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
|
â€50
|
100
|
1600
|
-600
|
2000
|
2100
|
-100
|
200
|
150
|
â€50
|
100
|
2400
|
-400
|
3000
|
2900
|
100
|
200
|
150
|
â€50
|
100
|
3200
|
-200
|
4000
|
3700
|
300
|
200
|
150
|
â€50
|
100
|
4000
|
0
|
5000
|
4500
|
500
|
200
|
150
|
â€50
|
100
|
4800
|
+200
|
Table: GDP and Aggregate Expenditure Model
Source: (Created by Author)
- 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.
- 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
- d)
The aggregate equation of AE is given as,
è AE = 800 + 0.8Y
- e)
The value of Real GDP in equilibrium is at 4000
- 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)
- 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)
- 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)
- 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
- 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
- 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.
- 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.