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Short Run Spending and Output Analysis

1) The document discusses planned aggregate expenditure (PAE), which is the total planned spending on final goods and services in an economy. 2) PAE has four main components: consumption (C), investment (I), government purchases (G), and net exports (NX). 3) A consumption function shows the relationship between consumption spending and disposable income. Consumption depends largely on disposable income, with the marginal propensity to consume measuring the change in consumption from a change in income.

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113 views20 pages

Short Run Spending and Output Analysis

1) The document discusses planned aggregate expenditure (PAE), which is the total planned spending on final goods and services in an economy. 2) PAE has four main components: consumption (C), investment (I), government purchases (G), and net exports (NX). 3) A consumption function shows the relationship between consumption spending and disposable income. Consumption depends largely on disposable income, with the marginal propensity to consume measuring the change in consumption from a change in income.

Uploaded by

scribd225
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Spending and

Output in the
Short Run: Part 1

MB MC

Lecture 4
MB MC

Contents

 1. Planned Aggregate Expenditure


 2. The Components of Planned Aggregate Expenditure
 3. Planned Spending Versus Actual Spending
 4. Consumption Function
 5. Planned Aggregate Expenditure and Output

Macro Lecture 4 Slide 2


MB MC

Planned Aggregate Expenditure

 Planned Aggregate Expenditure


 Total planned spending on final goods and
services
 Output at each point in time is determined
by the amount that the people throughout
the economy want (plan) to spend.

Macro Lecture 4 Slide 3


MB MC

Planned Aggregate Expenditure

 The Components of Planned Aggregate


Expenditure
1. Consumer expenditure or
Consumption (C)
Household spending on durables,
nondurables, and services

Macro Lecture 4 Slide 4


MB MC

Planned Aggregate Expenditure

 The Components of Planned Aggregate


Expenditure
2. Investment expenditure (I),
 New capital goods spending
New residential spending

Increases in inventories

Macro Lecture 4 Slide 5


MB MC

Planned Aggregate Expenditure

 The Components of Planned Aggregate


Expenditure
3. Government purchases (G)
Federal,state, and local governments’
spending on goods and services

Macro Lecture 4 Slide 6


MB MC

Planned Aggregate Expenditure

 The Components of Planned Aggregate


Expenditure
4. Net exports (NX)
Exports - imports
Therefore,

PAE = C + I + G + NX

Macro Lecture 4 Slide 7


MB MC

Planned Aggregate Expenditure

 Planned Spending Versus Actual


Spending
 Inthe Keynesian model, output is
determined by PAE.
 Actual expenditures may not equal PAE.
If inventories are larger than expected:

o I > planned Investment (IP)


If inventories are smaller than expected:

o I < IP

Macro Lecture 4 Slide 8


MB MC

Planned Aggregate Expenditure


 Planned Aggregate Expenditure
 PAE = C + Ip + G + NX
 Because firms meet demand at preset prices
and cannot control how much they sell, their
actual investment (including inventory) may differ
form planned investment. That’s why we write Ip
for planned investment to distinguish from I
(actual investment).

Macro Lecture 4 Slide 9


MB MC

Planned Aggregate Expenditure

 Planned Aggregate Expenditure


 PAE = C + Ip + G + NX
 For consumption, govt. spending and
net export we assume planned and
actual spending are the same. So we
need not write Cp Gp, etc.

Macro Lecture 4 Slide 10


MB MC

Planned Aggregate Expenditure

 Consumer Spending and the Economy

 Consumption (C) accounts for two thirds of


total spending
 The primary determinant of C is
disposable income or Y - T ( or Yd)

Macro Lecture 4 Slide 11


MB MC

Planned Aggregate Expenditure

 Consumption Function

It shows the relationship between


consumption spending and its
determinants, in particular,
disposable (after-tax) income

Macro Lecture 4 Slide 12


MB MC

Planned Aggregate Expenditure

 Relating Consumption to Income and Other


Determinants
 The consumption function:
 C = č + c(Y - T)
 č = a constant; represents the non income determinant
of C (also called autonomous consumption).
Consumer optimism

Wealth

Real interest rates

Macro Lecture 4 Slide 13


MB MC

Planned Aggregate Expenditure

 Consumption Function
C = č + c(Y - T)
 C = č + cYd

 c = marginal propensity to consume


 c = the amount by which consumption
rises when disposable income rises by
$1; 0 < c < 1

Macro Lecture 4 Slide 14


MB MC

A Consumption Function

Consumption
function
Consumption spending C

C =C + c(Y - T)

Slope = c = MPC
C

Disposable income Y-T

Macro Lecture 4 Slide 15


MB MC
The U.S. Consumption Function,
1960-2001

Macro Lecture 4 Slide 16


MB MC

Planned Aggregate Expenditure

 Planned Aggregate Expenditure and


Output
 The relationship between changes in
production and income and PAE
C is a large part of PAE

C depends on Y

PAE depends on Y

Macro Lecture 4 Slide 17


MB MC

Planned Aggregate Expenditure

 Example
 PAE = C + IP + G + NX
 C = č + c(Y – T)
 PAE = č + c(Y – T) + IP + G + NX
 Suppose

č = 620; c = 0.8; T = 250; IP = 220; G =


300; NX = 20

Macro Lecture 4 Slide 18


MB MC

Planned Aggregate Expenditure


 Example:
Then: Substituting
PAE = 620 + 0.8(Y - 250) + 220 + 300 + 20
PAE = 620 + 0.8Y - 0.8(250) + 220 + 330 +
20
 PAE = 620 + 0.8Y - 200 + 220 + 300 + 20
 PAE = (620 - 200 + 220 + 300 + 20) + 0.8Y
 PAE = 960 + 0.8Y

Macro Lecture 4 Slide 19


MB MC

Planned Aggregate Expenditure

 Example
 PAE = 960 + 0.8Y
 0.8 = Marginal propensity to consume
(MPC)
 If Y increases by $1, C will increase by 80
cents (c = 0.80)
 C is part of PAE
 PAE increases by 80 cents ($1 X 0.80)

Macro Lecture 4 Slide 20

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