Lecture Notes Days 7-8. The Keynesian Model

# Lecture Notes Days 7-8. The Keynesian Model - Day 7...

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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.

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Lecture Notes Days 7-8. The Keynesian Model - Day 7...

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