Learning Objectives: Aggregate Expenditures LO4: See how government’s budget balance and the balance of trade both relate to national income LO5: Understand the multiplier and how it impacts the economy LO6: Derive aggregate demand from aggregate expenditures CHAPTER 6 6-1© 2012 McGraw-Hill Ryerson Limited

Table 6.5 Government Budget Function 6-2© 2012 McGraw-Hill Ryerson Limited LO4 National Income (Y) Tax Revenue (T) Government Spending (G) Budget Surplus (+)/ deficit (−) (T – G) – – – – – Autonomous taxes

Table 6.5 Government Budget Function 6-3© 2012 McGraw-Hill Ryerson Limited LO4 National Income (Y) Tax Revenue (T) Government Spending (G) Budget Surplus (+)/ deficit (−) (T – G) – – – – – Induced taxes > 20 > 100

Adding the Government Sector Tax function 6-4© 2012 McGraw-Hill Ryerson Limited LO4 T = Y National Income (Y) Tax Revenue (T) Government Spending (G) Budget Surplus (+)/ deficit (−) (T – G) – – –60 Induced Taxes Autonomous Taxes Marginal Tax Rate

Government Spending, Taxation, and the Budget Line Chapter 6-5 Balanced Budget G,T T = Y Budget Deficit Budget Surplus Budget Line (BL) National Income (Y) G = Budget Balance Deficit Surplus Fig. 6.6 LO4

Table 6.6 Expenditures Equilibrium 6-6© 2012 McGraw-Hill Ryerson Limited LO4 National Income (Y) Tax (T) Dispos Income (Y D ) Cons (C) Saving (S) Invest (I) Govt Spending (G) Agg Expend (AE) (C+I+G) 060–60 5– – – – Y = AE

Self Test Given that T = Y and G = 200: What is the budget balance (T – G) at the following income levels? a)400 b)600 c)900 d) © 2012 McGraw-Hill Ryerson Limited LO4

Taxation Reduces Spending Consumer spending is related to Disposable Income Disposable income = Income – Taxes 6-8© 2012 McGraw-Hill Ryerson Limited LO4 Y D = Y - T = Y – ( Y) = Y – 60 – 0.2Y Y D = Y C = Y D = ( Y) = 50 – Y C = Y

Adding the Foreign Sector Spending on imports increases when Canadian incomes increase Spending on exports increases when foreign incomes increase; largely independent of Canadian incomes Marginal propensity to import: the ratio of the change in imports that results from a change in income 6-9© 2012 McGraw-Hill Ryerson Limited LO4

Table 6.7 Net Exports Function 6-10© 2012 McGraw-Hill Ryerson Limited LO4 National Income (Y) Exports (X) Imports (IM) Net Exports (X N ) (X – IM) – –20

Adding the Foreign Sector Import function 6-11© 2012 McGraw-Hill Ryerson Limited LO4 IM = Y Induced Imports Autonomous Imports MPM National Income (Y) Exports (X) Imports (IM) Net Exports (X N ) (X – IM)

6-12© 2012 McGraw-Hill Ryerson Limited LO4

Net Exports Equal to difference between exports and imports Also called “balance of trade” 6-13© 2012 McGraw-Hill Ryerson Limited LO4 X N = X - IM

Determinants of Net Exports 1.Comparative price levels 2.The value of the exchange rate 3.Income levels abroad 4.Foreign tastes 6-14© 2012 McGraw-Hill Ryerson Limited LO4

Table 6.8 Expenditures Equilibrium: Full Model 6-15© 2012 McGraw-Hill Ryerson Limited LO4 (Y)(T)(Y D )(C)(S)(I)(G)(X)(IM)(X N ) (AE) (C+I+G+ X N ) 060–605– – – – – –20700

Aggregate Expenditure Function 6-16© 2012 McGraw-Hill Ryerson Limited LO4 Calculating AE Equilibrium AE = Y Y = AE Y = Y.5 Y = 300 Y = 300/.5 = 600 (Y)(T)(Y D )(C)(S)(I)(G)(X)(IM)(X N ) (AE) (C+I+G+ X N ) 060–605– – –

Aggregate Expenditure Function 6-17© 2012 McGraw-Hill Ryerson Limited LO4 Calculating AE Equilibrium At equilibrium, leakages = injections I + G + X = S + T + IM = = 335 (Y)(T)(Y D )(C)(S)(I)(G)(X)(IM)(X N ) (AE) (C+I+G+ X N )

Aggregate Expenditure Function 6-18© 2012 McGraw-Hill Ryerson Limited LO4 Deriving Aggregate Expenditures Add individual consumption, investment, government, and net export functions:

Self Test Assuming that the MPC, MTR, and MPM are constant and I, G, and X are all autonomous: a)Fill in the table. b)Calculate the value of expenditures equilibrium 6-19© 2012 McGraw-Hill Ryerson Limited LO4 YTYDYD CSIGXIMXNXN AE 020 — 30 — 50 —— 10 —— 100—60102——70——–2— 20060———— — 20——— 300—220246–26———— —

Self Test Assuming that the MPC, MTR, and MPM are constant and I, G, and X are all autonomous: a)Fill in the table. 6-20© 2012 McGraw-Hill Ryerson Limited LO4 YTYDCSIGXIMXNAE – –26

Self Test Assuming that the MPC, MTR, and MPM are constant and I, G, and X are all autonomous: b)Calculate the value of expenditures equilibrium 6-21© 2012 McGraw-Hill Ryerson Limited LO4

Self Test Find the value of MPE, given that: MPCD = 0.9; MTR = 0.25; MPM = a)MPE 6-22© 2012 McGraw-Hill Ryerson Limited LO4