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Principles of Economics 2nd edition by Fred M Gottheil PowerPoint Slides prepared by Ken Long ©1999 South-Western College Publishing 1 Chapter 22 Equilibrium National Income 5/23/2017 ©1999 South-Western College Publishing 2 This chapter discusses principles associated with The relationship between The Equilibrium Level of Aggregate Expenditure & Aggregate The The Income Paradox Expenditure Multiplier of Thrift Saving and Income Investing National Aggregate Demand ©1999 South-Western College Publishing 3 What is the purpose of this chapter? To build an economic model to represent an economy tending toward or being in equilibrium ©1999 South-Western College Publishing 4 What is Aggregate Expenditure? The total spending by consumers, investors, government, and foreigners ©1999 South-Western College Publishing 5 What assumption do we make in this chapter? There is no government spending or foreign trade disposable income is the same as total income ©1999 South-Western College Publishing 6 At what point is the Equilibrium? Where intended Investment equals intended Savings I=S ©1999 South-Western College Publishing 7 Why is intended I = intended S an equilibrium? I > S (the economy grows) I < S (the economy shrinks) ©1999 South-Western College Publishing 8 What happens when intended I > intended S? The optimism of investors concerning the future leads to more investments and economic growth ©1999 South-Western College Publishing 9 What happens when intended I < intended S? There is a shrinkage in the circulation of money, spending declines, leading to an economic slump ©1999 South-Western College Publishing 10 Can actual Investment be greater than Saving? No! Every dollar invested has to come from savings ©1999 South-Western College Publishing 11 What is the Aggregate Expenditure Curve? A curve that shows the quantity of aggregate expenditures at different levels of national income or GDP ©1999 South-Western College Publishing 12 Aggregate Expenditure Income - Expenditure Model 45o National Income 131 Aggregate Expenditure Income - Expenditure Model Aggregate expenditure function Equilibrium (Ii =Si) 45o National Income 141 What are Unwanted Inventories? Goods produced for consumption that remain unsold ©1999 South-Western College Publishing 15 What is Actual Investment? Intended investment plus or minus unintended changes in inventory ©1999 South-Western College Publishing 16 What causes Unemployment? Unwanted inventories ©1999 South-Western College Publishing 17 What happens when actual Investment is greater than intended Investment? When Ia > Ii unemployment increases ©1999 South-Western College Publishing 18 What happens when actual Investment is less than intended Investment? When Ia < Ii unemployment decreases ©1999 South-Western College Publishing 19 What happens when actual Investment equals intended Investment? When Ia = Ii the economy is in equilibrium ©1999 South-Western College Publishing 20 The Bureau of Economic Analysis has data on current income http://www.bea.doc.gov/bea/dn1.htm ©1999 South-Western College Publishing 21 What happens when Consumption or Investment change? The equilibrium level of national income changes ©1999 South-Western College Publishing 22 Aggregate Expenditure Shift in Aggregate Expenditure C2+I2 C1+I1 original equilibrium new employment 45o National Income 23 23 What is the Income Multiplier? The multiple by which income changes as a result of a change in aggregate expenditure ©1999 South-Western College Publishing 24 Change in Y Multiplier = change in AE ©1999 South-Western College Publishing 2 25 5 If investors increase spending by $100 billion, will GDP increase by $100 billion? NO, it will increase by more than $100 billion because of the multiplier 26 $100 $90 MPC = 9/10 $81 MPS = 1/10 $74 ... $1,000 2 7 27 How do we measure the multiplier? 1/MPS 28 If MPC equals 9/10, what is MPS? 1/10 29 One divided by one tenth equals 10 Simple Multiplier . 1 = 1 . 1 X 10 10 = 1 10 30 30 Aggregate Expenditure MPC = .9 MPS = .1 C+I 90 100 National Income 31 31 If the multiplier is 10, how much does GDP increase when investment increases by $1billion? 10 x $1bil = $10 billion 32 If the multiplier is 10, how much does GDP decrease when investment decreases by $1billion? 10 x -$1bil = -$10 billion 33 If the price level increases what happens to AE? Aggregate expenditure will decrease lowering equilibrium GDP 34 If the price level decreases what happens to AE? Aggregate expenditure will increase raising equilibrium GDP 35 What is the Paradox of Thrift? The more people try to save, the more income falls, leaving them with no more and perhaps with even less saving ©1999 South-Western College Publishing 36 • What is Aggregate Expenditure? • At what point is the Equilibrium? • Why is intended I = intended S an equilibrium? • What is Actual Investment? • What happens when actual Investment > intended Investment? • What happens when actual Investment < intended Investment? 37 •What happens when Consumption or Investment change? •What is the Income Multiplier? •If the price level increases what happens to AE? • If the price level decreases what happens to AE? •What is the Paradox of Thrift? 38 END ©1999 South-Western College Publishing 39