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Unformatted text preview: Define: Planned aggregate expenditure (PAE) as the total planned spending on final goods and services. 4 components of aggregate expenditure AE = C + I + G + NX 36 Suppose aggregate production (GDP) = 100 • We know from Week 1 that actual expenditure must equal 100? • However planned expenditure can differ from 100. Why is actual expenditure not always equal to planned expenditure? (Unplanned) Inventories 37 Suppose PAE = 90, Y = 100 AE = PAE + ΔInventories = 100 100 = 90 + 10 = 100 Planned spending equals 90 but firms produced 100, the extra 10 units is assumed to be “purchased” by firms and becomes an inventory of unsold goods. The firms did not plan to “buy” the 10 units of goods and so it is called unplanned inventory investment. 38 Actual Aggregate Expenditure (AE) NX G I C AE + + + = Planned Aggregate Expenditure (PAE) NX G I C PAE P + + + = I = actual investment (includes unplanned inventory investment P I = planned investment 39 So far we have defined PAE, but now we need an economic model of the determinants of PAE. To begin we will focus on what determines consumption expenditure. Hypothesize that an important influence on consumption spending by households is current disposable income. Disposable income = income less (net) taxes = Y – T 40 ) ( T Y c C C − + = C is exogenous (or autonomous) consumption. • Factors (other than disposable income) that could affect consumption, e.g. wealth, real interest rates • The value of an exogenous variable is determined outside of the model under consideration ) ( T Y c − captures the effect of disposable income on consumption (sometimes called induced consumption) c = marginal propensity to consume (parameter). 41 MPC is the change in consumption when disposable income changes by a dollar. ) ( T Y c C C − + = c T Y C MPC = − ∆ ∆ = ) ( Assume: 0 < c < 1 A dollar increase in disposable income raises consumption by less than one dollar 42 43 C ) ( T Y c C C − + = C slope = c 0 (YT) 44 Given our definition of PAE and model of consumption expenditure we can rewrite PAE as follows NX G I C PAE P + + + = ) ( T Y c C C − + = NX G I T Y c C PAE P + + + − + = ) ( cY NX G I cT C PAE P + + + + − = ] [ • The first terms is independent of output and is called exogenous expenditure • The second term is called induced expenditure since it depends on output 45 We define equilibrium as being when firms produce a level of output that equals planned aggregate expenditure PAE Y = Using the equation for PAE, cY NX G I cT C PAE P + + + + − = ] [ and the above definition of equilibrium it is straightforward to solve for equilibrium output. 46 PAE Y = cY NX G I cT C PAE P + + + + − = ] [ Substituting cY NX G I cT C Y P + + + + − = ] [ Collect terms in Y ] [ ) 1 ( NX G I cT C c Y P + + + − = − ] [ ) 1 ( 1 NX G I cT C c Y P e + + + − − = e Y is shortrun equilibrium output Another component of aggregate expenditure is … Investment expenditure ( I ) • The purchase of new buildings and houses, plant and equipment and increases in stocks (inventories) by the private sector • What determines current investment expenditure? – Real interest rates – Expectations – In the Keynesian aggregate expenditure model, I is exogenous (it is not determined by Y ) 1 0 r I Investment expenditure . 2 0 Income ( Y ) I (investment expenditure) I 4 A Diagram Showing Consumption and Investment C, I cY C C + = P I Y 5 Planned Aggregate Expenditure cY I C I C PAE P P + + = + = P I C PAE + = C, I, PAE cY C C + = P I Y...
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 One '08
 henry
 Economics, Macroeconomics, Inflation, Unemployment, Keynesian economics

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