Spending and Output in the Short Run Chapter 13. Chapter 13 Learning Objectives. You should be able to: List the components of investment. Distinguish.

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Presentation transcript:

Spending and Output in the Short Run Chapter 13

Chapter 13 Learning Objectives. You should be able to: List the components of investment. Distinguish between actual and planned aggregate expenditure. Describe the consumption function, graph the consumption function. Distinguish between autonomous and induced expenditure. Use the Keynesian cross diagram to determine short-run equilibrium output. Describe the expenditure multiplier and show its effect on the Keynesian cross diagram. Explain how fiscal policy is used to stabilize the economy. Define automatic stabilizers.

Aggregate Expenditure & National Income AE = C + I + G + NX AE = Y

Investment Components Plant and equipment, office buildings Inventories Residential housing

Planned Aggregate Expenditure

Consumption Function

The U.S. Consumption Function,

Spending Autonomous: the same regardless of the level of income Induced: dependent on the level of income

Rate of change of Y with a change in G where c is the marginal propensity to consume

Okun’s Law For every 2% change in the output gap, unemployment changes 1%. So with a 4% recessionary gap, expect unemployment to be 2% greater than the natural rate.

Fiscal Policy Government spending. Taxes. Under the control of the Treasury.

Automatic Stabilizers Taxes. Unemployment insurance. Welfare.