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Income and Expenditures Equilibrium

Income and Expenditures Equilibrium. Equilibrium Real GDP: mpc = .7, mpi = .1. Movement to Equilibrium. 45 o line: AE = Y. 700. Total Expenditure. 600. Increase Output, increase Employment. 500. Reduce Output, Reduce Employment. Aggregate planned expenditure. 400. 0. 300. 400.

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Income and Expenditures Equilibrium

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  1. Income and Expenditures Equilibrium

  2. Equilibrium Real GDP: mpc = .7, mpi = .1

  3. 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)

  4. Leakages 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?

  6. Computing the Spending Multiplier:Marginal 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.

  7. Multiplier at Work

  8. Gaps: Recessionary Gap, GDP Gap

  9. 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)?

  10. Sequence of Expenditures

  11. Sequence of Expenditures

  12. From Aggregate ExpendituretoAggregate Demand

  13. The Fixed-Price, Keynesian AS-AD Model

  14. The Paradox of Thrift

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