srequil - E202 Short-run Equilibrium SHORT-RUN EQUILIBRIUM...

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E202 – Short-run Equilibrium 1 SHORT-RUN EQUILIBRIUM The feedback effect from the circular flow of output and income complicates short-run adjustment. AD Q Y C AD Schematically: The behavioral elements of this model fall into two categories. • INDUCED: Determined (in part) by income > Consumption Source of the feedback effect > Net taxes, saving, imports LEAKAGES from the output/ income flow • AUTONOMOUS: NOT a function of income > Investment, govt. spending, exports INJECTIONS into the output/ income flow Short-run equilibrium output/income will be: • Positively related to injections • Inversely related to leakages In equilibrium injections and leakages will be equal.
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E202 – Short-run Equilibrium 2 FORMAL MODEL The equilibrium between injections and leakages can be represented by: AD = 1 Leakage Rates ! " # $ % Autonomous Spending ( ) AD = 1 Saving Rate + Tax Rate + Import Rate ! " # # # $ % I + G + EX ( ) = Multiplier ( ) Autonomous Spending ( ) Note that equilibrium AD will be: • Positively related to injections • Inversely related to leakages LEAKAGE RATES SAVINGS Earlier we developed the saving function:
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This note was uploaded on 03/30/2010 for the course ECON-E 202 taught by Professor Nahn during the Spring '08 term at Indiana.

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srequil - E202 Short-run Equilibrium SHORT-RUN EQUILIBRIUM...

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