420 Ch 5

420 Ch 5 - 5.1 Problem of Unemployment According to Keynesian theory high unemployment in GB and US was the result of deficiencies in Aggregate

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5.1 Problem of Unemployment According to Keynesian theory, high unemployment in GB and US was the result of  deficiencies in Aggregate Demand Gov’t needed to spend in on public works to increase AD ( expansionary fiscal policy) 5.2 Conditions for Equilibrium Output Equilibrium occurs when output is equal to  aggregate demand Y=E ,  GDP = Aggregate Demand Aggregate Demand =  Consumption (C ), Desired Business investment Demand (Ir ),  and government sector Demand for goods and services (G) When considering a closed economy: Neglect foreign trade GDP = GNP Depreciation is Neglected NNP is neglected GDP = National Income The aggregate price level is fixed All variable are  real  variables, and all changes are changes in real terms 5.2 National Income (y)  = C + S + T
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There are three equivalent ways to state the condition of equilibrium in the model a.i. Y = E = C+I+G a.ii. S + T = I + G a.iii. Ir = I National Income is distributed by household into three flows ( p74) Households:  Suppliers of factor services and demanders of output Business Sector:  suppliers of output and demanders of factor services Flow of consumption expenditures that goes back to the business sector as a demand  for the output.  Inner loop depicts a process whereby firms produce   Y,  which generates an equal  amount of income to the household sector, which in turn generates a demand for the  output ( ) The two other flows out of the household sector are the  savings flow  and the  flow of  tax payments These can be seen as leakages from the central loop The  savings leakage  flows into financial markets, savings is held in some financial  asset The  tax flow  is paid to the government sector (net tax) Investment injections  are additional demands for output from the business and  government sector.  The dollar amount of investment represents an equivalent flow of funds lent to the  business sector.  Government spending  is a demand for the output of the business sector  The second version of equilibrium, ensures that the amount of income  households do not spend on output (S+T) and therefore the amount of output that  is produced but not sold to households (Y-C = S+T), is just equal to the amount of  the other two sectors wish to buy (I+G) The third notion of equilibrium states that desired investment must equal realized 
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This note was uploaded on 02/23/2012 for the course ECON 420 taught by Professor Hill during the Fall '08 term at UNC.

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420 Ch 5 - 5.1 Problem of Unemployment According to Keynesian theory high unemployment in GB and US was the result of deficiencies in Aggregate

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