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© © The McGraw-Hill Companies, 2002 0 Aggregate output in the short run Potential output –the output the economy would produce if all factors of production were fully employed Actual output –what is actually produced in a period –which may diverge from the potential level
© © The McGraw-Hill Companies, 2002 1 Some simplifying assumptions Prices and wages are fixed The actual quantity of total output is demand-determined –this will be a Keynesian model For now, also assume: –no government –no foreign trade Later chapters relax these assumptions
© © The McGraw-Hill Companies, 2002 2 Aggregate demand Given no government and no international trade, aggregate demand has two components: –Investment firms desired or planned additions to physical capital & inventories for now, assume this is autonomous –Consumption households demand for goods and services so, AD = C + I
© © The McGraw-Hill Companies, 2002 3 Consumption demand Households allocate their income between CONSUMPTION and SAVING Personal Disposable Income –income that households have for spending or saving –income from their supply of factor services (plus transfers less taxes)
© © The McGraw-Hill Companies, 2002 4 Consumption and income in the UK at constant 1995 prices, 1989-2001 Income is a strong influence on consumption expenditure – but not the only one.
© © The McGraw-Hill Companies, 2002 5 The consumption function Income Consumption C = 8 + 0.7 Y The consumption function shows desired aggregate consumption at each level of aggregate income 0 The marginal propensity to consume (the slope of the function) is 0.7 – i.e. for each additional £1 of income, 70p is consumed. With zero income, desired consumption is 8 (autonomous consumption).8
© © The McGraw-Hill Companies, 2002 6 The saving function S = -8 + 0.3 Y Income Saving 0 The saving function shows desired saving at each income level. Since all income is either saved or spent on consumption, the saving function can be derived from the consumption function or vice versa.
© © The McGraw-Hill Companies, 2002 7 The aggregate demand schedule Income Aggregate demand C Aggregate demand is what households plan to spend on consumption and what firms plan to spend on investment. AD = C + I I The AD function is the vertical addition of C and I. (For now I is assumed autonomous.)
© © The McGraw-Hill Companies, 2002 8 Equilibrium output Output, Income Desired spending 45 o line The 45 o line shows the points at which desired spending equals output or income. AD Given the AD schedule, This the point at which planned spending equals actual output and income. equilibrium is thus at E. E
© © The McGraw-Hill Companies, 2002 9 I planned investment (I) An alternative approach S, I Output, Income An equivalent view of equilibrium is seen by equatingS to planned saving (S) The two approaches are equivalent. E again giving us equilibrium at E
© © The McGraw-Hill Companies, 2002 10 Effects of a fall in aggregate demand Output, Income Desired spending 45 o line AD 0 Y0Y0Y0Y0 Suppose the economy starts in equilibrium at Y 0. a fall in aggregate demand to AD 1 AD 1 leads the economy to a new equilibrium at Y 1. Y1Y1Y1Y1 Notice that the change in equilibrium output is larger than the original change in AD.
© © The McGraw-Hill Companies, 2002 11 The multiplier The multiplier is the ratio of the change in equilibrium output to the change in autonomous spending that causes the change in output. The larger the marginal propensity to consume, the larger is the multiplier. –The higher is the marginal propensity to save, the more of each extra unit of income leaks out of the circular flow.
Chapter 21 The determination of national income David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point.
© The McGraw-Hill Companies, 2008 Chapter 20 Output and aggregate demand David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill,
© The McGraw-Hill Companies, 2002 Week 8 Introduction to macroeconomics.
Capter 16 Output and Aggregate Demand 1 Chapter 16: Begg, Vernasca, Fischer, Dornbusch (2012).McGraw Hill.
The Macroeconomic Environment By the end of this class you should be able to: 1)Define macroeconomics 2)Explain the flow of income in an economy 3)Recognise.
Income and Expenditure Chapter 11 THIRD EDITIONECONOMICS andMACROECONOMICS.
1 ECON203 Principles of Macroeconomics Topic: Expenditure Multipliers: The Keynesian Model Dr. Mazharul Islam 9W/10/2013.
Chapter Twenty Four Aggregate Expenditure and Equilibrium Output.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-1 CHAPTER 6 Building Blocks of the Flexible-Price Model.
Income and Spending Chapter #10 (DFS) Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written.
EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL 13 CHAPTER.
