Macroeckeynesianmodel - Day 7 Building the Keynesian Model...

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Day 7 – Building the Keynesian Model Consumption and Real GDP: Disposable personal income = income – taxes DPI = Y – Tx For now, assume Tx = 0, thus DPI = Y Adding Investment: Simplest Keynesian Model, two sectors, the household and businesses. AE = C + I; AE is aggregate expenditures, C is Consumption by households, I is Investment by Businesses. At equilibrium, AE = Y; so Y = C + I Investment (I): business spending on additions to plants, equipment, inventories, and newly constructed housing. Putting it in the model on a graph: (Figure 15.10) What determines Investment? Unlike Consumption, which is determined by income and thus determined within the model, Investment is determined outside the model. Investment might be decided by expected profits, interest costs, or business confidence…all outside the model. What we know so far: AE = C + I AE = Y at equilibrium, so Y = C + I Also: Y = C + S Thus, the other way to talk about the equilibrium condition is to say, putting Y = C + I together with Y = C + S, then I = S. Savings and Investment are done by different groups (households and businesses) for different reasons. Putting the Model into a graph : (Figure 15.11) Point on graph where two lines intersect- savings=0 The Keynesian Cross Diagram : I p is planned investment, I a is actual investment. If Consumers save more than investors plan to borrow and invest, then investors actually invest more, in the form of unintended increase in inventories. This is point B. But this is not equilibrium: the unintended increase in inventories will cause firms to
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This note was uploaded on 10/13/2011 for the course ECONOMICS 103 taught by Professor Crocker during the Fall '08 term at UMass (Amherst).

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Macroeckeynesianmodel - Day 7 Building the Keynesian Model...

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