[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

AGGREGATE EXPENDITURES (AE )
The aggregate
expenditures
schedule shifts
up by the change
in G (∆G )
45°
Figure 30.7
New aggregate
expenditures
schedule (AE 1
)
Y 0
Aggregate
expenditures
= output
Y 1
INCOME = OUTPUT (Y )
THE EFFECT OF AN INCREASE IN
GOVERNMENT PURCHASES
Original
aggregate
expenditures
schedule
(AE 0
)
Government purchases (G ) are one of the components
of aggregate expenditures. An increase in
government purchases shifts the aggregate
expenditures schedule up by the amount of the
increase. Because of the multiplier effect, the
increase in equilibrium output, Y 1 − Y 0 , is greater
than the increase in government purchases, ∆G.
Third, changing perceptions of risk or of future economic conditions affect
investment expenditures. Their influence helps account for the volatility
of investment, and they can be added to our list of factors that shift the
aggregate expenditures schedule.
Government Purchases
The third component of aggregate expenditures is government purchases.
In later chapters, when we discuss fiscal policy in the United States, we will
usually focus on the expenditure and tax policies of the federal government.
However, this category consists of the purchases of goods and services by all
levels of government—federal, state, and local. In fact, of the total government
purchases of roughly $2 trillion (about 18 percent of GDP), only about
one-third—under $700 billion—are made by the federal government. Its total
expenditures of about $3 trillion exceed those by state and local governments,
but a large fraction of federal expenditures are for programs such as Social
Security that do not directly purchase goods and services. The largest
component of federal government purchases is defense, equal to roughly
two-thirds of the total.
At this point in our analysis, it is useful to assume that total government
purchases do not vary with income but instead are simply fixed—say, at $2
trillion. Earlier, we learned that taxes vary with income, so government revenue
will rise and fall as income fluctuates. But because the government can
borrow (run a deficit) when tax revenues are less than expenditures, and
repay its debt when tax revenues exceed expenditures, government spending
does not need to move in lockstep with tax revenues. In later chapters we
will study in greater detail the role of fiscal policy, government expenditures,
and tax policies. For now, though, we will assume that government purchases are
fixed (in real terms).
Government purchases (G) are one component of aggregate expenditures. An
increase in G will raise aggregate expenditures at each level of total income. This
rise shifts the AE schedule up by the amount of the increase in G, as Figure 30.7
shows. Equilibrium again occurs at the intersection of the aggregate expenditures
schedule and the 45-degree line. The total increase in equilibrium output depends
on the size of the change in G and on the multiplier.
Net Exports
The analysis so far has ignored the important role of international trade. Such an
omission is appropriate for a closed economy, an economy that neither imports
nor exports, but not for an open economy, one actively engaged in international
trade. Today, the United States and other industrialized economies are very much
open economies.
676 ∂ CHAPTER 30 AGGREGATE EXPENDITURES AND INCOME