chap10lecture notes

chap10lecture notes - CHAPTER TEN AGGREGATE EXPENDITURES:...

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CHAPTER TEN AGGREGATE EXPENDITURES: THE MULTIPLIER, NET EXPORTS AND GOVERNMENT INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Describe and define the multiplier effect. 2. State the relationships between the multiplier and the MPS and the MPC. 3. Define the net export schedule. 4. Explain the impact of positive (or negative) net exports on aggregate expenditures and the equilibrium level of real GDP. 5. Explain the effect of increases (or decreases) in exports on real GDP. 6. Explain the effect of increases (or decreases) in imports on real GDP. 7. Describe how government purchases affect equilibrium GDP. 8. Describe how personal taxes affect equilibrium GDP. 9. Explain what is meant by the balanced-budget multiplier and why it equals 1. 10. Identify a recessionary gap and explain its effect on real GDP. 11. Identify an inflationary gap and explain its effect. 12. Explain the relationship between the concept of recessionary gap and the Great Depression. 13. Explain the relationship between the Vietnam era inflation and the inflationary gap concept. 14. List four deficiencies of the aggregate expenditures model. 15. Define and identify terms and concepts listed at the end of the chapter. LECTURE NOTES I. Introduction A. This chapter examines why and how a particular level of real GDP might change. B. The revised model adds realism by including the foreign sector and government in the aggregate expenditures model. C. The new model is then applied to two historical periods and some of its deficiencies are considered. The focus remains on real GDP. II. Changes in Equilibrium GDP and the Multiplier A. Equilibrium GDP changes in response to changes in the investment schedule or to changes in the saving-consumption schedules. Because investment spending is less stable than the saving-consumption schedule, this chapter’s focus will be on investment changes. B. Figure 10-1 shows the impact of changes in investment. Suppose investment spending rises (due to a rise in profit expectations or to a decline in interest rates). 131
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Aggregate Expenditures: The Multiplier, Net Exports and Government 1. Figure 10-1a page 200 shows the increase in aggregate expenditures from (C + I g )0 to (C + I g )1. 2. Figure 10-1b shows the shift in investment schedule from I g0 to I g1 . C. In both cases , the $5 billion increase in investment leads to a $20 billion increase in equilibrium GDP. D. Conversely, a decline in investment spending of $5 billion is shown to create a decrease in equilibrium GDP of $20 billion. Draw table 10-1 page 201 here Multiplier Effect Round of Available MPC = MPS = Spending to Spend 0.75 0.25 1 $5.00 $3.75 $1.25 2 $3.75 $2.81 $0.94 3 $2.81 $2.11 $0.70 4 $2.11 $1.58 $0.53 5 $1.58 $1.19 $0.40 6 $1.19 $0.89 $0.30 7 $0.89 $0.67 $0.22 8 $0.67 $0.50 $0.17 9 $0.50 $0.38 $0.13 10 $0.38 $0.28 $0.09 11 $0.28 $0.21 $0.07 12 $0.21 $0.16 $0.05 13 $0.16 $0.12 $0.04 14 $0.12 $0.09 $0.03 15 $0.09 $0.07 $0.02 16 $0.07 $0.05
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