income and expenditures equilibrium
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Income and Expenditures EquilibriumIncome and Expenditures Equilibrium
2
Equilibrium Real GDP: mpc = .7, mpi = .1(1)
RealGDP(Y)
(2)
Consumption(C)
(3)
Investment(I)
(4)Gov’t
Spending(G)
(5)Net
Exports(X)
(6)Aggregate
Expenditures(AE)
(7)Unplanned Change in Inventories
(8)Change in Real
GDP
0 30 50 70 50 200 -200 Up
100 100 50 70 40 260 -160 Up
200 170 50 70 30 320 -120 Up
300 240 50 70 20 380 -80 Up
400 310 50 70 10 440 -40 Up
500 380 50 70 0 500 0 No chg
600 450 50 70 -10 560 40 Down
700 520 50 70 -20 620 80 Down
3Real GDP (Output)
Agg
rega
te p
lan
ned
expe
ndit
ure
400
500
600
700
0 300 400 500 600 700
45o line: AE = Y
Total Expenditure
Reduce Output,Reduce Employment
Increase Output,increase Employment
Movement to EquilibriumMovement to Equilibrium
4
Leakages and InjectionsLeakages and Injections
5
Spending Multiplier
The spending multiplier measures the change in equilibrium income (real GDP) produced by change in autonomous expenditures:
ΔY/ΔI = ΔY/ΔG = ΔY/ΔX – By how many dollars does real GDP change for
every dollar change in autonomous expenditures?
MPIMPS 1
leakages1
Multiplier
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Computing the Spending Multiplier:Marginal propensity to save = mps = .3Marginal propensity to import = mpi = .1
MPIMPS 1
leakages1
Multiplier
If MPS = 0.30 and MPI is 0.10, then MPS + MPI = 0.40 = 4/10.
1/0.40 = 1/(4/10) = 10/4 = 2.5
The multiplier is 2.5.
NOTE: The spending multiplier would be larger in a closed economy because MPI would be zero.
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Multiplier at WorkMultiplier at Work
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Gaps: Recessionary Gap, GDP Gap
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GDP Gap, Recessionary GapGDP gap = potential real GDP
– actual real GDP– How much does real GDP have to
increase to generate full employment?
Recessionary gap
– How much additional spending is needed to achieve potential GDP (to create full employment)?
multiplier spendinggap GDP
gapry Recessiona
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Sequence of ExpendituresSequence of Expenditures
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Sequence of ExpendituresSequence of Expenditures
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From Aggregate ExpendituretoAggregate Demand
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The Fixed-Price, Keynesian AS-AD Model
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The Paradox of ThriftThe Paradox of Thrift
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