ECN 211 L13 Equilibrium in the Keynesian Model_BB

ECN 211 L13 Equilibrium in the Keynesian Model_BB -...

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Unformatted text preview: 05/13/09 1 ECN 211 Macroeconomic Principles L13:Equilibrium in the Keynesian Model. 05/13/09 2 Aggregate Expenditures Remember AE = C + I + G + NX Remember AE varies as income varies Note: AE are planned expenditures I.e. what we plan to spend at different levels of income. 05/13/09 3 Aggregating expenditures. 30 Y Aggregate expenditures C C+I 80 150 C+I+G C+I+G+NX=AE 200 05/13/09 4 Equilibrium Equilibrium occurs in the fixed price Keynesian model when aggregate expenditures equal the level of output/input Y = AE 05/13/09 5 Real GDP (Y) Aggregate expenditures 45 o Line (Y=AE) $100 $100 $200 $200 $300 $300 Therefore have to be on the 45 degree line in equilibrium 05/13/09 6 Aggregate Expenditures Example C = 30 + 0.7Y I = 50 G = 70 X = 100 M = 50 + 0.1Y 05/13/09 7 Equilibrium AE = 30 + 0.7Y + 50 + 70 + 100 - 50 - 0.1Y AE = 200 + 0.6Y Equilibrium occurs when AE = Y Thus Y = 200 + 0.6Y 200 = 0.4Y Y* = 500 05/13/09 8 Real GDP (Y) 45 o Line (Y=AE) $200 $200 $500 $500 $400 $440 $400 AE Aggregate expenditures Getting to Equilibrium Found that equilibrium occurs (Y=AE) when income (real GDP) equals $500 But how do we get there? Suppose income was $400 Planned aggregate expenditure at an income level of $400 is $440 We are planning on purchasing more output than what has been produced this year. Remember GDP (Y) is what is produced in a given year. So how can we consume more than what is produced?? 05/13/09 9 GDP (Y) and Inventory Investment. Remember when units are produced but not sold within a year they are an addition to inventory investment Therefore if we plan to consume more than what is produced within a given year....
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ECN 211 L13 Equilibrium in the Keynesian Model_BB -...

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