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10 - 1Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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The Aggregate Expenditures Model
10C H A P T E R
10 - 2Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Aggregate Expenditures ModelSimplifications...
•A Private Closed Economy•Defer Government & Taxes•Defer Exports and Imports•Real GDP = DI•Excess Production Capacity •Unemployed Labor Exists•More Aggregate Expenditures Doesn’t Affect Price Level
10 - 3Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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INVESTMENT DEMAND & SCHEDULE
Exp
ecte
d r
ate
of
retu
rn,
r, a
nd
real
in
tere
st r
ate,
i (
per
cen
ts)
Inve
stm
ent
(bil
lio
ns
of
do
lla
rs)
Investment(billions of dollars)
20
8
20
Real Domestic Product, GDP(billions of dollars)
I D
Ig
InvestmentDemandCurve
InvestmentSchedule
2020
10 - 4Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
EQUILIBRIUM GDP
GDP = C + Ig
Real Domestic OutputAggregate Expenditures Schedule
Equilibrium GDP
Disequilibrium
Graphical Analysis…
10 - 5Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Pri
vate
sp
end
ing
, C +
I g
(bill
ion
s o
f d
olla
rs)
o45
o
C
C + Ig
Ig = $20 Billion
Equilibrium
Real domestic product, GDP (billions of dollars)
370 390 410 430 450 470 490 510 530 550
(C + I g = GDP)
EQUILIBRIUM GDP
C =$450 Billion
$530
510
490
470
450
430
410
390
370
10 - 6Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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EQUILIBRIUM GDPSaving and Planned
Investment are Equal•Leakage•Injection
No Unplanned Changes in Inventories•Above Equilibrium•Below Equilibrium•Actual Investment
10 - 7Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
Pri
vate
sp
end
ing
(b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
510
490
470
450
430
430 450 470 490 510
(C + Ig ) 0
(C + Ig ) 1
Equilibrium GDPat Ig0 leveEquilibrium GDP
at Ig1 level of investmentl of investment
Increasesin the levelof C + Ig
10 - 8Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
Pri
vate
sp
end
ing
(b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
510
490
470
450
430
430 450 470 490 510
Equilibrium GDPat Ig2 level of investment
(C + Ig ) 0
(C + Ig ) 2
Decreasesin the levelof C + Ig
10 - 9Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES
Net ExportsPositive if exports > imports
Negative if imports > exportsNet Exports and Aggregate Expenditures
C + Ig + ( X – M )Xn = ( X – M )C + Ig + Xn
10 - 10Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES
Net Export ScheduleNet Exports and
Equilibrium GDP•Positive Net Exports•Negative Net Exports
Graphically…
10 - 11Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES
Pri
vate
sp
end
ing
(b
illi
on
s o
f d
oll
ars)
o45o
Real domestic product, GDP (billions of dollars)
510
490
470
450
430
430 450 470 490 510
Aggregate Expenditureswith Positive Net Exports
C + Ig
C + Ig + Xn1
Net
Exp
ort
s, X
n
(bil
lio
ns
of
do
lla
rs)
+5
0
-5
430 450 470 490 510 Real GDP
10 - 12Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES
Pri
vate
sp
end
ing
(b
illi
on
s o
f d
oll
ars)
o45o
Real domestic product, GDP (billions of dollars)
510
490
470
450
430
430 450 470 490 510
Aggregate Expenditureswith Negative Net Exports
C + Ig C + Ig + Xn2
Net
Exp
ort
s, X
n
(bil
lio
ns
of
do
lla
rs)
+5
0
-5
430 450 470 490 510 Real GDP
10 - 13Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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INTERNATIONAL ECONOMICLINKAGES
• Prosperity Abroad
• Tariffs
• Exchange Rates
10 - 14Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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GLOBAL PERSPECTIVENET EXPORTS OF GOODS, 2001
Source: World Trade Organization
-400 -140 -100 -60 -20 0 20 60 100
Negative Net Exports Positive Net Exports
Billions of Dollars
United States
United Kingdom
Canada
France
Germany
Italy
Japan
10 - 15Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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ADDING THE PUBLIC SECTOR
Simplifying Assumptions•Government Purchases do not Affect Consumption and Investment Spending
•All Taxes are Personal•Tax Collections are Fixed
Graphically…
10 - 16Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
ADDING THE PUBLIC SECTOR
Ag
gre
gat
e E
xpen
dit
ure
s (b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
470 550
C
C + Ig + Xn
C + Ig + Xn + GGovernmentSpending of$20 Billion
Government Purchases and Equilibrium GDP
10 - 17Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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ADDING THE PUBLIC SECTORLump-Sum Tax and Equilibrium GDP
Ag
gre
gat
e E
xpen
dit
ure
s (b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
490 550
C + Ig + Xn + G
Ca + Ig + Xn + G
$15 Billion Decreasein Consumption froma $20 Billion Increasein Taxes
10 - 18Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
FULL-EMPLOYMENT GDP
Ag
gre
gat
e E
xpen
dit
ure
s (b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
490 510 530
AE0
Recessionary Gap
AE1
530
510
490
Recessionary Gap= $5 Billion
Full Employment
10 - 19Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
FULL-EMPLOYMENT GDP
Ag
gre
gat
e E
xpen
dit
ure
s (b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
490 510 530
AE0
Inflationary Gap
AE2
530
510
490
Inflationary Gap= $5 Billion
Full Employment
10 - 20Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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InjectionsLeakagesUnplanned Changes in Inventories
Recessionary GapInflationary Gap
FULL-EMPLOYMENT GDP
10 - 21Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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APPLICATIONS OF THE MODEL
•U.S. Recession of 2001
•U.S. Inflation in the Late 1980s
10 - 22Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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LIMITATIONS OF THE MODEL
•Does Not Show Price-Level Changes
• Ignores Premature Demand-Pull Inflation
•Limited Real GDP to the Full-Employment Level
•Does not Deal with Cost-Push Inflation
•Does not Allow for “Self-correction”
planned investmentinvestment scheduleaggregate expenditures scheduleequilibrium GDPleakageinjectionunplanned changes in inventoriesnet exportslump-sum taxrecessionary gapinflationary gap
Copyright McGraw-Hill/Irwin, 2005ENDBACK
10 - 24Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Coming Next:
AGGREGATE DEMANDAND
AGGREGATE SUPPLY
CHAPTER 11
