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Principles of Macroeconomics

Principles of Macroeconomics. Chapter 11: Income and Expenditures Equilibrium. Keynesian equilibrium. Fixed price level Output adjusts to achieve equilibrium AE > Y  output rises AE < Y  output falls AE = Y  equilibrium. Equilibrium. Macroeconomic equilibrium.

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Principles of Macroeconomics

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  1. Principles of Macroeconomics Chapter 11: Income and Expenditures Equilibrium

  2. Keynesian equilibrium • Fixed price level • Output adjusts to achieve equilibrium • AE > Y  output rises • AE < Y  output falls • AE = Y  equilibrium

  3. Equilibrium

  4. Macroeconomic equilibrium

  5. Macroeconomic equilibrium

  6. Macroeconomic equilibrium

  7. Leakages and injections • Y= C + I + G + Ex-Im • Y = C + S + T (T=taxes) • equilibrium: • C+I+G+Ex-Im = C+S+T • I+G+Ex = S+T+IM • injections = leakages

  8. Multiplier • Increase in AE results in larger increase in equilibrium output • For example, • rise in G leads to higher income • resulting in higher C • resulting in higher income • etc.

  9. Multiplier • Spending multiplier: 1/(MPS + MPI)

  10. GDP gap and multiplier • GDP gap = potential real GDP – actual real GDP • Recessionary gap = GDP gap / multiplier

  11. Real-world complications • price level effects • endogenous taxes • foreign trade repercussions

  12. AE and AD • As price level rises, C, I, and X decline due to: • wealth effect • interest-rate effect, and • international trade effect.

  13. AE and AD

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