Income and Expenditures Equilibrium

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Income and Expenditures Equilibrium
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Equilibrium Real GDP mpc .7, mpi .1
(1) Real GDP (Y) (2) Consumption (C) (3) Investment (I) (4) Govt 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
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Movement to Equilibrium
45o line AE Y
700
Total Expenditure
600
Increase Output, increase Employment
500
Reduce Output, Reduce Employment
Aggregate planned expenditure
400
0
300
400
500
600
700
Real GDP (Output)
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Leakages and Injections
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Spending Multiplier

• The spending multiplier measures the change in
  equilibrium income (real GDP) produced by change
  in autonomous expenditures
• ?Y/?I ?Y/?G ?Y/?X
• By how many dollars does real GDP change for
  every dollar change in autonomous expenditures?

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Computing the Spending MultiplierMarginal
propensity to save mps .3Marginal
propensity to import mpi .1
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 Work
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Gaps Recessionary Gap, GDP Gap
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GDP Gap, Recessionary Gap

• GDP 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)?

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Sequence of Expenditures
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Sequence 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 Thrift