Chapter 9 Income and Spending Item Etc. McGraw-Hill/Irwin Macroeconomics, 10e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
© 2010 Pearson Addison-Wesley CHAPTER 1. © 2010 Pearson Addison-Wesley.
28 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL © 2012 Pearson Addison-Wesley.
The circular flow of income and the Keynesian multiplier Equilibrium in the goods market.
Topic 3: Fiscal Policy Circular Flow Investment Taxes and Government Spending 1.
1 FINA 353 Principles of Macroeconomics Lecture 8 Topic: Expenditure Multipliers: The Keynesian Model Dr. Mazharul Islam.
1 of 29 PART V The Core of Macroeconomic Theory © 2012 Pearson Education PART The Core of Macroeconomic Theory V.
Aggregate Expenditure CHAPTER 30 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Distinguish.
Introduction: Thinking Like an Economist CHAPTER 9 The Multiplier Model Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
AGGREGATE EXPENDITURE AND EQUILIBRIUM OUTPUT Chapter 20 1.
1 of 27 The level of GDP, the overall price level, and the level of employment—three chief concerns of macroeconomists—are influenced by events in three.
Income and Expenditure Chapter 11. The Multiplier Effect A closer examination of C + I + G reveals an interesting phenomena: Increases in spending (C.
THE MULTIPLIER UNDERSTAND THE MULTIPLIER EFFECT BY ANALYZING A REAL WORLD EXAMPLE DEMONSTRATE UNDERSTANDING OF HOW THE MPC AND MPS ARE USED TO CALCULATE.
Slides for Part III-B These slides will take you through the basics of income- expenditure analysis. The following is based on Dornbusch & Fisher, Chapter.
Aggregate Expenditure Chapter 14. AE (Aggregate Expenditure) Concept –total expenditure in the economy which is equal to the sum of C, I, G and NX. –Autonomous.
1 Lecture 8 The Keynesian Theory of Consumption Other Determinants of Consumption Planned Investment (I) The Determination of Equilibrium Output (Income)
Source: "Macroeconomics", Mankiw, Fourth Edition: Chapter 10, Fifth Edition: Chapter 10 1 Aggregate Demand I The Economy in the Short-run.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Aggregate Demand and Output in the Short Run.
10 Prepared by: Fernando Quijano and Yvonn Quijano © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair Aggregate Expenditure.
Spending and Output in the Short Run Chapter 13. Chapter 13 Learning Objectives. You should be able to: List the components of investment. Distinguish.
The Multiplier The Multiplier and the Marginal Propensities to Consume and Save Ignoring imports and income taxes, the marginal propensity to consume determines.
Income and Spending Chapter #10. AD and Equilibrium Output The Keynesian model (flat AS curve) develops the theory of AD: ↑ in autonomous spending causes.
Introduction to Macroeconomics Chapter 22. Keynesian Macroeconomics.
Product Markets and National Output Chapter 12. Discussion Topics Circular flow of payments Composition and measurement of gross domestic product Consumption,
Chapter 3: National Income. Production Function Output of goods and services as a function of factor inputs Y = F(K, L) Y = product output K = capital.
1 of 17 Principles of Economics: Econ101. Keynes on Say’s Law Keynes on Wage Rates and Prices Consumption Function Equilibrium Real GDP and Gaps.
Copyright © 2008 Pearson Education Canada Chapter 6 Determination of National Income.
Lecture Six Short-run equilibrium Multiplier Adding the government sector Fiscal Policy and Aggregate Expenditure Model.
8 Prepared by: Fernando Quijano and Yvonn Quijano © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair Aggregate Expenditure.
Expenditure Multipliers: The Keynesian Model CHAPTER 12.
Lecture Seven Review: Short-run equilibrium Adding the government sector Lump sum tax and net tax.
11 EXPENDITURE MULTIPLIERS © 2014 Pearson Addison-Wesley After studying this chapter, you will be able to: Explain how expenditure plans are determined.
GDP in an Open Economy with Government Chapter 17 LIPSEY & CHRYSTAL ECONOMICS 12e.
The Goods Market. The Composition of GDP Consumption (C) refers to the goods and services purchased by consumers. Investment (I), sometimes called fixed.
The Keynesian Model in Action To complete the Keynesian model by adding the government and the foreign sector.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair Prepared by: Fernando & Yvonn Quijano 21 Chapter PART V THE GOODS.
DETERMINATION OF NATIONAL INCOME in the Keynesian Model At Equilibrium national income: –withdrawals equal injections –income equals expenditure.
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