1. Aggregate Expenditures10
C H A P T E R
Aggregate Expenditures
The Multiplier,
Net Exports,
and Government

2. CHANGES IN EQUILIBRIUM GDP
AND THE MULTIPLIER
Equilibrium GDP
at Ig1 level of investment
Equilibrium GDP
at Ig0 level of investment
510
490
470
450
430
(C + Ig ) 1
(C + Ig ) 0
Increases
in the level
of C + Ig
Private spending (billions of dollars) 45 o o
Real domestic product, GDP (billions of dollars)

3. CHANGES IN EQUILIBRIUM GDP at Ig2 level of investment
AND THE MULTIPLIER
Equilibrium GDP
at Ig2 level of investment
510
490
470
450
430
(C + Ig ) 0
(C + Ig ) 2
Private spending (billions of dollars)
Decreases
in the level
of C + Ig 45 o o
Real domestic product, GDP (billions of dollars)

4. Inverse relationship between
THE MULTIPLIER EFFECT
Multiplier =
Change in Real GDP
Initial Change in Spending
Change
in GDP =
Multiplier x
initial change
in spending
The Multiplier Effect and the Marginal Propensities
Inverse relationship between
Multiplier & MPS

5. = = x MPC and the Multiplier THE MULTIPLIER EFFECT or 1 Multiplier MPS
Change in
GDP =
Multiplier x
initial change
in spending
MPC and the Multiplier
MPC
Multiplier .9 .8
.75
.67 .5 10 5 4 3 2

6. INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT
Net Exports
Positive if exports > imports
Negative if imports > exports
Net Exports and Aggregate Expenditures
C + Ig + ( X – M )
Xn = ( X – M )
C + Ig + Xn

7. INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT
Net Export Schedule
Net Exports and Equilibrium GDP
Positive Net Exports
Negative Net Exports
Graphically…

8. INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT
510
490
470
450
430
Aggregate Expenditures
with Positive Net Exports
C + Ig + Xn1
C + Ig
Private spending (billions of dollars) 45 o o
Real domestic product, GDP (billions of dollars) +5 -5
(billions of dollars)
Net Exports, Xn
Real GDP

9. INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT
510
490
470
450
430
Aggregate Expenditures
with Negative Net Exports
C + Ig
C + Ig + Xn2
Private spending (billions of dollars) 45 o o
Real domestic product, GDP (billions of dollars) +5 -5
(billions of dollars)
Net Exports, Xn
Real GDP

10. INTERNATIONAL ECONOMIC
LINKAGES
Prosperity Abroad
Tariffs
Exchange Rates

11. GLOBAL PERSPECTIVE NET EXPORTS OF GOODS, 1999 Negative Net Exports
Positive Net Exports
Canada
France
Germany
Italy
Japan
United Kingdom
United States
-400
-140
-100
-60
-20 20 60
100
Billions of Dollars
Source: World Trade Organization

12. ADDING THE PUBLIC SECTOR
Simplifying Assumptions
Investment and Net Exports are Independent of the Level of GDP
Government Purchases Do Not Affect Private Spending
All Taxes are Personal
Tax Collections are Fixed
Unless Stated Otherwise, Price Level is Constant

13. ADDING THE PUBLIC SECTOR
Government Purchases and Equilibrium GDP
Government
Spending of
$20 Billion
C + Ig + Xn + G
C + Ig + Xn C
Aggregate Expenditures (billions of dollars) 45 o o
Real domestic product, GDP (billions of dollars)

14. ADDING THE PUBLIC SECTOR
Lump-Sum Tax and Equilibrium GDP
$15 Billion Decrease
in Consumption from
a $20 Billion Increase
in Taxes
C + Ig + Xn + G
Ca + Ig + Xn + G
Aggregate Expenditures (billions of dollars) 45 o o
Real domestic product, GDP (billions of dollars)

15. ADDING THE PUBLIC SECTOR
Injections
Leakages
Unplanned Changes in Inventories
Balanced Budget Multiplier
Recessionary Gap
Inflationary Gap

16. FULL-EMPLOYMENT GDP Recessionary Gap Recessionary Gap = $5 Billion
AE0
530
510
490
AE1
Recessionary Gap
= $5 Billion
Aggregate Expenditures (billions of dollars)
Full Employment 45 o o
Real domestic product, GDP (billions of dollars)

17. FULL-EMPLOYMENT GDP Inflationary Gap Inflationary Gap = $5 Billion
AE2
Inflationary Gap
= $5 Billion
AE0
530
510
490
Aggregate Expenditures (billions of dollars)
Full Employment 45 o o
Real domestic product, GDP (billions of dollars)

18. The End of the Japanese Growth “Miracle”
APPLICATIONS OF THE MODEL
Great Depression
Vietnam War Inflation
The End of the Japanese Growth “Miracle”

19. Does Not Show Price-Level Changes
LIMITATIONS OF THE MODEL
Does Not Show Price-Level Changes
Ignores Premature Demand-Pull Inflation
Bars Real GDP Beyond Full-Employment
Does Not Deal With Cost-Push Inflation

20. CHAPTER
CONCLUSIONS

21. balanced-budget multiplier recessionary gap inflationary gap
KEY TERMS
multiplier
net exports
lump-sum tax
balanced-budget multiplier
recessionary gap
inflationary gap
BACK
END
Copyright McGraw-Hill/Irwin, 2002

22. AGGREGATE DEMAND AND AGGREGATE SUPPLY
Coming Next:
AGGREGATE DEMAND
AND
AGGREGATE SUPPLY
CHAPTER 11