chapter 21 the income-expenditure model

chapter 21 the income-expenditure model - CHAPTER 21 The...

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CHAPTER 21 The Income- Expenditure Model
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              Chapter Twenty-One 2 of 35 Lecture Outline 1. Developing a simple income-expenditure model to determine equilibrium output 2. Using a consumption function to describe consumption spending a. autonomous consumption and the marginal propensity to consume b. changes in the consumption function 3. Understanding the link between saving and investment 4. Understanding how GDP is affected by changes in consumption and/or investment: the multiplier effect 5. Examining the impact of government spending and taxation on GDP: fiscal policy and fiscal multipliers 6. Understanding how automatic stabilisers work in an economy 7. Including the foreign sector in aggregate demand: exports and imports FYR
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                             Chapter Twenty-One 3 of 35 A Simple  Income-Expenditure Model At any point on the 45˚ line, the distance to the horizontal axis is the same as the distance to the vertical axis.
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                              Chapter Twenty-One 4 of 35 Equilibrium Output Aggregate expenditure curve Shows the level of aggregate expenditure planned at each level of real GDP. (Short-Run) Equilibrium Output : the level of GDP at which planned expenditure equals the amount that is produced. Y = PAE Equilibrium output = y * = C + I = planned expenditures Keynesian assumption: Producers meet demand at preset prices in the short
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Chapter Twenty-One 5 of 35 Adjustment to Equilibrium Output If output were lower ( If output were lower ( y y 1 ), it ), it would fall short of demand would fall short of demand and production would rise. and production would rise. If output were higher ( y 2 ), it would exceed demand and production would fall. Adjustments to Equilibrium Output C + I Production Inventories Direction of Output 100 100 No change Output stays constant 100 80 Depletion of inventories Output increases 100 120 Excess of inventories Output stays decreases Expenditure Output, Y 0 y 2 Excess production y 1 Insufficient production
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Chapter Twenty-One 6 The consumption function shows the relationship between desired spending and the level of income. Ca = autonomous consumption , does not depend on the level of income. by
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This note was uploaded on 02/12/2012 for the course ECON EC1101 taught by Professor Ms during the Spring '08 term at National University of Singapore.

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chapter 21 the income-expenditure model - CHAPTER 21 The...

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