Upload
janel-barber
View
214
Download
0
Tags:
Embed Size (px)
Citation preview
Lecture 9: Monday, July 12th
Review Quiz 3 on Chapters 7 & 8Review Mid-term Progress Reports
Class AttendanceExtra Credit: Attend FTAA DebateChapter 9: Building the Aggregate Expenditures ModelChapter 10: Aggregate ExpendituresNext Class on Wednesday, July 14th
Review Quiz 3 on Chapters 7 & 8
Worth 20 points> 15 points: 16 students10 – 15 points: 4 students< 10 points: 3 students
Range 1.5 – 29.50
Review Mid-term Progress Reports
70 points to date% Points not weighed exactly as in Final Grade calculation, an estimate based on #points you could have accumulated to dateSome still have not submitted Article Summaries
> 87 % : A (8) > 75 % : B (7); Half are B+ > 60 % : C (4) > 50 % : D (2) < 50 % : F (5 – 7)
Extra Credit Attend FTAA Debate
Thursday, July 15th
3:30 – 7:00 PMFIU University Park Campus: MARC Pavilion CenterCost: $15
Chapter 9: Building the Aggregate Expenditures Model
Simplifying Assumptions for Private Closed Economy For now, we ignore government
expenditures, taxes, exports & imports All savings = personal savings Depreciation, Net Foreign Factor Income are
zero
Aggregate spending consists of Consumption & Investment
GDP, NI, PI, & DI are equal
Tools of Aggregate Expenditures Model
Amount of goods & services produced, level of employment depend directly on level of aggregate expenditures (total spending)Businesses will produce only a level of output that they think they can profitably sellBegin with excess production capacity and unemployed labor increase in aggregate expenditures will increase total output & employment but not raise price levelAssume inflation is zero
Consumption & Saving
Personal Savings means Not SpendingPersonal Savings = Disposable Income (DI) – Consumptions (C)
Most important determinant of Consumption is Income, Disposable IncomeDI is also determinant of Saving
Break-Even Income: Income level at which households plan to consume their entire income
Average Propensities
Average Propensity to Consume (APC) = Consumption / Income
Average Propensity to Save (APS) = Savings / Income
APC + APS = 1
Highest APC countries are Canada & U.S.
Marginal Propensities
Marginal Propensity to Consume (MPC) = Consumption / Income
Marginal Propensity to Save (MPS) = Savings / Income
Nonincome Determinants of Consumption & Savings
Wealth: real & financial assets Wealthier households consume more
Expectations on future prices & income Expected inflation triggers current spending,
less savings
TaxationHousehold Debt Increase in debt means increased current
consumption High debt triggers consumption reduction to
pay off loans
Investment
Business will invest in all projects for which the expected rate of return exceeds interest rateExpected ROR (r): Investment spending is guided by profit motive
Real Interest Rate Financial cost of borrowing money “capital” Apply the interest rate (i) to borrowed amount
Firm undertakes profitable projects only when r i Real interest rate is less inflation
Investment Demand Curve
Shows the total monetary amounts that will be invested by a economy at various possible real interest ratesShifts are caused by: Cost of acquiring, operating, & maintaining
capital goods Business Taxes Technology Stock of Capital goods on hand Business Expectations
Investment Schedule
Investment v. Real GDPIg
Shows the amount of investment at each level of GDPInvestment Schedule is UnstableFactors: Durability of Capital & Variability of Expectations Irregularity of Innovation
Equilibrium GDP
In closed economy, aggregate expenditures (GDP) consist only of consumption (C) + investment (Ig) Total level of goods produced = C + Ig
Equilibrium Output: Output whose production creates total spending just sufficient to purchase that output No overproduction No excess of total spending
At Equilibrium GDP, C + Ig = GDP
Disequilibrium
At levels of GDP below equilibrium, economy wants to spend at higher levels Greater output will increase
employment & total income
At levels of GDP above equilibrium, economy wants to spend less, cut production, decline output fewer jobs, decline in total income
Say’s Law
Act of producing goods generates income equal to the value of the goods producedProduction of any output automatically provides the income needed to buy that outputSupply creates its own demand
International Trade & Equilibrium Output
In an open economy, Net Exports = Exports – ImportsGDP = C + Ig + XnGDP = C + Ig + (X – M) Positive Net Exports increases aggregate expenditures & GDP beyond what they would be in closed economyNegative Net Exports reduced aggregate expenditures & GDP below what they would be in closed economy
International Economic Linkages
Prosperity Abroad Rising incomes among foreign trading partner
allows U.S. to sell more goods abroad, raising U.S. exports
Tariffs When other countries restrict their imports to
stimulate their economies, they are reducing U.S. exports, depressing U.S. economy
U.S. can retaliate by imposing own trade barriers on foreign products
Exchange Rates Depreciation of the dollar relative to other
currencies enables people abroad to obtain more $/ unit of own currencies
Government
Add government spending and taxes to modelSimplifying Assumptions Levels of investment & net exports are
independent of level of GDP Gov’t purchases can’t affect private spending Gov’t tax revenues
Disposable Income < Personal Income GDP, NI, PI remain equal Fixed taxes are collected No inflation