expenditure
multiplier?
Aggregate Expenditure
Multiplier
14
CHAPTER CHECKLIST
When you have completed your
study of this chapter, you will be able to
1Distinguish between autonomous expenditure and
induced expenditure and explain how real GDP
influences expenditure plans.
2 Explain how real GDP adjusts to achieve equilibrium
expenditure.
3 Explain the expenditure multiplier.
4 Derive the AD curve from equilibrium expenditure.
1
14.1 EXPENDITURE PLANS AND REAL GDP
2
14.1 EXPENDITURE PLANS AND REAL GDP
3
14.1 EXPENDITURE PLANS AND REAL GDP
4
14.1 EXPENDITURE PLANS AND REAL GDP
2. A $2 trillion change in
consumption expenditure,
so...
3. The MPC is
$2 trillion ÷ $3 trillion = 2/3.
5
14.1 EXPENDITURE PLANS AND REAL GDP
2. Consumption expenditure
decreases and the
consumption function shifts
downward if
• The real interest rate rises
• Wealth decreases
• Expected future income
decreases
6
14.2 EQUILIBRIUM EXPENDITURE
Equilibrium Expenditure
Equilibrium expenditure is the level of aggregate
expenditure when aggregate planned expenditure
equals real GDP.
Equilibrium expenditure equals the real GDP at which
the AE curve intersects the 45° line.
7
14.2 EQUILIBRIUM EXPENDITURE
Figure 14.5 shows equilibrium
expenditure.
Convergence to Equilibrium
At equilibrium expenditure, production plans and
spending plans agree, and there is no reason to change
production or spending.
But when aggregate planned expenditure and actual
aggregate expenditure are unequal, production plans
and spending plans are misaligned, and a process of
convergence toward equilibrium expenditure occurs.
Throughout this convergence process, real GDP
adjusts.
8
14.2 EQUILIBRIUM EXPENDITURE
9
14.3 THE EXPENDITURE MULTIPLIER
10
14.3 THE EXPENDITURE MULTIPLIER
ΔY = ΔC + ΔI
But the change in consumption expenditure is determined
by the change in real GDP and the marginal propensity to
consume.
It is
ΔC = MPC × ΔY
Now substitute MPC × ΔY for ΔC in the equation at the top
of the screen
ΔY = MPC × ΔY + ΔI
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14.3 THE EXPENDITURE MULTIPLIER
(1 – MPC) × ΔY = ΔI
Rearrange to get
ΔI
ΔY =
(1 – MPC)
ΔY 1
=
ΔI (1 – MPC)
ΔY 1 1
= 4.
= =
ΔI (1 – 0.75) 0.25
12
14.3 THE EXPENDITURE MULTIPLIER
ΔY 1
=
ΔI (1 – Slope of AE curve)
13
14.3 THE EXPENDITURE MULTIPLIER
14
14.3 THE EXPENDITURE MULTIPLIER
15
14.3 THE EXPENDITURE MULTIPLIER
16
14.4 THE AD CURVE AND EQUILIBRIUM …
17
14.4 THE AD CURVE AND EQUILIBRIUM …
Equilibrium expenditure
decreases to $13 trillion at point A.
18