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    ECN 111 Chapter 15 Lecture Notes

    Uploaded by

    Althea Acidre
    This document provides lecture notes on Chapter 15 of ECN 111. It covers topics such as: - Equilibrium expenditure, which occurs when aggregate planned expenditure equals real GDP. The economy converges to equilibrium through changes in production and spending. - The expenditure multiplier, which is the amount by which a change in autonomous expenditure magnifies the change in equilibrium expenditure and real GDP. The size of the multiplier depends on factors like the marginal propensity to consume. - Deriving the aggregate demand (AD) curve from the aggregate expenditure model, showing that the AD curve slopes downward as a higher price level results in a lower quantity of real GDP demanded.

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    ECN 111 Chapter 15 Lecture Notes

    Uploaded by

    Althea Acidre
    54 views2 pages
    This document provides lecture notes on Chapter 15 of ECN 111. It covers topics such as: - Equilibrium expenditure, which occurs when aggregate planned expenditure equals real GDP. The economy converges to equilibrium through changes in production and spending. - The expenditure multiplier, which is the amount by which a change in autonomous expenditure magnifies the change in equilibrium expenditure and real GDP. The size of the multiplier depends on factors like the marginal propensity to consume. - Deriving the aggregate demand (AD) curve from the aggregate expenditure model, showing that the AD curve slopes downward as a higher price level results in a lower quantity of real GDP demanded.

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    This document provides lecture notes on Chapter 15 of ECN 111. It covers topics such as: - Equilibrium expenditure, which occurs when aggregate planned expenditure equals real GDP. The economy converges to equilibrium through changes in production and spending. - The expenditure multiplier, which is the amount by which a change in autonomous expenditure magnifies the change in equilibrium expenditure and real GDP. The size of the multiplier depends on factors like the marginal propensity to consume. - Deriving the aggregate demand (AD) curve from the aggregate expenditure model, showing that the AD curve slopes downward as a higher price level results in a lower quantity of real GDP demanded.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    54 views2 pages

    ECN 111 Chapter 15 Lecture Notes

    Uploaded by

    Althea Acidre
    This document provides lecture notes on Chapter 15 of ECN 111. It covers topics such as: - Equilibrium expenditure, which occurs when aggregate planned expenditure equals real GDP. The economy converges to equilibrium through changes in production and spending. - The expenditure multiplier, which is the amount by which a change in autonomous expenditure magnifies the change in equilibrium expenditure and real GDP. The size of the multiplier depends on factors like the marginal propensity to consume. - Deriving the aggregate demand (AD) curve from the aggregate expenditure model, showing that the AD curve slopes downward as a higher price level results in a lower quantity of real GDP demanded.

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    ECN 111 Chapter 15 Lecture Notes

