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1、 Prepared By Brock WilliamsChapter 11The Income-ExpenditureModelHeading into the global recession in 2007, the Chinese economy was growing at the extraordinary rate of 11 percent per year.Copyright 2014 Pearson Education, Inc. All rights reserved.11-2 Learning Objectives1. Discuss the income-expendi
2、ture model.2. Identify the two key components of the consumption function.3. Calculate equilibrium income in a simple model.4. Explain how government spending and taxes affect equilibrium income.5. Discuss the role of exports and imports in determining equilibrium income.6. Explain how the aggregate
3、 demand curve is related to the income-expenditure model.Copyright 2014 Pearson Education, Inc. All rights reserved.11-3 Equilibrium Output FIGURE 11.1The 45 LineAt any point on the 45 line, the distanceto the horizontal axis is the same as the distance to the vertical axis.11.1 A SIMPLE INCOME-EXPE
4、NDITURE MODELCopyright 2014 Pearson Education, Inc. All rights reserved.11-4 Equilibrium Output FIGURE 11.2Determining Equilibrium Outputequilibrium outputThe level of GDP at which planned expenditure equals the amount that is produced.equilibrium output = y* = C + I = planned expendituresAt equilib
5、rium output y*, total demand y* equals output y*.planned expendituresAnother term for total demand for goods and services.11.1 A SIMPLE INCOME-EXPENDITURE MODEL (cont.)Copyright 2014 Pearson Education, Inc. All rights reserved.11-5 Adjusting to Equilibrium Output FIGURE 11.3Equilibrium OutputEquilib
6、rium output (y*) is determined at a, where demand intersects the 45 line.If output were higher (y1), it would exceed demand and production would fall. If output were lower (y2), it would fall short of demand and production would rise.11.1 A SIMPLE INCOME-EXPENDITURE MODEL (cont.)Copyright 2014 Pears
7、on Education, Inc. All rights reserved.11-6 Consumer Spending and Incomeconsumption functionThe relationship between consumption spending and the level of income.C = Ca + byautonomous consumptionThe part of consumption that does not depend on income.marginal propensity to consume (MPC)The fraction o
8、f additional income thatis spent.11.2 THE CONSUMPTION FUNCTIONCopyright 2014 Pearson Education, Inc. All rights reserved.11-7 Consumer Spending and Income FIGURE 11.4Consumption FunctionThe consumption function relates desired consumer spending to the level of income.11.2 THE CONSUMPTION FUNCTION (c
9、ont.)Copyright 2014 Pearson Education, Inc. All rights reserved.11-8 Changes in the Consumption Function FIGURE 11.5Movements of the Consumption Function11.2 THE CONSUMPTION FUNCTION (cont.)Copyright 2014 Pearson Education, Inc. All rights reserved.11-9 Changes in the Consumption FunctionTwo factors
10、 that can cause autonomous consumption to change: Increases in consumer wealth will cause an increase in autonomous consumption. Increases in consumer confidence will increase autonomous consumption.11.2 THE CONSUMPTION FUNCTION (cont.)Copyright 2014 Pearson Education, Inc. All rights reserved.11-10
11、 FALLING HOME PRICES, THE WEALTH EFFECT, AND DECREASED CONSUMER SPENDINGAPPLYING THE CONCEPTS #1: How do changes in the value of homes affect consumer spending?Home equity is the difference between the home value and what is owed on the mortgage. The largest component of net wealth for most families
12、. Changes in home equity like other forms of wealth affect consumer spending.From 1997 to mid-2006 housing prices rose by about 90 percent and consumer wealth grew by $6.5 trillion. This ended in 2006 as housing prices began to fall.According to a review of studies by the Congressional Budget Office
13、, each $1 decline in consumer wealth would lower consumption spending between $.02 and $.07, or $21 to $72 billion of spending. This would reduce economic growth 0.1 to 0.5 percent during 2007.A P P L I C A T I O N1Copyright 2014 Pearson Education, Inc. All rights reserved.11-11 FIGURE 11.6Equilibri
14、um Output and the Consumption FunctionEquilibrium output is determined where the C + I line intersects the 45 line.At that level of output, y*, desired spending equals output.y*=(Ca+I)(1-b)equilibrium output =(autonomous consumption + investment)(1- MPC)11.3 EQUILIBRIUM OUTPUT ANDTHE CONSUMPTION FUN
15、CTIONCopyright 2014 Pearson Education, Inc. All rights reserved.11-12 Saving and InvestmentS = y Cy = C + Iy C = IS = Isavings functionThe relationship between the level of saving and the level of income.11.3 EQUILIBRIUM OUTPUT ANDTHE CONSUMPTION FUNCTION (cont.)Copyright 2014 Pearson Education, Inc
16、. All rights reserved.11-13 Saving and Investment FIGURE 11.7Savings, Investment, and Equilibrium OutputEquilibrium output is determined at the level of output, y*, where savings equals investment.11.3 EQUILIBRIUM OUTPUT ANDTHE CONSUMPTION FUNCTION (cont.)Copyright 2014 Pearson Education, Inc. All r
17、ights reserved.11-14 Understanding the Multiplier FIGURE 11.8The MultiplierWhen investment increases from I0 to I1, equilibrium output increases from y0 to y1.The change in output (y) is greater than the change in investment (I).multiplier =1(1- MPC)11.3 EQUILIBRIUM OUTPUT ANDTHE CONSUMPTION FUNCTIO
18、N (cont.)Copyright 2014 Pearson Education, Inc. All rights reserved.11-15 USING LONG-TERM MACRO DATA TO MEASURE MULTIPLIERSAPPLYING THE CONCEPTS #2: What evidence does the long historical record provide about multipliers?Estimating the effect of multipliers is difficult because governments do not ch
