Subject:
Economics
Material Type:
Module
Level:
Community College / Lower Division, College / Upper Division
Provider:
Ohio Open Ed Collaborative
Tags:
Macroeconomics
License:
Creative Commons Attribution Non-Commercial
Language:
English
Media Formats:
eBook, Text/HTML

Aggregate Expenditure: Course Map & Recommended Resources

Overview

This topic may be covered after reading The Aggregate Demand/Aggregate Supply Model (Chapter 11 in OpenStax) and The Keynesian Perspective (Chapter 12 in OpenStax). Preferably, Aggregate Expenditures should be taught as the theory of Aggregate Demand. In the latter case, sections of the Keynesian perspective should be coupled with this section on Aggregate Expenditure. Thereafter, students can study the Money Market and Monetary Policy. Finally, the instructer can put together all these frameworks to derive Aggregate Demand. 

The fundamental ideas of Keynesian economics were developed before the AD/AS model was popularized. From the 1930s until the 1970s, Keynesian economics was usually explained with a different model, known as the expenditure-output approach. This approach is strongly rooted in the fundamental assumptions of Keynesian economics: it focuses on the total amount of spending in the economy, with no explicit mention of aggregate supply.

Learning Objectives

  1. Utilize the aggregate expenditure model to determine macroeconomic equilibrium (8)
  2. Identify the determinants of the components of aggregate expenditure (5,8, 10)
  3. Define the marginal propensity to consume and to save (8)
  4. Describe the multiplier effect and use the formula to calculate changes in equilibrium (8)
  5. Use Keynesian cross model to find equilibrium income. (5,8)
  6. Use the Keynesian cross to show changes in equilibrium (including shocks) (8,10)
  7. Understand the relationship between aggregate expenditure and aggregate demand (8)

NOTE: This Module meets Ohio TAG's 5, 8, 10 for an Intro to Macroeconomics Course

Recommended Textbook Resources

The Expenditure Output Model

All the learning objectives are covered in the above text except for learning Objective 7. Learning objective 7 can be covered using the source below.

Principles of Macroeconomics 2e, Appendix B. Authored by: S. Greenlaw and Shapiro et al. (June 4, 2018.) Provided by: OpenStax CNX. 

Aggregate Expenditures and Aggregate Demand

Macroeconomics Principles v. 2.0, section 13.3. Authored by: Libby Rittenberg.

Supplemental Content/Alternative Resources

Keynesian Theory and Policy

  • This is a simple introduction to the General Theory and has a brief bio of Keynes.
  • Rethinking Macroeconomics: An introduction. Authored by: J. F. McDonald (2016).

Keynesian Cross (Video)

  • This video explains the derivation of the Keynesian Cross failrly well. Subsequent videos show shifts. Can be used if you wanted to flip the classroom or assign a video instead of a reading.
  • Authored by: Khan Academy.

Masters of Money – Keynes (Video)

  • This is part of a 3-part documentary series produced by the BBC. The program is presented by Stephanie Flanders, who was then the BBC economics editor.  The series explores the lives of John Maynard Keynes, Friedrich Hayek, and Karl Marx, and their influence on modern economics.
  • Authored by: BBC (2012).

Topic Exercise

This is a numerical exercise that helps to build an understanding of the components of aggregate expenditures (Learning Objective 2). Question 5 hints at Learning Objective 3. Overall students goto FRED and obtain two data series and construct a scatter plot.

Instructions:
Your goal in this exercise is to see if you can graph a simplified version of the US economy’s consumption function. Recall the consumption function was consumption expenditures depends on disposable income. C[(Y-T)]

  1. Go to FRED
  2. Search for Real Disposable Personal Income (DPIC96). Make sure the data is quarterly. Add that to a graph.
  3. Now Click “Edit Graph”. Then Click “Add Line”. In the search bar type: “Personal Consumption Expenditures, Billions of Dollars, Seasonally Adjusted Annual Rate (PCEC)”. Make sure you pick Quarterly Data. You should have two lines with years on the x-axis. Save this graph
  4. Why is disposable income always larger than personal consumption expenditures. What does this mean? Is the gap between the two lines constant? What does this mean?
  5. Now, in the format tab, change the Graph Type to “Scatter”. Make sure you have disposable income on the X-axis. You can also decrease the size of the mark type. Explain what you see.

Active Learning Exercise

Flipped classrooms is a term used to describe when an instructor chooses to replace lecture with student centered learning strategies. For more information on flipped classrooms, see Cornell’s Center for Teaching Innovation. “Flipping the Classroom”

Flipped classroom: Group Learning Exercise on how to solve for equilibrium in Keynesian Cross Model. 

Ask students to goto the Khan Academy Keynesian Cross Video the night before. In class the next day, put students in random groups and ask them to collectively answer the following set of questions. As a challenge exercise, you may ask students to read this article on the South African Public Works Program: Targeting Poverty through Community-Based Public Works Programmes: Experince from South Africa

  • The Journal of Development Studies, 38:3. Authored by: M. Adato & L. Haddad (2002). Page Numbers: 1-36. DOI: 10.1080/00220380412331322321

Instructions:

 In the Keynesian cross model, assume that the consumption function is given by:

C = 200+0.75(Y-T). 
Planned investment (I) = 100
Government purchases (G) = Taxes (T) = 100

Calculate:

  1. The equilibrium level of income (Y) 
  2. Planned expenditures (E)
  3. What happens to the equilibrium level of income if we increase government purchases to 200? Compute the new equilibrium. 
  4. What do you notice about how much equilibrium income has increased by? Is it more that the 100 increase in government expenditure? Why?
  5. Now, you are ready to use your simple model to generate some predications. In the late 1980’s, South Africa was suffering from a recession. Many of black South African’s were living in terrible conditions in township settlements and this problem was exacerbating political divides. To come out of this recession, South African economists suggested a public works program to improve housing conditions in the townships. The government would not build the homes themselves but would give loans to hire South Africans to build their own homes. Use the Keynesian cross to illustrate how this public works program could bring South Africa out of a recession.