Macroeconomics Chapter 11

Introduction

Presentation by Jason Dean, King’s University College, focusing on Chapter 11: The Aggregate Expenditures Model.

Learning Objectives

1. LO11.1: Sticky Prices

   • Role in the aggregate expenditures model.

   • Factors causing price stickiness: wage contracts, menu costs, wage rigidities.

   • Implications: time lags and inefficiencies in economic output.

2. LO11.2: Investment Schedule

   • Derivation from the investment demand curve and interest rates.

   • Lower interest rates stimulate investment; higher rates discourage it.

3. LO11.3: Aggregate Expenditures Schedule

   • Combination of consumption and investment in a private closed economy.

   • Influencing factors: consumer confidence, household wealth, business profits, interest rates.

4. LO11.4: Equilibrium GDP

   • Comparison of actual vs. potential output.

   • Significance of understanding divergences for economic performance evaluation.

5. LO11.5: Multiplier Effects

   • How initial spending changes lead to increased consumption and investment.

   • Importance of MPC in measuring multiplier size.

6. LO11.6: International Sector Integration

   • Impact of exports and imports on aggregate expenditures.

   • Factors: global demand shifts, exchange rate fluctuations.

7. LO11.7: Public Sector Integration

   • Effects of government fiscal policy on economic output.

   • Role of government spending in boosting demand and employment.

8. LO11.8: Expenditure Gaps

   • Definitions: equilibrium GDP, full-employment GDP, recessionary, and inflationary gaps.

   • Policy implications for addressing these gaps.

Key Concepts in the Aggregate Expenditures Model

• Assumptions: Basis in Keynesian principles; total spending determines output and employment.

• Fixed Prices: Prices are sticky in the short run; imbalances lead to unemployment.

• Aggregate Expenditures Calculation: Sum of consumption (C) and investment (Ig) in a private closed economy.

Investment Demand Curve

• Overview: Relationship between investment and interest rates.

• Example: Interest rate shifts significantly affect business investment spending.

Aggregate Expenditures and GDP

• Components: GDP as the sum of consumption and investment; consumption is the primary driver.

• Equilibrium: Intersection of aggregate expenditures and actual GDP determines output levels.

Effects of Changes in Investment

• Investment Schedule Changes: Direct implications on aggregate GDP.

• Multiplier Effect: Illustrates the amplified impact of spending changes across the economy.

International and Public Sector Integration

• International Sector: Net exports add complexity; global factors influence domestic economy.

• Public Sector: Government spending changes aggregate demand, crucial for economic stabilization.

Understanding Expenditure Gaps

• Types: Recessionary and inflationary gaps; implications for fiscal policy and economic stability.

Real World Application

• Historical Context: Examples of fiscal policies during economic crises (e.g., 2008 financial crisis).

• COVID-19 Response: Government interventions to stabilize the economy through direct payments and support.

Say’s Law vs. Keynesian Economics

• Say’s Law: Market self-regulation; supply creates its own demand.

• Keynesian Economics: Advocates for government intervention to manage demand and avoid unemployment.

Chapter Summary

Overview of sticky prices, investment schedules, and aggregate expenditures within a closed economy. Highlights the role of the international and public sectors and the importance of fiscal policy in stabilizing economic conditions.