19、ange spending and taxes much during normal economic times.Looking at periods of major war buildup and aftermath revealed: Defense spending had a multiplier of less than one so the increase in the economy was less than the government expenditure. There was evidence that the expenditures crowded out o
20、ther components of spending. The multiplier was larger during periods of greater unemployment.A P P L I C A T I O N2Copyright 2014 Pearson Education, Inc. All rights reserved.11-16 FIGURE 11.9Government Spending, Taxes, and GDPFiscal Multipliersplanned expenditures including government = C + I + G11
21、.4 GOVERNMENT SPENDINGAND TAXATIONCopyright 2014 Pearson Education, Inc. All rights reserved.11-17 Fiscal MultipliersThe consumption function with taxes isThe formula for the tax multiplier ismultiplier for government spending =1(1- MPC)C=Ca+b(y-T)tax multiplier =-MPC(1- MPC)11.4 GOVERNMENT SPENDING
22、AND TAXATION (cont.)Copyright 2014 Pearson Education, Inc. All rights reserved.11-18 Using Fiscal MultipliersAlthough it is very simple, our income-expenditure model illustrates some important lessons: An increase in government spending will increase total planned expenditures for goods and services
23、. Cutting taxes will increase the after-tax income of consumers and will also lead to an increase in planned expenditures for goods and services. Policymakers need to take into account the multipliers for government spending and taxes as they develop policies.In the long run, of course, we are bette
24、r off if government spends the money wisely, such as on needed infrastructure such as roads and bridges. This is an example of the principle of opportunity cost.P R I N C I P L E O F O P P O RT U N I T Y C O S TThe opportunity cost of something is what you sacrifice to get it.11.4 GOVERNMENT SPENDIN
25、GAND TAXATION (cont.)Copyright 2014 Pearson Education, Inc. All rights reserved.11-19 THE BROKEN WINDOW FALLACY AND KENSESIAN ECONOMICSAPPLYING THE CONCEPTS #3: How does Keynesian Economics change our normal ideas of economic scarcity?Austrian economist, Henry Hazlitt, popularized the “Broken Window
26、s” fallacy in economics. Imagine that a hoodlum threw a brick through a store window. While at first this seems to be a tragedy, the store owner has to hire a firm to fix the window. That generates business for the window repair firm and, through a multiplier, additional business throughout the comm
27、unity. Was the broken window good for society?The fallacy here is that the money that the store owner paid to have the window repaired would have been spent elsewhere in the economy, say on clothing.Hazlitt applies a similar argument to public spending financed by taxes. A government spending progra
28、m may appear to increase business, but the taxes needed to finance the spendingeither paid now or in the futurewill mean less business for other firms. Government spending and the taxes necessary to finance it will just crowd out other production of goods and services in the economy. But in the Keyn
29、esian world, where resources are underemployed, the story is quite different. Here the increase in spendingeven financed by taxeswill bring resources that are not being utilized into the economy. As long as there is excess capacity in the economy, the extra spending will increase output and not crow
30、d out other goods and services. A P P L I C A T I O N3Copyright 2014 Pearson Education, Inc. All rights reserved.11-20 Understanding Automatic Stabilizers FIGURE 11.10Growth Rates of U.S. GDP, 18712011After World War II, fluctuations in GDP growth became considerably smaller.SOURCE: Angus Maddison,
31、Dynamic Forces in Capitalist Development (New York: Oxford University Press, 1991); U.S. Department of Commerce.11.4 GOVERNMENT SPENDINGAND TAXATION (cont.)Copyright 2014 Pearson Education, Inc. All rights reserved.11-21 Understanding Automatic Stabilizers FIGURE 11.11Increase in Tax Rates C = Ca +
32、b(1 t)yadjusted MPC = b(1 t)An increase in tax rates decreases the slope of the C + I + G line. This lowers output and reduces the multiplier.11.4 GOVERNMENT SPENDINGAND TAXATION (cont.)Copyright 2014 Pearson Education, Inc. All rights reserved.11-22 To modify our model to include the effects of wor
33、ld spending on exports and U.S. spending on imports, we need to take two steps:M = mymarginal propensity to importThe fraction of additional income that is spent on imports.1Add exports, X, as another source of demand for U.S. goods and services.2Subtract imports, M, from total spending by U.S. resi
34、dents. We will assume that imports, like consumption, increase with the level of income.11.5 EXPORTS AND IMPORTSCopyright 2014 Pearson Education, Inc. All rights reserved.11-23 FIGURE 11.12U.S. Equilibrium Output in an Open EconomyOutput is determined when the demand for domestic goods equals output
35、.11.5 EXPORTS AND IMPORTS (cont.)Copyright 2014 Pearson Education, Inc. All rights reserved.11-24 FIGURE 11.13How Increases in Exports and Imports Affect U.S. GDP11.5 EXPORTS AND IMPORTS (cont.)Copyright 2014 Pearson Education, Inc. All rights reserved.11-25 THE LOCOMOTIVE EFFECT: HOW FOREIGN DEMAND
36、 AFFECTS A COUNTRY S OUTPUTAPPLYING THE CONCEPTS #4: How do countries benefit from growth in their trading partners?From the early 1990s until quite recently, the United States was what economists term the “l(fā)ocomotive” for global growth. Our demand for foreign products increased. U.S. imports increased along with output during this period. The increased demand fueled exports in foreign countries and promoted their growth.Studies have shown that the increase in demand
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