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The Aggregate Expenditures Model - Coggle Diagram

- - - - The most important assumption is that prices are fixed. The aggregate expenditures model is an extreme version of a sticky price model
    - - To Keynes, the Great Depression's massive unemployment of labor and capital was caused by firms reacting in a predictable way to unplanned increases in inventory levels.
        The model's other key assumption-the one that allows it to achieve equilibrium-is that production decisions are made in response to unexpected changes in inventory levels.
    - - The Keynesian aggregate expenditures model remains relevant today because many prices in the modern economy are inflexible downward over relatively short periods of time,
    - - As a first step, we examine aggregate expenditures and equilibrium GDP in a private closed economy that lacks both international trade and government. Then we will open the closed economy to exports and imports.
- - - - the amount that firms plan or intend to invest
- - - - savings
        
        leakage
        
        A withdrawal of potential spending from the income expenditures stream via savings,tax payments or imports or a withdrawal that reduces the lending potential of the banking system
      - investments
        
        injection
        
        an addition of spending into the income expenditure system : any increment to consumption,investment,government purchases or net exports
    - - unplanned inventory changes
        
        changes in inventories that firms did not anticipate ; changes in inventories that occured because of unexpected increases or decreass in aggregate spending
- - - - positive net exports increase aggregate expenditures and GDP beyond what they would be in a closed economy
    - - negative net exports reduce aggregate expenditures and GDP below what they would be in a closed economy
  - - - A rising level of real output and income among U.S. foreign trading partners enables the United States to sell more goods abroad, thus raising U.S. net exports and increasing U.S. real GDP (assuming initially there is excess capacity). There is good reason for Americans to be interested in our trading partners' prosperity. Their good fortune enables them to buy more U.S. exports, increasing our income and enabling us in turn to buy more foreign imports. These imported goods are the ultimate benefit of international trade. Trade transfers foreign prosperity to Americans.
    - - Depreciation (a decrease in the value) of the dollar relative to other currencies enables people abroad to obtain more dollars with each unit of their own currencies. The price of U.S. goods in terms of those currencies will fall, stimulating purchases of U.S. exports. Also, U.S. customers will find they need more dollars to buy foreign goods and, consequently, will reduce their spending on imports. If the economy has available capacity, the increased exports and decreased imports will increase U.S. net exports and expand the nation's GDP.
    - - Because higher net exports increase real GDP, countries often look for ways to reduce imports and increase exports during recessions or depressions. Thus, a recession might tempt the U.S. federal government to increase tariffs and devalue the international value of the dollar (for instance, by supplying massive amounts of dollars in the foreign exchange market). Increasing net exports, the thinking goes, would expand domestic production, reduce domestic unemployment, and help the economy recover.
- - - - a tax that collects a constant amount at all levels of GDP
    - - Sa+M+T=Ig+X+G
        
        In the full model, it is still the case that injections into the income expenditures stream equal leakages from the income stream.For theprivate closed economy, $ = Ig. For the expanded economy, imports and taxes are added leakages. Saving, importing, and paying taxesare all uses of income that subtract from potential consumption. Consumption will now be less than GDP-creating a potential spending Bap-in the amount of aftertax saving (Sa), imports (M), and taxes (T). But exports (X), government purchases (G), and investment (Ig), are injections into the income expenditures stream. At the equilibrium GDP, the sum of the leakages equals the sum of injections, In symbols
- - - - keynes's solution to the recessionary expenditure gap
        
        lower taxes
        
        increase government spending
  - - - COVID19 recession of 2020
- - - - downward slope
        
        When the price of an individual product falls, the consumer's (constant) nominal income allows a larger purchase of the product; that's the income effect.
        At the same time, the consumer will want to buy more of the individual product because it becomes less expensive relative to other goods, whose prices have not changed; that's the substitution effect.
      - real-balances effect
        The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.
      - Interest-rate effect
        The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases)
      - forelgn purchases effect
        The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.
    - - determinants of aggregate demand
        Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve.
        
        consumer spending
        
        Consumer Wealth
        Consumer wealth is the total dollar value of all assets owned by consumers less the dollar value of their liabilities (debts). Assets include stocks, bonds, and real estate. Liabilities include mortgages, student loans, and credit card balances.
        
        Consumer Expectations
        Changes in expectations about the future may alter consumer spending.
        
        Household Borrowing
        Consumers can increase their consumption spending by borrowing. Doing so shifts the aggregate demand curve to the right.
        
        Personal Taxes
        A reduction in personal income tax rates raises take-home income and increases consumer purchases at each possible price level. Tax cuts shift the aggregate demand curve to the right. Tax increases reduce consumption spending and shift the aggregate demand curve to the left.
        
        Investment Spending
        Investment spending (the purchase of capital goods) is a second major determinant of aggregate demand.
        
        Real Interest Rates
        Other things equal, an increase in real interest rates will raise borrowing costs, lower investment spending, and reduce aggregate demand.
        
        Expected Returns
        Higher expected returns on investment projects increase the demand for capital goods and shift the aggregate demand curve to the right.
        
        Expectations about future business conditions:If firms are optimistic about future business conditions, they are more likely to forecast high rates of return on current investment and therefore may invest more today.
        
        Technology :New and improved technologies enhance expected returns on investment and thus increase aggregate demand.
        
        Degree of excess capacity: A rise in excess capacity-unused capital-reduces the expected return on new investment and hence decreases aggregate demand.
        
        Business taxes: An increase in business taxes will reduce after-tax profits from capital investment and lower expected returns.
        
        Government Spending
        Government purchases are the third determinant of aggregate demand. An increase in government purchases (for example, more transportation projects) shifts the aggregate demand curve to the right,
        
        Net export spending
        
        National Income Abroad
        Rising national income abroad encourages people living abroad to buy more products, some of which are made in the United States. U.S. net exports thus rise, and the U.S. aggregate demand curve shifts to the right. Declines in national income abroad do the opposite: They reduce U.S. net exports and shift the U.S. aggregate demand curve to the
        
        Exchange Rates
        Changes in the dollar's exchange rate-the price of foreign currencies in terms of the U.S. dollar-may affect U.S. exports and therefore aggregate demand.
- - - - input prices
        
        domestic resource prices :Other things equal, decreases in wages increase profits by reducing per-unit production costs. So when wages fall, the aggregate supply curve shifts to the right. By contrast, increases in wages reduce profits by raising per-unit production costs. So when wages rise, the aggregate supply curve shifts to the left. Examples:
        
        Prices of Imported Resources
        Resources imported from abroad (such as oil, tin, and copper) affect U.S. aggregate supply because added supplies of resources-whether domestic or imported-typically reduce resource prices and, consequently, per-unit production costs.
      - productivity
        A measure of average output or real output per unit of input. For example, the productivity of labor is determined by dividing real output by hours of work.
        
        productivity=total outputs/total inputs
        
        Higher productivity implies greater efficiency. An increase in productivity enables the economy to obtain more output from its limited resources.
      - Legal-Institutional Environment
        
        Changes in the legal-institutional setting in which businesses operate are the final determinant of aggregate supply. Such changes may alter the per-unit costs of output and, in doing so, shift the aggregate supply curve.
        
        Business Taxes and Subsidies
        Higher business taxes, such as sales, excise, and payroll taxes, increase per-unit costs and reduce short-run aggregate supply. Higher business taxes shift aggregate supply to the left.
        
        Government Regulation
        It is usually costly for businesses to comply with government regulations. More regulation therefore tends to increase per-unit production costs and shift the aggregate supply curve to the left.