ifeel aggregate y, c s 4

7/30/2019 Ifeel Aggregate y, c s 4

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Outline

I. Aggregate output and aggregateincome (Y)

II. Equilibrium Aggregate Output(income)

III. The multiplier


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I. Aggregate Output and

Aggregate Income (Y)

Aggregate outputis the total quantityof goods and services produced (orsupplied) in an economy in a given

period. Aggregate incomeis the total income

received by all factors of production ina given period.


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I. Aggregate Output and

Aggregate Income (Y)

Aggregate output (income) (Y)is acombined term used to remind you of theexact equality between aggregate output

and aggregate income.


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Income, Consumption,

and Saving (Y, C, and S)

Saving (S)is the part of its income that ahousehold does not consume in a given

period. Distinguished from savings, which isthe current stock of accumulated saving.

S Y C


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Explaining Spending Behavior

All income is either spent on consumption or saved inan economy in which there are no taxes.

Saving = Aggregate Income Consumption


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Household Consumption and

Saving Some determinants of aggregate

consumption include:

1. Household income

2. Interest rates3. Households expectations about

the future


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Saving

The relationship betweenconsumption and income iscalled the consumption

function.

For an individualhousehold, the consumptionfunction shows the level of

consumption at each levelof household income.


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Saving

The slope of the

consumption function (b) iscalled the marginalpropensity to consume(MPC), or the fraction of achange in income that isconsumed, or spent.

C a bY =

0 1 b


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An Aggregate Consumption Function

C Y 100 75.AGGREGATEINCOME, Y

(BILLIONS OFDOLLARS)

AGGREGATECONSUMPTION, C

(BILLIONS OFDOLLARS)

0 100

80 160

100 175

200 250

400 400

400 550

800 700

1,000 850


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An Aggregate Consumption Function

Derived from the Equation C= 100 +

.75Y

At a national income of

zero, consumption is$100 billion (a).

For every $100 billionincrease in income

(D

Y), consumption risesby $75 billion (DC).

C Y 100 75.


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Deriving a Saving Function

from a Consumption Function

S Y C Y - C = S

AGGREGATEINCOME

(Billions ofDollars)

AGGREGATECONSUMPTION


AGGREGATESAVING


0 100 -100

80 160 -80100 175 -75

200 250 -50

400 400 0

600 550 50

800 700 100

1,000 850 150

C Y 100 75.


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Planned Investment (I)

Investmentrefers to purchases by firms ofnew buildings and equipment and additions toinventories, all of which add to firms capital

stock.

change in inventory= production sales


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The Planned Investment Function

For now, we will assumethat planned investment isfixed. It does not change

when income changes. When a variable, such as

planned investment, isassumed not to depend on

the state of the economy, itis said to be anautonomous variable.


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Planned Aggregate Expenditure

(AE)

Planned aggregateexpenditureis thetotal amount the

economy plans tospend in a givenperiod. It is equal toconsumption plusplanned investment.

ICAE


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II. Equilibrium Aggregate

Output (Income)

Equilibriumoccurs when there is notendency for change. In the macroeconomicgoods market, equilibrium occurs when

planned aggregate expenditure is equal toaggregate output.

aggregate output Yplanned aggregate expenditure AE=C+ Iequilibrium: Y= AE, orY= C+ I


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Output (Income)

Y > C+ I

aggregate output > planned aggregate expenditureinventory investment is greater than planned

actual investment is greater than planned investment

Disequilibria:

C+ I > Yplanned aggregate expenditure > aggregate outputinventory investment is smaller than planned

actual investment is less than planned investment


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Output (Income)


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Output (Income)

C Y 100 75. I 25Deriving the Planned Aggregate Expenditure Schedule and Finding Equilibrium (All Figures in Billions ofDollars) The Figures in Column 2 are Based on the Equation C= 100 + .75Y.

(1) (2) (3) (4) (5) (6)

AGGREGATEOUTPUT

(INCOME) (Y)AGGREGATE

CONSUMPTION (C)PLANNED

INVESTMENT (I)

PLANNEDAGGREGATE

EXPENDITURE (AE)C+ I

UNPLANNEDINVENTORY

CHANGEY (C+ I)

EQUILIBRIUM?(Y= AE?)

100 175 25 200 100 No

200 250 25 275 75 No

400 400 25 425 25 No500 475 25 500 0 Yes

600 550 25 575 + 25 No

800 700 25 725 + 75 No

1,000 850 25 875 + 125 No


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Output (Income)

AE C I (1)

C Y 100 75.(2)

I 25(3)


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The Saving/Investment

Approach to Equilibrium

If planned investment is exactly equal to saving, thenplanned aggregate expenditure is exactly equal to

aggregate output, and there is equilibrium.


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The S=IApproach to Equilibrium

Aggregate output will be equal to plannedaggregate expenditure only when savingequals planned investment (S= I).


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III. The Multiplier

The multiplieris the ratio of the change in theequilibrium level of output to a change in someautonomous variable.

In this chapter, for example, we consider plannedinvestment to be autonomous.


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III. The Multiplier

The multiplier of autonomous investmentdescribes the impact of an initial increase inplanned investment on production, income,

consumption spending, and equilibriumincome.


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III. The Multiplier Equation

multiplierMPS

1

, or multiplier MPC

1

1

The size of the multiplier depends on the slope of

the planned aggregate expenditure line.


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The Multiplier

After an increase inplanned investment,equilibrium output is

four times theamount of theincrease in plannedinvestment.


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The Size of the Multiplier

in the Real World

The size of the multiplier in the U.S.economy is about 1.4. For example, asustained increase in autonomous

spending of $10 billion into the U.S.economy can be expected to raise realGDPover time by $14 billion.


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The Paradox of Thrift

When householdsbecome concernedabout the future and

decide to save more,the correspondingdecrease inconsumption leads toa drop in spendingand income.

Households end up consuming less, butthey have not saved any more.


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ifeel aggregate y, c s 4

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