ECN 204 Lecture 7: Lecture 7.docx
Document Summary
Lecture 7: basic keynesian model, assumption: price is fixed in the short run, aggregate expenditure is the planned total spending on final goods and services. Ae=c+i (no government, no trade: the equilibrium output is that output which creates total spending just sufficient to produce that output (y=ae) No unplanned changes in inventories: the multiplier, mps and the multiplier are inversely related. Multiplier= 1/mps =1/(1-mpc: recall that ye = (co + i)/(1-c, multiplier = change in equilibrium output/change in autonomous expenditure. Increases in public spending shift the ae schedule upward and result in higher equilibrium. Ae and c have the same slope mpc x (1-t: multiplier effect is given by the combination of the two, multiplier = 1/(1-mpc x (1-t), the change of equilibrium gdp is given by g x multiplier. Disequilibrium: graphical analysis, other features of equilibrium gdp, savings equals planned investment. Leakage is a withdrawal of potential spending from the income-expenditures stream via saving, tax payments, or imports.
