Principles of Economics Macroeconomics

1
Principles of Economics(Macroeconomics)

• Lecture 11, Econ 1200 (A 04)

2
The Aggregate Expenditure Model

• Chapter 07

3
Open-Economy Multiplier

• spending on imports is another leakage

4
C Ig Xn0
Aggregate expenditures (billions of dollars)
o
430 450 470 490 510
Real domestic product, GDP (billions of dollars)

• Equilibrium GDP at Xn0 level of net exports
  equals 470 billion

5
C Ig Xn1
C IgXn0
Aggregate expenditures (billions of dollars)
o
430 450 470 490 510
Real domestic product, GDP (billions of dollars)

• Equilibrium GDP at Xn1 level of net exports
  equals 490 billion

6
Net Exports Equilibrium GDP

• A decline in net exports decreases aggregate
  expenditures reduces GDP
• A rise in net exports increases aggregate
  expenditures increases GDP

7
Adding the Public Sector

• increases in public spending shift the AE
  schedule upward result in higher equilibrium
  GDP

8
550
C Ig Xn
510
Aggregate expenditures (billions of dollars)
G40
470
o
470 510 550
GDP (billions of dollars)

• Impact of 40 billion in government purchases on
  equilibrium GDP

9
Equilibrium vs Full-Employment GDP

• Equilibrium vs Full-Employment GDP
• Recessionary gap - When aggregate expenditures
  are inadequate to bring about full employment
• Inflationary gap - When aggregate expenditures
  are greater than the full employment level
  causing demand-pull inflation

10
Recessionary gap - When aggregate
expenditures are inadequate to bring about full
employment
(Ca Ig Xna G)0
(Ca Ig Xna G)1
Aggregate expenditures (billions of dollars)
Recessionary Gap 20 billion
20
o
510 530
Real GDP (billions of dollars)
11
Inflationary gap - When aggregate
expenditures are greater than the full employment
level causing demand-pull inflation
(Ca Ig Xna G)2
(Ca Ig Xna G)0
Aggregate expenditures (billions of dollars)
Inflationary Gap 20 billion
20
o
510 530 550
GDP (billions of dollars)
12
Limitations of the Model

• It does not show price-level changes
• It does not deal with cost-push inflation
• It does not allow for self-correction