point above the full employment output level, there is excess demand for goods and services, which leads to an increase in the price level and an increase in output. Conversely, when the AD curve intersects the AS curve at a point below the full employment output level, there is excess supply of goods and services, which leads to a decrease in the price level and a decrease in output.
There are several factors that can shift the AD curve. An increase in government spending, for example, will shift the AD curve to the right, resulting in a higher equilibrium output. Similarly, an increase in the level of household income will also shift the AD curve to the right, as households will have more money to spend on goods and services. On the other hand, a decrease in the level of household income will shift the AD curve to the left, resulting in a lower equilibrium output.
It is important to note that while changes in aggregate expenditure can affect the level of equilibrium output, they do not necessarily affect the unemployment rate. The unemployment rate reflects the percentage of the labor force that is not employed but is actively seeking work. An increase in aggregate expenditure may lead to an increase in output and employment, but it could also lead to an increase in the labor force as more people enter the job market.
In conclusion, aggregate expenditure and equilibrium output are closely related concepts in economics. Aggregate expenditure represents the total amount of money spent on goods and services in an economy, while equilibrium output is the level of output produced when all resources are being used efficiently. The AD curve shows the relationship between aggregate expenditure and the price level of goods and services, while the AS curve shows the relationship between the price level and the quantity of goods and services that firms are willing and able to produce. Changes in aggregate expenditure can affect the level of equilibrium output, but they do not necessarily affect the unemployment rate.
6.5 Equilibrium output and the AD curve
Conversely, if output is initially above the equilibrium level, Figure 6. . Producers responded by lowering production to try to reduce excess inventory. For example, assume as shown in the diagram, that output and incomes are only Y 1. Disposable personal income is consumed and saved. The Marginal Propensity to Consume and the Multiplier We can compute the multiplier for this simplified economy from the marginal propensity to consume.
Aggregate Expenditure and Equilibrium Output Flashcards
At every point on the line, the value of output and income measured on the horizontal axis equals the value of expenditure on the vertical axis. That is, a decrease in planned investment would lead to a multiplied decrease in real GDP. The aggregate expenditures curve for a price level of 1. Real GDP is determined by aggregate expenditure. The higher production of consumer goods to meet this extra spending would mean extra employment, higher payrolls, higher profits, and higher farm and professional and service incomes. Furthermore, we know that, when output is below potential output, employment is less than full and the unemployment rate u is higher than the natural rate u n.
6.3: Aggregate expenditure and equilibrium output in the short run
Then in equilibrium: Using the numbers in the example in Table 6. Aggregate expenditure and equilibrium output in the short run 135 In Figure6. Conversely, if output is initially above the equilibrium level, Figure 6. It follows that a shift in the curve will change equilibrium real GDP. There will be more than planned inventory when sales are overestimated. Since E is the only point on the AE line also on the line, it is the only point at which output and planned expenditure are equal. Aggregate income is the total income received by all factors of production in a given period.
Aggregate expenditure and equilibrium output in the short run
The flatter the aggregate expenditures curve, the smaller the multiplier. That follows, since the change in aggregate expenditure is the full amount of the spending increase instead of the portion of a tax rebate of the same magnitude that consumers decide to spend. Household income: higher income leads to higher spending and saving. If sales don't match expectations some inventories of products build up or fall short, capacity is not matched to demand and some sales opportunities are lost or costs are not recovered. Since we are assuming no government and no taxes, disposable personal income and personal income are the same. In this chapter we have developed a basic explanation for the shifts in AD that cause changes in real output.
Macroeconomics Chapter 8: Aggregate Expenditure and Equilibrium Output Flashcards
Taxes and the Aggregate Expenditure Function Suppose that the only difference between real GDP and disposable personal income is personal income taxes. AE curve for an economy with only consumption and investment expenditures. The line gives the equilibrium condition. For example, assume as shown in the diagram, that output and incomes are only Y 1. As part of the analysis, in the article he mentioned that he assumed an MPC of about two-thirds, since many households at the time were living paycheck-to-paycheck. When business changes its investment plans in response to predictions and expectations about future markets and profits, or exports change in response to international trade conditions, the multiplier translates these changes in autonomous expenditure into shifts in the AD curve. At point E the AE line crosses the line and.
Chapter 8 Aggregate Expenditure and Equilibrium Output 2f0cb1f8d442732650 f356949 d1466f8
Finally, we shall also assume that the only component of aggregate expenditures that may not be at the planned level is investment. In our example, the marginal propensity to consume is 0. The process continues, thus multiplying the impact of the reduction in aggregate expenditures resulting from the reduction in planned investment. The AE function in Figure 6. C unplanned inventory investment is positive.
Unplanned changes in business inventories: indicators of disequilibrium between planned and actual expenditures — incentives for businesses to adjust levels of em-ployment and output Y. Auto manufacturers, for example like to have an inventory of 30 to 60 days of finished vehicle sales available for retail buyers. Equilibrium real GDP in the upper panel determines the position of the AD curve in the lower panel. Planned exex-penditure is greater than current output. Autonomous aggregate expenditures are shown by the horizontal line in Panel a.
28.3 Aggregate Expenditures and Aggregate Demand
When aggregate output increases, additional income is generated and vice versa. AE does not equal real GDP. Income Y 2 is the only income at which aggregate expenditure just buys all current output. The AE line is above the line along which expenditure and output are equal. A lower price level will increase exports and reduce imports, increasing net exports. We turn now to an investigation of the relationship between the marginal propensity to consume and the multiplier. We get the following: Equation 28.
28.2 The Aggregate Expenditures Model
The reason is that, in addition to the autonomous part of consumption and planned investment, there are two other components of aggregate expenditures—government purchases and net exports—that we have also assumed are autonomous. Panel a shows aggregate expenditures curves for three different price levels. Heller applied the aggregate expenditures model. At any level of real GDP other than the equilibrium level, there is unplanned investment. Real GDP is determined by aggregate expenditure. A reduction in the price level will increase the real quantity of money and thus lower the interest rate. When output is above the equilibrium level, firms reduce output.
Income, Consumption, and Saving Y, C, and S 1. In Panel a , the intercept includes only the first two components. Labor markets I Aggregate Output and Aggregate Income Y A. The implied multiplier is thus 1. This model provides an important first insight into the sources of business cycles in the economy.