    15.1 Expenditure Plans and Real GDP


    A. The Economy at Full Employment
    At full employment, GDP equals potential GDP and is determined by real factors. Changes in the quantity
    of money change only the price level, but they have no effect on potential GDP. Away from potential GDP,
    real and monetary factors interact to determine real GDP.
    B. Departures from Full Employment
    Away from full employment, fluctuations in aggregate supply and aggregate demand bring fluctuations
    around full employment.
    C. Fixed Price Level
    The aggregate expenditure model tells us about the forces that determine the quantity of real GDP
    demanded at any given price level.
    D. Planned and Unplanned Expenditures
    Aggregate planned expenditure is equal to planned consumption expenditure plus planned investment
    plus planned government purchases plus planned exports minus planned imports. If aggregate planned
    expenditure equals real GDP, the change in firms’ inventories is the planned change. If aggregate planned
    expenditure exceeds real GDP, firms’ inventories are smaller than planned; if aggregate planned
    expenditure is less than real GDP, firms’ inventories are larger than planned.
    E. Autonomous Expenditure and Induced Expenditure
    The components of aggregate expenditure that do not change when real GDP changes are called
    autonomous expenditure. The components of aggregate expenditure that change when real GDP changes
    are called induced expenditure.
    F. The Consumption Function
    The consumption function is the relationship between consumption expenditure and disposable income,
    other things remaining the same.
    1. Consumption Plans
    For households and the economy as a whole, as disposable income increases, planned consumption
    expenditure increases.
    2. Marginal propensity to consume (MPC) is the fraction of a change in disposable income that is
    spent on consumption. The marginal propensity to consume is equal to
    Change in consumptio n expenditur e
    .
    Change in disposable income
    3. Other Influences on Consumption
    a. A movement along the consumption function results from a change in disposable income.
    b. Shifts in the consumption function result from changes in the real interest rate, the buying power of
    net assets, and expected future disposable income.
    G. Imports and GDP
    The major factor that influences U.S. imports is U.S. real GDP. An increase in real GDP is also an increase
    in income and, as income increases, consumers increase their expenditure on most goods and services,
    including imports.
    a. The marginal propensity to import is the fraction of an increase in real GDP that is spent on imports—
    the change in imports divided by the change in real GDP.
    15.2 Equilibrium Expenditure
    A. Aggregate Planned Expenditure and Real GDP
    Aggregate planned expenditure is the sum of planned consumption expenditure, investment, government
    purchases of goods and services, and exports minus imports.
    B. Equilibrium Expenditure
    Equilibrium expenditure is the level of aggregate expenditure that occurs when aggregate planned
    expenditure equals real GDP.
    C. Convergence to Equilibrium
    When aggregate planned expenditure and actual aggregate expenditure are unequal, production plans and
    spending plans are inconsistent, and a process of convergence toward equilibrium expenditure occurs.
    1. If aggregate planned expenditure exceeds real GDP, inventories decrease below their target levels. Firms
    increase their production to build up their inventories and GDP increases.
    2. If aggregate planned expenditure is less than real GDP, inventories increase above their target levels.
    Firms decrease their production to reduce their inventories and GDP decreases.
    15.3 The Expenditure Multiplier
    A. The Basic Idea of the Multiplier
    The multiplier is the amount by which a change in any component of autonomous expenditure is
    magnified or multiplied to determine the change that it generates in equilibrium expenditure and real GDP.
    1. The multiplier exists because a change in autonomous expenditure creates a change in disposable
    income, which leads to additional changes in induced expenditure and disposable income.
    B. The Size of the Multiplier
    Change in equilibrium expenditur e
    Multiplier = .
    Change in autonomous expenditur e
    C. Why is the Multiplier Greater Than 1?
    The multiplier is greater than 1 because an increase in autonomous expenditure induces further increases in
    aggregate expenditure—induced expenditure increases.
    D. The Multiplier and the MPC
    The greater the marginal propensity to consume, the larger is the multiplier. Ignoring the effects of imports
    1
    and income taxes, the multiplier equals .
    (1  MPC )
    E. Imports and Income Taxes
    The larger is the marginal propensity to import and the larger is the marginal tax rate (the fraction of a
    change in real GDP that is paid in income taxes), the smaller is the multiplier.
    1. The general formula for the multiplier is
    1
    Multiplier = .
    (1  Slope of AE curve )
    F. Business-Cycle Turning Points
    The forces that bring business-cycle turning points are the swings in autonomous expenditure such as
    investment and exports. The mechanism that gives momentum to the economy's new direction is the
    multiplier.
    15.4 The AD Curve and Equilibrium Expenditure
    A. Deriving the AD Curve from Equilibrium Expenditure.
    The AD curve can be derived from the aggregate expenditure model.
    1. An increase in the price level decreases aggregate expenditure.
    2. The decrease in aggregate expenditure is reflected in a downward shift in the AE curve.
    3. The decrease in aggregate expenditure leads to a decrease in equilibrium expenditure.
    4. Plotting the higher price level against the lower level of equilibrium expenditure creates a point on the
    aggregate demand (AD) curve.
    5. Because a higher price level results in a lower quantity of real GDP demanded, the AD curve is downward
    sloping.

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