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Lecture-8-slides

Lecture-8-slides - 1 Lecture 8 The Aggregate Expenditures...

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Unformatted text preview: 1 Lecture 8: The Aggregate Expenditures Model Reference - Chapter 7 VII. Changes in Equilibrium GDP and the Multiplier A. Equilibrium GDP changes in response to changes in the investment schedule or to changes in the consumption schedule. Because investment spending is less stable than the consumption schedule, this chapter’s focus will be on investment changes. B. Figure 7-10 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). 2 1. Figure 7-10 shows the increase in aggregate expenditures from (C+ I g ) to (C + I g ) 1 . In this case, the \$5 billion increase in investment leads to a \$20 billion increase in equilibrium GDP. 2. Conversely, a decline in investment spending of \$5 billion is shown to create a decrease in equilibrium GDP of \$20 billion to \$450 billion. C. The multiplier effect: 1. A \$5 billion change in investment led to a \$20 billion change in GDP. This result is known as the multiplier effect. 2. Multiplier = change in real GDP / initial change in spending. In our example M = 4. 3 3. Three points to remember about the multiplier: a. The initial change in spending is usually associated with investment because it is so volatile. b. The initial change refers to an upshift or downshift in the aggregate expenditures schedule due to a change in one of its components, like investment....
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Lecture-8-slides - 1 Lecture 8 The Aggregate Expenditures...

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