25A SHORT RUN: KEYNISS MODEL
AGREGATED EXPENDITURE + CURVE + MULTIPLER + SOME ECONOMIC SHIT

In the very short run, firm set their prices and hold them fixed and the quantities they sell depend on demand, not supply.
Fixed prices have two implications for the economy as a whole:
1.Because each firm’s price is fixed, the price level is fixed
2.Aggregate demand determines the aggregate quantity of goods sold  real GDP.

Expenditure Plans
The four components of aggregate expenditure  consumption expenditure, investment, government expenditures on goods and services, and net exports  sum to real GDP.
Aggregate planned expenditure equals planned consumption expenditure plus planned investment plus planned government expenditures plus planned exports minus planned imports

Other things remaining the same,
1.An increase in real GDP increases aggregate expenditure
2.An increase in aggregate expenditure increases real GDP
This two-way link determines real GDP when the price level is fixed

C onsumption and saving are influenced by:
1.Disposable income
2.The real interest rate
3.Wealth
4.Expected future income
Disposable income is aggregate income (GDP) minus taxes plus transfer payments

The marginal propensity to consume (MPC) is the fraction of a change in disposable income spent on consumption.
It is calculated as the change in consumption expenditure, C, divided by the change in disposable income, YD, that brought it about. That is:
MPC = C/YD

The marginal propensity to save (MPS) is the fraction of a change in disposable income that is saved. It is calculated as the change in saving, S, divided by the change in disposable income, YD, that brought it about. That is:
MPS = S/YD

Example:
If investment increases by €200 and, in response, equilibrium expenditure increases by €800 the multiplier is 4.0
The MPC plus the MPS equals one.
W MIEJSCACH W KTÓRYCH JEST , STOI ZNAK DELTY ( MÓJ KOMP TEGO NIE ODCZYTUJE)

In the short run, home imports are influenced primarily by home real GDP.
The marginal propensity to import is the fraction of an increase in real GDP spent on imports.
For example, if a €100 billion increase in real GDP increases imports by €30 billion, the marginal propensity to import is 0.3.

Consumption expenditure minus imports, which varies with real GDP, is induced expenditure..
Consumption expenditure and imports can have an autonomous component.

The relationship between aggregate planned expenditure and real GDP can be described by an aggregate expenditure schedule, which lists the level of aggregate expenditure planned at each level of real GDP.

The relationship can also be described by an aggregate expenditure curve(AE Curve), which is a graph of the aggregate expenditure schedule.

Consumption expenditure minus imports, which varies with real GDP, is induced expenditure.

The sum of investment, government purchases, and exports, which does not vary with GDP, is autonomous expenditure.
An increase in autonomous expenditure shifts the AE curve upward; a decrease shifts it downward.
When autonomous expenditure decreases, firms’ inventories pile up, so firms decrease production and real GDP decreases.

Actual aggregate expenditure is always equal to real GDP.

Aggregate planned expenditure might differ from actual aggregate expenditure

Equilibrium expenditure is the level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP.

If aggregate planned expenditure is greater than real GDP (the AE curve is above 45 degrees line) there is an unplanned decrase in inventories.

If aggregate planned expenditure is less than real GDP (the AE curve is below the 45° line), firms have an unplanned increase in stocks or inventories

The multiplier is the amount by which a change in autonomous expenditure is magnified or multiplied to determine the change in equilibrium expenditure and real GDP.
The multiplier equals the change in equilibrium expenditure divided by the change in autonomous expenditure.
So the multiplier = 1/(1 – MPC(or AE Curve)) or, alternatively, the multiplier = 1/MPS.
EXAMPLE:
Multiplier = 4.0 if AE Curve = 0.75 because: 1/1-0,75=4

AE CURVE + MULTIPLIER ACTIVITIES. (info co zawierają dane czynniki powyżej w def.)
An increase in investment (or any component of autonomous expenditure) increases aggregate expenditure and real GDP
Increase in real GDP leads to an increase in induced expenditure.
Increase in induced expenditure leads to a further increase in aggregate expenditure and real GDP. Income taxes decrase the size of the multiplier.
Income taxes and imports both reduce the slope of the AE curve and make the size of the multiplier smaller.
Increase in autonomous expenditure brings an unplanned decrease in stocks, which triggers an expansion.

Decrease in autonomous expenditure brings an unplanned increase in stocks, which triggers a recession.

The aggregate expenditure curve is the relationship between aggregate planned expenditure and real GDP, with all other influences on aggregate planned expenditure remaining the same.

The aggregate demand curve is the relationship between the quantity of real GDP demanded and the price level, with all other influences on aggregate demand remaining the same.
Increase in autonomous expenditure shifts the aggregate expenditure curve upward and shifts the aggregate demand curve rightward by the multiplied increase in equilibrium expenditure.
Increase in investment shifts the AEcurve upward and shifts the ADcurve rightward.
Real GDP increases by less than the shift of the ADcurve because the price level rises
Increase in autonomous expenditure in the short-run increases real GDP and the price level.
The money wage rate starts to rise, the SAScurve starts to shift leftward and the price level rises.

The AEcurve shifts downward and real GDP decreases until it is back at potential real GDP.

Starting from full employment, the multiplier in the long-run is zero.