BU204_Krugman_Chapter 11

BU204_Krugman_Chapter 11 - > Income and Expenditure B E A...

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>> FTER THE TERRORIST ATTACKS ON September 11, 2001, many leading figures in American life made speeches urging the shocked nation to show fortitude—and keep buying con- sumer goods. “Do your business around the country. Fly and enjoy America’s great destination spots,” urged President Bush. “Go shopping,” said former president Clinton. Such words were a far cry from British prime minister Winston Churchill’s famous 1940 declaration, in the face of an immi- nent Nazi invasion of the United Kingdom, that he had nothing to offer but “blood, toil, tears, and sweat.” But there was a reason politicians of both parties called for spend- ing, not sacrifice. The economy was already BE A PATRIOT AND SPEND What you will learn in this chapter: The meaning of the aggregate consumption function, which shows how current disposable in- come affects consumer spending How expected future income and aggregate wealth affect con- sumer spending The determinants of investment spending, and the distinction between planned investment spending and unplanned inventory investment How the inventory adjustment process moves the economy to a new equilibrium after a demand shock Why investment spending is con- sidered a leading indicator of the future state of the economy A chapter 269 11 Income and Expenditure After 9/11, Americans traveled less but shopped more for goods that they could enjoy at home like barbecue grills and swimming pools. Brooke Slezak/Taxi/Getty Images Scott Olson/Getty Images in recession, mainly because of a 14% drop in real investment spending. A plunge in consumer spending would have greatly deepened the recession. Fortunately, that didn’t happen: American consumers bought less of some goods and services, such as air travel, but bought more of others. As we explained in Chapter 10, the source of most, but not all, recessions since World War II has been negative demand shocks, leftward shifts of the aggregate de- mand curve. Over the course of this and the next three chapters, we’ll continue to focus on the short-run behavior of the economy, looking in detail at the factors that cause such shifts of the aggregate de- mand curve. In this chapter, we begin by looking at the determinants of consumer
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270 PART 5 SHORT-RUN ECONOMIC FLUCTUATIONS Consumer Spending Should you splurge on a restaurant meal or save money by eating at home? Should you buy a new car and, if so, how expensive a model? Should you redo that bathroom or live with it for another year? In the real world, households are constantly confronted with such choices—not just about the consumption mix but about how much to spend in total. These choices, in turn, have a powerful effect on the economy: consumer spending normally accounts for two-thirds of total spending on final goods and serv- ices. So changes in consumer spending can produce significant shifts of the aggregate demand curve. And as we know from Chapter 10, the position of the aggregate de-
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This note was uploaded on 05/18/2010 for the course BU204 MACROECONO taught by Professor Joseruiz during the Spring '09 term at Kaplan University.

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BU204_Krugman_Chapter 11 - > Income and Expenditure B E A...

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