A S S I G N M E N T

W E E K 3
FELICIA IRENE - 202250351

9. Classify each of the following items as a final or an intermediate good or service,

and identify which is a component of consumption expenditure, investment, or
government expenditure on goods and services.
a. Financial services bought by China Investment Corporation
b. Desktop computers bought by Barclays
c. New taximeters imported from China by the London Taxi Company
d. New DVD bought by a student from Virgin Megastore

Answer

a. Intermediate Service (the company is going to include it with it's final

product and it's not included in GDP)
b. Final Good (Part of Investment expenditure)
c. Final Good (Part of Investment expenditure)
d. Final Good (Part of consumption expenditure)
Expenditure
M U L T I P L I E RS

FELICIA IRENE - 202250351

4 components Aggregate Expenditure :
1. Consumption expenditure THESE FOUR
2. Investment
3. Government expenditure on goods
COMPONENTS
and services SUM TO REAL GDP
4. Net exports (Export minus Import)

DISPOSABLE INCOME 4 consumption and saving plans :

= Aggregate income minus taxes +
transfer payments
Aggregate income equals real GDP, so
disposable income depends on real GDP.
1. Disposable income
2. Real interest rate
3. Wealth
4. Expected future income
CONSUMPTION FUNCTION &
SAVING FUNCTION
 MARGINAL PROPENSITIES TO
CONSUME AND SAVE
MARGINAL PROPENSITY
TO CONSUME (MPC ) =
MARGINAL PROPENSITY
TO SAVE (MPS ) =
OPTIONAL =
SLOPES AND MARGINAL PROPENSITIES
The slope of the consumption function is the marginal propensity to consume, and the
slope of the saving function is the marginal propensity to save.
 CONSUMPTION AS A IMPORT FUNCTION
FUNCTION OF REAL GDP
Consumption expenditure changes The relationship between imports and
when disposable income changes and real GDP is determined by the marginal
disposable income changes when real propensity to import, which is the
GDP changes. So consumption fraction of an increase in real GDP that
expenditure depends not only on is spent on imports.
disposable income but also on real GDP
 AGGREGATE PLANNED
EXPENDITURE
To calculate aggregate planned expenditure at a given real GDP, we add the
expenditure components together. The first column of the table shows real GDP, and
the second column shows the planned consumption at each level of real GDP.

The constant components Investment (I), government expenditure on goods and

services (G), and exports (X) are shown by the horizontal lines in the figure.
Consumption expenditure (C) is the vertical gap between the lines labeled I + G + X and
I + G + X + C.

consumption expenditure - imports = induced expenditure.

The sum of investment, government expenditure, and exports, which does not vary with
real GDP, is called autonomous expenditure
 EQUILIBRIUM EXPENDITURE
Equilibrium expenditure is the level of aggregate expenditure that occurs when
aggregate planned expenditure equals real GDP. Equilibrium expenditure is a level of
aggregate expenditure and real GDP at which spending plans are fulfilled.
CONVERGENCE
TO
EQUILIBRIUM

FROM BELOW EQUILIBRIUM

&
FROM ABOVE EQUILIBRIUM
THE MULTIPLIER
The multiplier is the amount by which a
change in autonomous expenditure is
magnified or multiplied to determine the
change in equilibrium expenditure and
real GDP

The additional expenditure by

businesses means that aggregate
expenditure and real GDP increase. The
increase in real GDP increases
disposable income, and with no income
taxes, real GDP and disposable income
increase by the same amount. The
increase in disposable income brings an
increase in consumption expenditure.
And the increased consumption
expenditure adds even more to
aggregate expenditure
 IMPORTS AND INCOME THE MULTIPLIER PROCESS
TAXES
Imports and income taxes influence the The multiplier effect isn’t a one­shot
size of the multiplier and make it smaller event. It is a process that plays out over
than it otherwise would be. To see why a few months.
imports make the multiplier smaller, think
about what happens following an
increase in investment. The increase in
investment increases real GDP, which in
turn increases consumption
expenditure. But part of the increase in
expenditure is on imported goods and
services.
 AGGREGATE EXPENDITURE AND
AGGREGATE DEMAND
The aggregate expenditure curve is the relationship between the aggregate planned
expenditure and real GDP, all other influences on aggregate planned expenditure remaining
the same

1. Wealth effect = Other things remaining the same, the

higher the price level, the smaller is the purchasing power
DERIVING THE
AGGREGATE
DEMAND CURVE
- of wealth.
2. Substitution effects = For a given expected future price
level, a rise in the price level today makes current goods
and services more expensive relative to future goods and
services and results in a delay in purchases—an
intertemporal substitution