macroeconomics
National Income – a Simple
Equilibrium Model
1
 Think a “regular” market
 There are curves (demand, supply), or functions
 And there is equilibrium
 GDP we talked about last time is equilibrium
 Call it ACTUAL
 We can think about FUNCTIONS of national
income
 Call it DESIRED, or PLANNED
 Ya = Ca + Ia + Ga + Nxa
 Desired aggregate expenditure AE = C + I + G + NX
2
 We are going to split all expenditures into two
parts
 Autonomous, E = f(Y)
 Induced
 Assume very simple economy
 No trade
 No government
 AE = C + I
3
 Consumption function
 C = C(Y) = Cauto + MPC x YD
 Empirics
 Reasoning
 Keynesian consumption theory
 Permanent-income theory
4
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Average propensity to consume
APC = C/YD
Marginal propensity to consume
MPC = ΔC/ΔYD
 ΔC = MPC x ΔYD
 But then, what we do not consume we save
 Macro definition of savings, S = Y - C
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Average propensity to save
APS = S/YD
Marginal propensity to save
MPS = ΔS/ΔYD
 APC + APS = 1
 MPC + MPS = 1
5
 Shifts in AE function:
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Household wealth
Interest rates
Expectations
Other stuff
6
 Shifts in C function:
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Household wealth
Interest rates
Expectations
Other stuff
 They are also shifts in AE function!!!
7
 Equilibrium:
 AE = Ya
 Keynesian Cross
8
 Investment function
 I = I(r, exp, …)
9

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AE = AE(Y) = C + I = (Cauto + I) + MPC x YD
Equilibrium: AE = Y
Shifts in AE and determination of Ya
A multiplier:
 A (change in equilibrium Y)/(autonomous change
in AE)
 (simple) Multiplier = ΔY/ΔAE = 1/(1 – MPC)
 Canadian multiplier
10