Aggregate Expenditures

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Aggregate Expenditures
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• Says Law supply creates its own demand
• Keynes not all income spent on output produced?
  underspending? unsold? inventories up? production
  cut? jobs cut? underspending
• Not self-regulating, uninterrupted prosperity
• Keynesian Economics Aggregate Expenditure Model

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• Keys
• 1) U and I caused by saving and investment
  decisions
• 2) Prices and wages downwardly inflexible
• Costs, unions, expectations, tradition
• 3) Internal and external factors affect

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Simplifications

• 1) Closed economy
• 2) Ignore govt for now
• 3) All saving personal
• 4) Ignore depreciation and net foreign factor
  income (assume 0)
• GDPNIPIDI

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Consumption and Saving

• Saving not spending DI C S
• (not same as investment)
• DI S (45 degree line)
• Saving and Consumption Schedules
• Break-Even Income (DIC S0)

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Propensities to Consume and Save

• Average propensity to consume APC
  consumption/income APS saving/income
• APS APC 1
• Marginal Propensity to Consume MPC change
  consumption/ change in income
• MPS MPC 1

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Nonincome Determinants of Consumption and Saving

• Wealth
• Real and financial assets save to generate
  wealth increase w? C up and S down
• Expectations
• Will I have a job tomorrow? Will there by
  inflation, shortages?
• Household Debt
• Increase consumption past income home equity
  loans and refinancing
• Taxation
• GDP not equal DI? plot C and S against GDP taxes
  shift C and S in same direction

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Shifts and Stability

• Movement from one point to another change in
  amount consumed
• Shift entire schedule change in the consumption
  schedule
• Wealth, expectations, and debt shift schedules in
  opposite directions
• Taxes shift both down

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Investment

• Private spending on new plant, capital equipment,
  machinery, etc.
• Marginal benefit expected (real) rate of return
• Marginal cost real interest rate on borrow money

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Investment Demand Curve

• How many dollars worth of investment projects
  have an expected rate of return of (cummulative)
• Financial price of investment

IR
Investment
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Shifts

• Acquisition, Maintenance, and Operating Costs (of
  capital goods)
• Higher costs? lower rate of return
• Business Taxes
• Reduces rate of return
• Tech Changes
• Typewriter? computer
• Stock of Capital Goods on Hand
• Excess capacity? ID down
• Expectations
• Expected rate of return

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Investment Schedule

• The amounts business firms collectively intend to
  invest at each possible level of GDP
• Independent current DI or real output
• Simplification level of GDP may induce more or
  less investment
• Derived from investment demand curve and current
  real IR

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IR
Inv
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8
20
GDP
Inv
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Instability of Investment

• Durability
• Indefinite useful life
• Irregularity of Innovation
• 1920s automobile
• Variability of Profits
• Current profits predict future
• Variability of Expectations
• Project current forward, often wrong

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Equilibrium GDP

• C I GDP
• Output whose production will create total
  spending just sufficient to purchase that output
• Unintended investment () or disinvestment (-) in
  inventories
• Surpluses and shortages
• Total spending (demand) lt total output (supply) ?
  GDP down
• Total spending gt total output? GDP up

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Leakages-Injections Approach

• Less direct, explains reason CIg?GDP except at
  equil.
• Saving leakage (withdrawal from spending)?
  spending lt output
• Not all output for consumption (capital goods)?
  investment injection
• Leakage gt injection? C I ltGDP? above eq ? GDP
  falls
• Injection gt leakage? C I gtGDP? below eq ?GDP
  rises
• Other injections Exports and G

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Unplanned Inventory increase
Unplanned Inventory decrease
S
S I
E
I
RGDP
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Planned vs. Actual Investment

• Planned investment and saving (not necessarily
  equal) and Actual investment and saving (which
  are definitionally equal)
• Actual planned unplanned
• Unplanned changes in inventory balance the
  equation saving and investment

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• The equality of planned investment and saving
  determine equilibrium level of GDP
• How achieve e GDP?1) Diff S and PI? diff
  production and spending
• 2) Diff production plans spending plans?
  unintended (dis)investment
• 3) As long as unintended (dis)investment? revise
  production plans (up or down)
• 4) e GDP where 0 (dis)investment