Graphing the equilibrium condition E planned E=Y expenditure 45° income, output, Y CHAPTER 10 Aggregate Demand I slide 6
CHAPTER 10 Aggregate Demand I slide 6 Graphing the equilibrium condition income, output, Y E planned expenditure E =Y 45º
The equilibrium value of income E planned E=Y expenditure E=C+I+G income, output, Y Equilibrium Income CHAPTER 10 Aggregate Demand I slide 7
CHAPTER 10 Aggregate Demand I slide 7 The equilibrium value of income income, output, Y E planned expenditure E =Y E =C +I +G Equilibrium income
An increase in government purchases At Y1, E=C+I+G2 there is now an unplanned drop E=C+I+Gr in inventory △G so firms increase output and income rises toward a new equilibrium E1=Y1 △ E2=y2 CHAPTER 10 Aggregate Demand I slide 8
CHAPTER 10 Aggregate Demand I slide 8 An increase in government purchases Y E E =C +I +G1 E1 = Y1 E =C +I +G2 E2 = Y2 Y At Y1 , there is now an unplanned drop in inventory… …so firms increase output, and income rises toward a new equilibrium G
Solving for△Y Y=C+i+G equilibrium condition △y=△C+△+△ G in changes △c+△G because I exogenous MPC×△y+△ G because△C=MPC△y Collect terms with△y Finally! solve for△y on the left side of the equals sign △》= △G (1-MPC)x△y=AG 1-MPC CHAPTER 10 Aggregate Demand I slide 9
CHAPTER 10 Aggregate Demand I slide 9 Solving for Y Y C I G = + + = + + Y C I G = + MPC Y G = + C G (1 MPC) − = Y G 1 1 MPC Y G = − equilibrium condition in changes because I exogenous because C = MPC Y Collect terms with Y on the left side of the equals sign: Finally, solve for Y :
The government purchases multiplier Example: MPC =0.8 △y △G 1- MPC 084G=1 △G=5△G 0.2 The increase in g causes income to increase by 5 times as much CHAPTER 10 Aggregate Demand I slide 10
CHAPTER 10 Aggregate Demand I slide 10 The government purchases multiplier Example: MPC = 0.8 1 1 MPC 1 1 5 1 0 8 0 2 . . Y G G G G = − = = = − The increase in G causes income to increase by 5 times as much!