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Chapter 8 Aggregate Expenditure and Equilibrium Output

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Ciembra Rice

on 19 November 2014

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Transcript of Chapter 8 Aggregate Expenditure and Equilibrium Output

The Keynesian Theory OF Consumption
Aggregate output
-total quantity of goods and services produced (or supplied) in an economy given period
It can also be known as Gross Domestic Product (GDP)
Aggregate income
- total income received by all factors of production in a given period
Aggregate output(income)(Y)
- a combined term used to remind you of the exact equality between aggregate output and aggregate income
Consumption function
- relationship between consumption and income
Chapter 8 Aggregate Expenditure and Equilibrium Output
Planned Investment
planned investment (I)

Those additions to capital stock and inventory that are planned by firms. Spending by firms to acquire capital goods and inventories. It is distinguished from unplanned (unexpected) investments which tie up cash in slow moving or unsaleable inventory of finished goods or merchandise.



The Determination of Equilibrium Output (Income)
The equilibrium level of income (output)

The income (output) level at which aggregate supply equals aggregate demand. This is where the total output of goods and services equals the total quantity of goods and services demanded.
is determined by the aggregate demand and aggregate supply. In the Keynesian model the equilibrium national income or output is determined at that point where aggregate output must equal aggregate demand.

Actual Investment
The Multiplier
The multiplier is a estimated # by which the amount of a capital investment is multiplied to give the total amount by which national income is increased.
It also show the change in some exogenous variables, the multiplier effect is used when there is a new injection into our economy.
EX. Government funds building a new high wash

Increase in exports aboard

Reduction of interest rate or Tax rate.

The final income arising from any new injection of spending. So, when more money is spent, the more income is earn.

The term referred to as Marginal propensity Save(MPS)

Group members
Miguel Talford
Aulaya Williams- Grant
Jason White
Aron Stewart
Ciembra Rice
Pearson Wheatley
Aggregate consumption function shows the level of aggregate consumption at each level of aggregate income. The upward slope indicates that higher levels of income lead to higher levels of consumption spending
To calculate the slope you take the aggregate consumption and divide it by aggregate income
Actual Investment
The actual amount of investment that takes place,includes items such as unplanned changes in inventories.
Actual investment= planned investment + unplanned changes in inventories
Inventory changes are caused by a difference between aggregate expenditures and aggregate output.
If actual and planned investment differ, then aggregate expenditures are not equal to aggregate output, and the macroeconomy is not in equilibrium.

The Keynesian Theory Of Consumption continued
C
aggregate saving (S)
: The part of aggregate income that is not consumed.
S ≡ Y – C
A form of saving.
Can be explained as the summation of the savings made by all the individuals. The calculation of aggregate saving is done on the basis of the savings made by the citizens of a country.
For example, when we the nation acquires real domestic assets, such as new housing, new machinery, new factories and offices, additions to a firm’s inventory of goods, or new claims on assets overseas.

Marginal propensity to save (MPS)

Is the fraction of a change in income that is saved.
For example, if a household earns one extra dollar of disposable income, and the marginal propensity to save is 35 cent, then of that dollar, the household will spend 65 cents and save 35 cents. It can also go the other way, referring to the decrease in saving that results from a decrease in income.

The Keynesian Theory Of Consumption continued...
Marginal propensity to consume (MPC)
Is the fraction of a change in income that is consumed, or spent.
If a household earns one extra dollar of disposable income, and the marginal propensity to consume is 65 cents, then of that dollar, the household will spend 65 cents and save 35 cents. Obviously, the household cannot spend more than the extra dollar (without borrowing).
MPC + MPS ≡ 1 The marginal propensity to save and consume will always equal 1
.2 +.8 = 1
So if I had $10 extra dollars of disposable income I couldn’t spend any more than $10 but if I spend $10 that means that there is no marginal propensity to save.
.2 * $10 = $2 (If I wanted to save 20% MPS would be $2)
.8 * $10 = $8 (If I want to save 20% then marginal propensity to consume would be $8)
The Keynesian Theory Of Consumption continued...
Equilibrium can be expressed in a formula

Y= E or Y= C+I+G
Y= national income.
E= aggregate demand of – expenditures on goods and services
C= household consumption
I= Investment demand
G= Govt. demand for goods and services

Aggregate supply

the quantity of goods and services producers make available for sale and is equal to the money income received by the owners of the factors of production.
also refers to total production of goods and services in the economy. It is represented by C+S.
Aggregate demand

refers to the sum of total expenditures on goods and services in the economy. It is represented by C+I+G.
the sum that buyers plan to spend on output.
Simple stated, aggregate demand is the total amount of goods demanded in the economy.
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