9 The Aggregate Expenditure Model
9.1 The Aggregate expenditure model
Review Activities
Practice Problems
There are no practice problems for this section.
External Resources
No external resources for this section. (Videos in section 9.4.)
9.2 Components of aggregate expenditure
Review Activities
Practice Problems
Problem 10.2.1: The consumption function for an individual is given as C = 5,000 + 0.8 MPC.
- What is the level of autonomous consumption?
- What is the marginal propensity to consume? Marginal propensity to save?
- If this individual income is $50,000, how much will they spend?
- If this individual receives an additional $5,000, how much will they spend? Save?
Solutions: $5,000; 0.8, 0.2; $45,000; $4,000, $1,000
Example 9.2.2: The consumption function for an individual is given as C = 10,000 + 0.6 MPC.
- What is the level of autonomous consumption?
- What is the marginal propensity to consume? Marginal propensity to save?
- If this individual income is $70,000, how much will they spend?
- If this individual receives an additional $2,000, how much will they spend? Save?
Solutions: $10,000; 0.6, 0.4; $52,000; $1,200, $800
External Resources
No external resources for this section. (Videos in section 9.4).
9.3 Potential GDP
Review Activities
Practice Problems
No practice problems for this section.
External Resources
No external resources for this section.
9.4 Graphing the aggregate expenditure model
Review Activities
Practice Problems
Problem 9.4.1: Show an aggregate expenditure model that is in a state of macroeconomic equilibrium. Be sure everything is fully labelled.
Solution: See video.
Problem 9.4.2: Graphically show an economy where inventories are being depleted. Additionally show the return to macroeconomic equilibrium.
Solution: See video.
Problem 9.4.3: Graphically show an economy where inventories are increasing. Additionally show the return to macroeconomic equilibrium.
Solution: See video.
Problem 9.4.4: Graphically show an increase in planned investment on the aggregate expenditure model. Show the new macroeconomic equilibrium.
Solution: See video.
Problem 9.4.5: Graphically show a decrease in government spending on the aggregate expenditure model. Show the new macroeconomic equilibrium.
Solution: See video.
Problem 9.4.6: Use the table below to answer the following questions:
| Real GDP | Consumption | Planned Investment | Government Spending | Planned AE | Unplanned Change in Inventory | Change in Real GDP |
| $13,000 | $11,500 | $500 | $1,000 | |||
| $13,000 | $12,000 | $500 | $1,000 | |||
| $15,000 | $12,500 | $500 | $1,000 | |||
| $16,000 | $13,000 | $500 | $1,000 | |||
| $17,000 | $13,500 | $500 | $1,000 |
- Complete the table.
- Determine the macroeconomic equilibrium.
- Determine the MPC.
Solutions: See video for table; Equilibrium occurs at $13,000; MPC=0.5
Problem 9.4.7: Use the table below to answer the following questions:
| Real GDP | Consumption | Planned Investment | Government Spending | Planned AE | Unplanned Change in Inventory | Change in Real GDP |
| $33,000 | $30,700 | $2,000 | $500 | |||
| $34,000 | $31,600 | $2,000 | $500 | |||
| $35,000 | $32,500 | $2,000 | $500 | |||
| $36,000 | $33,400 | $2,000 | $500 | |||
| $37,000 | $34,300 | $2,000 | $500 |
- Complete the table.
- Determine the macroeconomic equilibrium.
- Determine the MPC.
Solutions: See video for table; Equilibrium occurs at $35,000; MPC=0.9
External Resources
Khan Academy: Keynesian Cross (An alternative name for the Aggregate-Expenditure Model)
Khan Academy: Shifting the Aggregate Expenditure Model
10.5 The Multiplier effect
Problem 9.5.1: The government enacts a $250 billion stimulus program directed at consumers. Further, the government expects that people will spend 90 cents of each dollar received.
-
Assuming no frictions exist, what total impact will this have on aggregate demand?
-
Of that increase in aggregate demand, how much of it came from an increase in government spending? Consumption?
-
Suppose that the government wants the stimulus to increase aggregate demand by a total of $750 million. In this case, how much of a stimulus should be instituted.
Answers: $2.5 trillion ($2,500 billion); Change in Government = $250 billion, Change in Consumption = $2.25 trillion ($2,250 billion); $75 billion
Problem 9.5.2: If we expect people to save 30 cents on the dollar of stimulus received, how much impact will each dollar of a government stimulus have on aggregate demand? Note: People can only spend or save.
Answer: $3.33 per $1 of government spending.
Problem 9.5.3: The government enacts a $150 billion stimulus package. The National Bureau of Economic Research estimates that the marginal propensity to consume is 0.80. Complete the chart below which shows the initial stimulus and first three rounds of spending.
| Round | Autonomous Spending | Induced Spending | Total Spending |
| 1 (init.) | |||
| 2 | |||
| 3 | |||
| 4 |
Answers: See solutions.
External Resources
Khan Academy: Multiplier