Download No Slide Title

150
100
150
45o
100
45o
0
90o
100
150
Y in million $
100
Isosceles
Equilibrium National Income:
Keynesian Cross:
Simplifying Assumptions:
 There is no Government Sector.
 There is no Foreign Sector.
 There is no Depriciation.
GDP + Net Factor Payments from Abroad
= GNP
GNP - Depreciation = NNP
NNP – Indirect Business Taxes = NI
GDP = NI
From Producers’ Side:
Y = C + Ii + G + (X-M)
In other words, the producers decide how
much of the total production would be
investment goods and how much would
be consumption good.
Y – Ii = Ci
Intended Consumption
Intended Investment
From Consumer’s Side:
Y=C+S
Consumers’ decide how much of Y
(income) they want to consume and
how much they want to save.
Consumer’s consumption is
determined by the consumption
function. Which is,C = a + bY
From Consumer’s side,
Y = C + S,
where C = a + bY
From Producer’s side,
Y = Ci + Ii
If, C = Ci
then S = Ii
The Economy will be in Macroequilibrium
C = Ci
C = Y - Ii
Y = C + Ii
Actual Investment (Ia): Investment
spending that producers actually
make --- that is, intended
investment (Ii), plus unintended
changes in inventories.
Ia = Ii +  in Inventory
C
a
0
Y
Ii
Ii
0
Y
AE,
C,
Ii,
S
y1
c1
45o
y1
y*
Y
When, yi <
Ci < C
*
y
Ii > S
Ia < Ii
This signals the economy to
Expand
AE,
C,
Ii,
S
y2
c2
45o
y*
y2
Y
When, yi >
Ci > C
*
y
Ii < S
Ia > Ii
This signals the economy to
Contract
AE,
C,
Ii,
S
y*
c*
45o
y*
Y
0
y*
Y
Ii
0
y*
Y
When, Ii > S
This will happen when Ia < Ii
Y increases and continues to increase
until it reaches equilibrium, where,
Ii = S.
When, S > Ii
This will happen when Ia > Ii
Y falls and continues to fall until it
reaches equilibrium where, Ii = S .
Making of the Income Multiplier:
Round
Change in Ii
Output
1
1000
Restringer
2
Income
C
S
1000
800
200
Waterbed
800
640
160
3
Computer
640
512
128
4
Violin
512
409.6
102.4
5
Auto Repair 409.6
327.7
81.9
6
Space Heater 327.7
262.2
65.5
Y= 1000 + 800 + 640 + 512 + 409.6 +
327.7 + …………….
Y= 1000 + (.8)(1000)+ (.8)(.8)(1000)
+ (.8)(.8)(.8)(1000) + ……..
Y= 1000 + .8(1000) + (.8)2(1000)
+ (.8)3(1000) + ……….
Y= 1000 + .8(1000) + (.8)2(1000)
+ (.8)3(1000) + ……….
Sn = a + ra + r2a + r3a + ………..
Income Multiplier =
$
Price Level
0
600
800
1000
Y
125
100
75
600
800
1000
Y
$
600
800
1000
Y
Price Level
0
100
600
800
1000
Y
The Paradox of Thrift:
30
S1
Ii
100
0
S2
650 800
The Paradox of Thrift:
30
S1
Ii
100
80
0
S2
500
800