Macroeconomics Aggregate Expenditures

Question: Discuss about the Macroeconomics for Aggregate Expenditures. Answer: 1.a) Aggregate Expenditures = Consumption + Government Expenditure + Investment + Net Exports A = 1300 + 150 + 200 50 = 1600 = Aggregate Expenditure B = 2400 200 150 (-50) B = 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 à ¢Ã¢â€š ¬Ã‚ 50 100 1600 -600 2000 2100 -100 200 150 à ¢Ã¢â€š ¬Ã‚ 50 100 2400 -400 3000 2900 100 200 150 à ¢Ã¢â€š ¬Ã‚ 50 100 3200 -200 4000 3700 300 200 150 à ¢Ã¢â€š ¬Ã‚ 50 100 4000 0 5000 4500 500 200 150 à ¢Ã¢â€š ¬Ã‚ 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, (Savings + Tax) = (Government Expenditure + Investment) + Net Exports (Savings Investments) = (Government Expenditure Tax) + Net Exports 200 = 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 Slope of AE = Marginal Leakage Rate = Change in leakage rate / Change in income MLR = 800/1000 = 0.8 MLR = (1 MPE) MPE = 0.2 d) The aggregate equation of AE is given as, 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. Change in Real GDP = (1/ (1-MLR)) X (Change in Government Expenditure) Change in Real GDP = (1/ (1 0.8) X (200 150) Change 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 S = I Y C G = I Y 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 (M/P)d = Ms 2Y 8000r = (M/P)d 2Y 8000r = 1600 Y 4000r = 800 . (ii) c) Equating equation (i) and (ii) for equilibrium real interest rate IS = LM Y + 2000r 1100 = Y 4000r - 800 r = 300/6000 = 0.05 . (iii) d) For level of output, we take equation (i) and substitute value of equation (iii) Y + 2000r = 1100 Y = 1100 2000 X 300/6000 Y = 1100 100 Y = 1000 = Level of output e) Value of C, I and G C = 200 + 0.25 (Y T) = 200 + 0.25 (1000 200) = 200 + 0.25 (800) = 200+200 = 400 I = 150 + 0.25Y 1000r = 150 + 0.25*1000 1000*300/6000 = 150 + 250 50 = 350 After calculation, 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 2Y 8000r = (M/P)d 2Y 8000r = 1840 Y 4000r = 920 . (iv) Equating equation (i) and (iv) for equilibrium real interest rate, we get IS = LM Y + 2000r 1100 = Y 4000r - 920 r = 180/6000 = 0.03 . (v) For level of output, we take equation (i) and substitute value of equation (v) Y + 2000r = 1100 Y = 1100 2000 X 180/6000 Y = 1100 60 Y = 1040 = Level of output Value of C and I C = 200 + 0.25 (Y T) = 200 + 0.25 (1040 200) = 200 + 0.25 (840) = 200+210 = 410 I = 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. The IS relation can be devised from S = I S = I Y C G = I Y 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 IS = LM Y + 2000r 1400 = Y 4000r - 800 r = 600/6000 = 0.01 . (vii) For level of output, we take equation (vi) and substitute value of equation (vii) Y + 2000r = 1400 Y = 1400 2000 X 600/6000 Y = 1400 200 Y = 1200 = Level of output Value of C and I C = 200 + 0.25 (Y T) = 200 + 0.25 (1200 200) = 200 + 0.25 (1000) = 200 + 250 = 450 I = 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.