Transcript 1999 South-Western College Publishing

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
4/2/2016
©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