Macroeconomics: Aggregate Expenditures

Discuss about the Macroeconomics for Aggregate Expenditures.

 

Aggregate Expenditures = Consumption + Government Expenditure + Investment + Net Exports

è A = 1300 + 150 + 200 – 50 = 1600 = Aggregate Expenditure

èB = 2400 – 200 – 150 – (-50)

èB = 2400 + 50 – 350 = 2100 = Consumption

Real GDP	Consumption	Savings	Investment	Government Expenditures	Net Exports	Taxes	Aggregate Expenditures	Surplus/ Shortage (Unplanned Investment)
0	500	-500	200	150	-50	100	800	-800
1000	1300	-300	200	150	‐50	100	1600	-600
2000	2100	-100	200	150	‐50	100	2400	-400
3000	2900	100	200	150	‐50	100	3200	-200
4000	3700	300	200	150	‐50	100	4000	0
5000	4500	500	200	150	‐50	100	4800	+200

Table: GDP and Aggregate Expenditure Model

Source: (Created by Author)

1. b)

For the above table, it can be seen that the country is running a trade deficit, as the imports are greater than exports due to the negative sign.

For domestic Trade balance,

è(Savings + Tax) = (Government Expenditure + Investment) + Net Exports

è(Savings – Investments) = (Government Expenditure – Tax) + Net Exports

è200 = 150 – 100 – 50 = 0

This depicts that the domestic balance is also facing a balance deficit in the country.

1. c)

AE = AE + (slope of AE)*Y

è Slope of AE = Marginal Leakage Rate = Change in leakage rate / Change in income

èMLR = 800/1000 = 0.8

èMLR = (1 – MPE)

èMPE = 0.2

1. d)

The aggregate equation of AE is given as,

è AE = 800 + 0.8Y

1. e)

The value of Real GDP in equilibrium is at 4000

1. f)

This can be done using the multiplier effect such that increase in change in real GDP can be calculated.

èChange in Real GDP = (1/ (1-MLR)) X (Change in Government Expenditure)

èChange in Real GDP = (1/ (1 – 0.8) X (200 – 150)

èChange Real GDP = 0.5 X 50 = 250 billion dollars

Increase in Real GDP from 4000 to (4000+250) that is 4250 billion dollars

2. a)

The IS relation can be devised from S = I

èS = I

è Y – C – G = I

èY – 200 - 0.25 (Y – T) – G = 150 + 0.25Y – 1000r

• Y – 200 - 0.25 (Y – 200) – 250 = 150 + 0.25Y – 1000r
• Y - 0.25Y – 0.25Y + 1000r = 200 - 50 + 250 + 150
• 5Y + 1000r = 550
• Y + 2000r = 1100 ………. (i)

1. b)

The LM relation can be devised from Md = Ms

è(M/P)^d = Ms

è2Y – 8000r = (M/P)^d

• 2Y – 8000r = 1600
• Y – 4000r = 800 ………. (ii)

1. c)

Equating equation (i) and (ii) for equilibrium real interest rate

èIS = LM

è Y + 2000r – 1100 = Y – 4000r - 800

è r = 300/6000 = 0.05 …………. (iii)

1. d)

For level of output, we take equation (i) and substitute value of equation (iii)

èY + 2000r = 1100

• Y = 1100 – 2000 X 300/6000
• Y = 1100 – 100
• Y = 1000 = Level of output

1. e)

Value of C, I and G

è C = 200 + 0.25 (Y – T) = 200 + 0.25 (1000 – 200) = 200 + 0.25 (800) = 200+200 = 400

èI = 150 + 0.25Y – 1000r = 150 + 0.25*1000 – 1000*300/6000 = 150 + 250 – 50 = 350

After calculation,

è C + I + G = Y

• 400 + 350 +250 = 1000 = Y = Level of Output

1. f)

Now, M/P = 1840

Then, the changes will be made in the money market.

(M/P)^d = Ms

è2Y – 8000r = (M/P)^d

• 2Y – 8000r = 1840
• Y – 4000r = 920 ………. (iv)

            Equating equation (i) and (iv) for equilibrium real interest rate, we get

èIS = LM

è Y + 2000r – 1100 = Y – 4000r - 920

è r = 180/6000 = 0.03 …………. (v)

For level of output, we take equation (i) and substitute value of equation (v)

èY + 2000r = 1100

• Y = 1100 – 2000 X 180/6000
• Y = 1100 – 60
• Y = 1040 = Level of output

Value of C and I

è C = 200 + 0.25 (Y – T) = 200 + 0.25 (1040 – 200) = 200 + 0.25 (840) = 200+210 = 410

èI = 150 + 0.25Y – 1000r = 150 + 0.25*1040 – 1000*180/6000 = 150 + 260 – 30 = 380

According to the changes in monetary expansion, the interest rate has decreased, level of output has increased and level of consumption has even increased. However, the change of consumption is more than the level of output in this scenario.

1. g)

Now, government spending has been increased to 400

Then, the changes will be made in the goods market.

èThe IS relation can be devised from S = I

èS = I

è Y – C – G = I

èY – 200 - 0.25 (Y – T) – 400 = 150 + 0.25Y – 1000r

• Y – 200 - 0.25 (Y – 200) – 400 = 150 + 0.25Y – 1000r
• Y - 0.25Y – 0.25Y + 1000r = 200 - 50 + 400 + 150
• 5Y + 1000r = 1400
• Y + 2000r = 1400 ………. (vi)

            Equating equation (vi) and (ii) for equilibrium real interest rate

èIS = LM

è Y + 2000r – 1400 = Y – 4000r - 800

è r = 600/6000 = 0.01 …………. (vii)

            For level of output, we take equation (vi) and substitute value of equation (vii)

èY + 2000r = 1400

• Y = 1400 – 2000 X 600/6000
• Y = 1400 – 200
• Y = 1200 = Level of output

Value of C and I

è C = 200 + 0.25 (Y – T) = 200 + 0.25 (1200 – 200) = 200 + 0.25 (1000) = 200 + 250 = 450

èI = 150 + 0.25Y – 1000r = 150 + 0.25*1200 – 1000*600/6000 = 150 + 300 – 100 = 350

According to the changes in fiscal expansion, the interest rate has decreased to a significant level, level of output has increased considerably whereas the investment has been the same and level of consumption has even increased. However, the change of consumption is more than the level of output due to increase in the government spending.