Class notes
Economics lecture notes
Macro and micro economics
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
Seller
Follow
Content preview
Macro-Economics Chapter 28 Page 1 of 11Expenditure Multipliers
Equilibrium income is attained when aggregate planned expenditure equals income. Equilibrium
expenditure is a level of expenditure and income at which everyone’s spending plans are fulfilled.This implies
that there are no unplanned changes in inventories/stocks. If the aforementioned conditions are not met then
the economy is not at equilibrium and convergence sets in naturally or through some intervention (Govt).
Fixed price and planned
expenditure
In the Keynesian model, all firms set their prices
and sell quantities that their customers are willing
to buy, like a grocery store. If they persistently sell a
greater quantity, they plan to and are constantly
running out f inventory, they will raise their prices.
If they are persistently selling a smaller quantity
than planned, and inventories are pilling up, they
will cut their prices. However, on any given day,
their prices are fixed and the quantities they sell
depend on demand, not supply.
Each firm’s price levels are fixed for the economy as
a whole:
1. The price level is fixed
2. Aggregate demand determines real GDP
Expenditure Plans
Aggregate expenditure components:
1. Consumption expenditure
2. Investment
3. Government expenditure on goods and services
4. Net exports (exports - imports)
AE = C + I + G + (X-M)
Aggregate planned expenditure is = the sum of planned levels of consumption expenditure, investment,
government expenditure on goods and services and exports minus imports. 2 of these components of
planned expenditure, consumption expenditure and imports, change when income changes and depends on
real GDP.
INCREASE IN AE = INCREASE REAL GDP
INCREASE IN REAL GDP = INCREASE IN AE
Consumption And Saving Plans
1. Disposable Income: aggregate income - taxes + transfer payments. Aggregate income = real GDP, so
disposable income depends on real GDP. The relationship between consumption expenditure and
, Macro-Economics Chapter 28 Page 2 of 11
disposable income -> the consumption
Y-axis: consumption expenditure
X-axis: disposable income
When disposable income = 0, this is autonomous
consumption and it is the amount of CE that
would take place in the short run if there was no
current income.
CE in excess= induced consumption, which is
induced by an increase in dispose income.
The 45 degree line, the height measures the
disposable income.
When CE > disposable income, dissaving.
function. Saving + disposable income = the
saving function.
2. Real interest rate
3. Wealth
4. Expected future income
Marginal propensities to consume and save
The MPC is the fraction of change in disposable income that is spent on consumption. It is calculated as the
change in CE/ the change in disposable income.
The MPS is the fraction of change in disposable income that is saved. It is calculated as the change in
saving/ the change in disposable income.
An increase in disposable income is either spent on consumption or saved, the MPC + MPS = 1.
The slope of the consumption function is the marginal propensity to consume and the slop of the saving
function is the marginal propensity to save.
Consumption as a function of real GDP
CE changes when disposable income changes and disable income changes when real GDP changes. So CE
depends on disposable income and real GDP. This link determines the equilibrium expenditure.
Import Function
Real GDP is the main influence on imports in the short run. An increase in real GDP increases the
quantity of South African imports. The relationship between imports and real GDP is determined
by the MPI - marginal propensity to import, which is a fraction of the increase in real GDP that is
spent on imports. It is calculated as the change in imports / the change in real GDP. For example, if
an increase in real GDP of R 1 trillion increase imports by R0,25 trillion, the marginal propensity to
import is 0,25.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller sarahaugust. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R451,00. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
73096 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy summaries for 15 years now