7.3 Equilibrium National Income Flashcards
Recall the disposible income function…
We take several steps to determine the relationship between consumption and national income in the presence of taxes.
Step 1 and 2
We take several steps to determine the relationship between consumption and national income in the presence of taxes.
Step 3 and 4
How does the marginal propensity to consume out of national income compare to marginal propensity to consume out of disposable income?
In the presence of taxes, the marginal propensity to consume out of national income is less than the marginal propensity to consume out of disposable income.
n Chapter 6, the only components of desired aggregate expenditure were consumption and investment. We now add government purchases and net exports. The separate components in their general form are…
Our first step in constructing the AE function is to express desired consumption in terms of national income.
In the AE function the first and second square brackets represent…
In this last equation, we can see the distinction between autonomous aggregate expenditure and induced aggregate expenditure.
The first square bracket brings together all the autonomous parts of expenditure. The second square bracket brings together all the parts of expenditure that change when national income changes—the induced part of consumption and imports.
The term in the second square bracket is the marginal propensity to spend out of national income—how much total desired spending on domestically produced output changes when national income changes by $1.
What is the function for the marginal propensity to spend out of national income?
The slope of the AE function is the marginal propensity to spend out of national income and is equal to
MPC(1 - t) - m
What is the aggregate expenditure function a sum of?
The aggregate expenditure function is the sum of desired consumption, investment, government purchases, and net export expenditures. The autonomous components of desired aggregate expenditure are desired investment, desired government purchases, desired exports, and the autonomous part of desired consumption.
Note that, unlike in Chapter 6, the marginal propensity to spend out of national income (z) is not simply equal to the marginal propensity to consume (MPC). Why?
How does the assumption that output is demand determined affect the equilibrium level of national income?
As in Chapter 6, we are maintaining our assumption that firms are able and willing to produce whatever level of output is demanded of them at a constant price level. With this assumption that output is demand determined, the equilibrium level of national income is that level of national income where desired aggregate expenditure (along the AE function) equals the actual level of national income.
What does the 45 degree line show?
As was also true in Chapter 6, the 45 degree line shows the equilibrium condition—the collection of points where Y = AE
What happens when national income is less then the equilibrium amount?
Suppose national income is less than its equilibrium amount. The forces leading back to equilibrium are exactly the same as those described in Chapter 6.
When households, firms, foreign demanders, and governments try to spend at their desired amounts, they will try to purchase more goods and services than the economy is currently producing.
Hence, some of the desired expenditure must either be frustrated or take the form of purchases of inventories of goods that were produced in the past.
As firms see their inventories being depleted, they will increase production, thereby increasing the level of national income.
What happens when national income is greater then the equilibrium amount?
The opposite sequence of events occurs when national income is greater than its equilibrium amount. Now the total of desired household consumption, investment, government purchases, and net foreign demand on the economy’s production is less than national output. Firms will notice that they are unable to sell all their output. Their inventories will be rising, and sooner or later they will seek to reduce the level of output until it equals the level of sales. When they do, national income will fall.
What do each of the variables represent in the function
z = MPC( 1-t ) - m
The marginal propensity to spend out of national income is less than the marginal propensity to consume out of disposable income because…
What is the differents in the equation for the simple multiplyer with the presence of goverment and foreign trade?
With all the typles of expenditures in play, how do we determine the Equilibrium level of income?
