Isosceles $ in million 150 100 150 100 100 150 Y in million $ 100 45o 100 150 Y in million $ 100

Equilibrium National Income: Keynesian Cross: Simplifying Assumptions: There is no Government Sector. There is no Foreign Sector. There is no Depriciation.

GDP + Net Factor Payments from Abroad = GNP GNP - Depreciation = NNP NNP – Indirect Business Taxes = NI GDP = NI

From Producers’ Side: Y = C + Ii Y = C + Ii + G + (X-M) In other words, the producers decide how much of the total production would be investment goods and how much would be consumption good. Intended Consumption Y – Ii Y = Ci Intended Investment

From Consumer’s Side: Y = C + S Consumers’ decide how much of Y (income) they want to consume and how much they want to save. Consumer’s consumption is determined by the consumption function. Which is,- C = a + bY

From Consumer’s side, Y = C + S, where C = a + bY From Producer’s side, Y = Ci + Ii If, C = Ci then S = Ii The Economy will be in Macroequilibrium C = Ci Y = C + Ii C = Y - Ii

Actual Investment (Ia): Investment spending that producers actually make --- that is, intended investment (Ii), plus unintended changes in inventories. Ia = Ii +  in Inventory

C + Ii C C = a + bY a Y Ii Ii Y

AE, C+Ii C, Ii, S C = a + by y1 c1 45o y1 y* Y

This signals the economy to Expand When, yi < y* Ci < C Ii > S Ia < Ii This signals the economy to Expand

AE, C+Ii C, Ii, S C = a + by y2 c2 45o y* y2 Y

When, yi > y* Ii < S Ci > C Ia > Ii This signals the economy to Contract

AE, C+Ii C, Ii, S C = a + by y* c* 45o y* Y

C + Ii C y* Y S Ii y* Y

When, Ii > S This will happen when Ia < Ii Y increases and continues to increase until it reaches equilibrium, where, Ii = S. When, S > Ii This will happen when Ia > Ii Y falls and continues to fall until it reaches equilibrium where, Ii = S .

Making of the Income Multiplier: 1000 800 200 Waterbed 800 640 160 Computer 640 512 128 512 409.6 102.4 Violin Auto Repair 409.6 327.7 81.9 Space Heater 327.7 262.2 65.5

Y= 1000 + 800 + 640 + 512 + 409.6 + 327.7 + ……………. (.8)(1000) + (.8)(.8)(1000) Y= 1000 + + (.8)(.8)(.8)(1000) + …….. Y= 1000 + .8(1000) + (.8)2(1000) + (.8)3(1000) + ……….

Y= 1000 + .8(1000) + (.8)2(1000) + (.8)3(1000) + ………. Sn = a + ra + r2a + r3a + ………..

Income Multiplier =

AE75 AE100 $ AE125 600 800 1000 Y Price Level 125 100 75 AD 600 800 1000 Y

AE+40 AE $ AE-40 600 800 1000 Y Price Level 100 AD 600 800 1000 Y

The Paradox of Thrift: 30 S2 S1 Ii 100 650 800

The Paradox of Thrift: 30 S2 S1 Ii 100 80 800 500