Keynesian Macromodels a. Simple Multiplier graphic solution EXPLANATION   Aggregate Demand Identity: AD = C + I  Aggregate demand AD is equal to demand for consumer goods C plus demand for investment goods I that will be assumed to be equal to a constant I0.  Consumption function: C = C0 + cY    Demand  for consumer goods C  is equal to  autonomous part  C0  plus demand proportional to Income Y.       C0   and  c  are given parameters. In the Consumption function Y is an independent variable, while C depends on Y. Aggregate demand AD depends directly on C and therefore indirectly on Y. Substituting Consumption function for C makes AD directly dependent on Y. AD = C + I  = C0 + cY + I0 In macroeconomic equilibrium  the income Y must be equal to Aggregate Demand AD. Y = AD and  therefore Y = C0 + cY + I0 so that the equilibrium level of Income Y is obtain by solving the above equation to get which can be also written as where  m   is the multiplier and  A is autonomous expenditure. NUMERIC EXAMPLE Now let the parameters of the model have the following numerical values: C0 =  50    c = .8    I0 = 50 It follows that the multiplier  is      m = 5  the autonomous expenditure is       A = 100 and the equilibrium income is     Yeq =  500. It then follows from the consumption function that       C = 450 and saving  is       S =  Yeq - C = 50;      Note that  saving is equal to investment      S = I0 = 50 GRAPHIC SOLUTION

Designed and maintained by Oldrich Kyn . If you want to send

a message to Oldrich Kyn  please click on the  following icon: