Aggregate Expenditures model.
The model that determines the equilibrium level of GDP by the intersection of the aggragate expenditures and aggreagate output (and income) curves.
Spending multiplier (SM)
- The ratio of the change in real GDP to an initial change in any component of aggregate expenditures, including consumptions, investment, goverment spending and net exports.
- 1 / (1-MPC) or
- 1 / MPS
Spending multiplier Arithmetic
- Any initial change in spending by the goverment, household or firms creates a chain reaction of further spending, which causes a greater comulative change in aggregate expenditures.
- chg in G X [1 / (1-MPC)]
- this formula will tell us how much will be the increase in G after the end of all rounds.
The amount by which the aggregate expenditures curve must be increase to achieve full employment equilibrium.
- The change in aggregate expenditures (total spending) resulting from an initial change in taxes.
- TM = 1- SM
The amount by which the aggregate expenditures curve must be decreased to achive full-employment equilibrium.