Determination of National Income and the Role of Fiscal Policy

1. Determination of National Income and the Role of Fiscal Policy

2. Equilibrium Level of National Income • The circular flow of income

3. A simplified circular flow of income model

4. A simplified circular flow of income model Cd

5. A simplified circular flow of income model Cd Incomes

6. A simplified circular flow of income model Cd Incomes W = S + T + M

7. A simplified circular flow of income model J = I + G + X Cd Incomes W = S + T + M

8. Equilibrium Level of National Income • Effect on national income of a change in injections and/or withdrawals • J > W : national income rises • W > J : national income falls • The Keynesian diagram: the withdrawals and injections approach • the withdrawals curve

9. Deriving equilibrium national income W Cd, W, J O Y

10. Equilibrium Level of National Income • Effect on national income of a change in injections and/or withdrawals • J > W : national income rises • W > J : national income falls • The Keynesian diagram: the withdrawals and injections approach • the withdrawals curve • the injections curve

11. Deriving equilibrium national income W J Cd, W, J O Y

12. Equilibrium Level of National Income • Effect on national income of a change in injections and/or withdrawals • J > W : national income rises • W > J : national income falls • The Keynesian diagram: the withdrawals and injections approach • the withdrawals curve • the injections curve • equilibrium

13. Deriving equilibrium national income W a J b Cd, W, J O Y1 Y

14. Deriving equilibrium national income c d Y2 Cd, W, J W J O Y

15. Deriving equilibrium national income x Cd, W, J W J O Ye Y

16. Equilibrium Level of National Income • The Keynesian diagram: the income and expenditure approach • the 45° line

17. Deriving equilibrium national income Y = Cd + W Cd, W, J W J O Y

18. Equilibrium Level of National Income • The Keynesian diagram: the income and expenditure approach • the 45° line • the expenditure curve

19. Deriving equilibrium national income E = Cd + J Cd J Cd, W, J Y = Cd + W W J O Y

20. Equilibrium Level of National Income • The Keynesian diagram: the income and expenditure approach • the 45° line • the expenditure curve • equilibrium

21. Deriving equilibrium national income e f Cd, W, J Y = Cd + W E = Cd + J Cd W J O Y1 Y

22. Deriving equilibrium national income g h Cd, W, J Y = Cd + W E = Cd + J Cd W J O Y2 Y

23. Deriving equilibrium national income z x Cd, W, J Y = Cd + W E = Cd + J Cd W J O Ye Y

24. The Multiplier • The multiplier: introduction • the circular flow of income and effects of changes in injections • definition of the multiplier: ΔY/ΔJ • The withdrawals and injections approach • graphical analysis: shift in the J line

25. The multiplier: (a) a shift in injections a Ye1 W, J W J1 O Y

26. The multiplier: (a) a shift in injections b Ye2 W, J W J2 a J1 O Ye1 Y

27. The multiplier: (a) a shift in injections Multiplier = DY / DJ = DY / DW = c-a / b-c DW DJ c DY W, J W b J2 J2 a J1 J1 O Ye1 Ye2 Y

28. The Multiplier • The multiplier: introduction • the circular flow of income and effects of changes in injections • definition of the multiplier: ΔY/ΔJ • The withdrawals and injections approach • graphical analysis: shift in the J line • the formula : 1/mpw • or : 1/(1–mpcd)

29. The multiplier: (a) a shift in injections Multiplier = DY / DJ = DY / DW = c-a / b-c = 1/mpw DW DJ c DY W, J W b J2 J2 a J1 J1 O Ye1 Ye2 Y

30. The Multiplier • The multiplier: introduction • the circular flow of income and effects of changes in injections • definition of the multiplier: ΔY/ΔJ • The withdrawals and injections approach • graphical analysis: shift in the J line • the formula : 1/mpw • or : 1/(1–mpcd) • graphical analysis: shift in the W line

31. The multiplier: (b) a shift in withdrawals W, J W1 a J O Ye1 Y

32. The multiplier: (b) a shift in withdrawals c Ye2 W, J W1 W2 a J O Ye1 Y

33. The multiplier: (b) a shift in withdrawals Multiplier = DY / DW = c-a / a-b b DW DY W, J W1 W2 a c J O Ye1 Y Ye2

34. The Multiplier • The multiplier: introduction • the circular flow of income and effects of changes in injections • definition of the multiplier: ΔY/ΔJ • The withdrawals and injections approach • graphical analysis: shift in the J line • the formula : 1/mpw • or : 1/(1–mpcd) • graphical analysis: shift in the W line • The income and expenditure approach

35. The Multiplier • The multiplier: introduction • the circular flow of income and effects of changes in injections • definition of the multiplier: ΔY/ΔJ • The withdrawals and injections approach • graphical analysis: shift in the J line • the formula : 1/mpw • or : 1/(1–mpcd) • graphical analysis: shift in the W line • The income and expenditure approach • graphical analysis: shift in the E line

36. The multiplier: (c) a shift in the expenditure curve Ye1 E, W, J Y E1 O Y

37. The multiplier: (c) a shift in the expenditure curve E, W, J Y E2 E1 O Ye1 Ye2 Y

38. The multiplier: (c) a shift in the expenditure curve Multiplier = DY / DJ = c-a / b-a c DY b DJ E, W, J Y E2 E1 a O Ye1 Ye2 Y

39. Keynesian Analysis of Unemployment and Inflation • 'Full-employment' national income • 'Gap' analysis • the deflationary gap

40. The deflationary gap W, J W J O Ye Y

41. The deflationary gap Deflationary gap c d W, J W J O Ye YF Y

42. The deflationary gap W, J, E Y E O Ye YF Y

43. The deflationary gap a b Deflationary gap W, J, E Y E O Ye YF Y

44. The deflationary gap W, J, E Y E a b Deflationary gap W c J d O Ye YF Y

45. Keynesian Analysis of Unemployment and Inflation • 'Full-employment' national income • 'Gap' analysis • the deflationary gap • the inflationary gap

46. The inflationary gap W, J W J O Ye Y

47. The inflationary gap W, J W J O Ye YF Y

48. The inflationary gap Inflationary gap g h W, J W J O Ye YF Y

49. The inflationary gap W, J, E Y E O Ye Y

50. The inflationary gap W, J, E Y E O Ye Y