ECON203 Principles of Macroeconomics Topic : Expenditure Multipliers: The Keynesian Model. EXPENDITURE PLANS AND REAL GDP. From the circular flow of expenditure and income, aggregate expenditure is the sum of Consumption expenditure, C Investment, I
Consumption (trillions of dollars)
Saving is zero
Change in disposable incomeMPConsume
Example : Notice that when disposable income increases from $6 to $8 trillion, consumption expenditure changes from $6.0 to $7.5 trillion. Then:
(Expected) real interest rate
Expectedfuture disposable income
Consumption (trillions of 1996 dollars)
Disposable income (trillions of 1996 dollars)
Aggregate expenditure is the sum of Consumption expenditure (C), Investment (I), Government expenditure (G), Net export (NX) [Export (X) minus Import (M)]
Note: Y is real GDP
The size of the multiplier, 1/(1 − MPC), depends on the marginal propensity to consume,: the larger the MPC, the larger the change in real GDP for any given autonomous increase in aggregate spending.
Marginal Propensity to Save MPS = 1-MPC
1. A $0.5 trillion increase in investment shifts the AE curve upward by $0.5 trillion from AE0 to AE1.
2.Equilibrium expenditure increases by $2 trillion from$9 trillion to $11 trillion.
3.The increase in equilibrium expenditure is 4 times the increase in investment, so the multiplier is 4
When the price level rises to 130, the AE curve shifts downward to AE2.
Equilibrium expenditure decreases to $9 trillion at point A.
The quantity of real GDP demanded at the price level of 130 is $9 trillion—a movement along the AD curve to point A.