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macroeconomics

macroeconomics. National Income – a Simple Equilibrium Model. Think a “regular” market There are curves (demand, supply), or functions And t here is equilibrium GDP we talked about last time is equilibrium Call it ACTUAL We can think about FUNCTIONS of national income

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macroeconomics

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  1. macroeconomics National Income – a Simple Equilibrium Model

  2. Think a “regular” market • There are curves (demand, supply), or functions • And there is equilibrium • GDP we talked about last time is equilibrium • Call it ACTUAL • We can think about FUNCTIONS of national income • Call it DESIRED, or PLANNED • Ya = Ca + Ia + Ga + Nxa • Desired aggregate expenditure AE = C + I + G + NX

  3. We are going to split all expenditures into two parts • Autonomous, E = f(Y) • Induced • Assume very simple economy • No trade • No government • AE = C + I

  4. Consumption function • C = C(Y) = Cauto + MPC x YD • Empirics • Reasoning • Keynesian consumption theory • Permanent-income theory

  5. Average propensity to consume • APC = C/YD • Marginal propensity to consume • MPC = ΔC/ΔYD • ΔC = MPC x ΔYD • But then, what we do not consume we save • Macro definition of savings, S = Y - C • Average propensity to save • APS = S/YD • Marginal propensity to save • MPS = ΔS/ΔYD • APC + APS = 1 • MPC + MPS = 1

  6. Shifts in AE function: • Household wealth • Interest rates • Expectations • Other stuff

  7. Shifts in C function: • Household wealth • Interest rates • Expectations • Other stuff • They are also shifts in AE function!!!

  8. Equilibrium: • AE = Ya • Keynesian Cross

  9. Investment function • I = I(r, exp, …)

  10. AE = AE(Y) = C + I = (Cauto + I) + MPC x YD • Equilibrium: AE = Y • Shifts in AE and determination of Ya • A multiplier: • A (change in equilibrium Y)/(autonomous change in AE) • (simple) Multiplier = ΔY/ΔAE = 1/(1 – MPC) • Canadian multiplier

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