2. 1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil

3. 2 Chapter 22 Equilibrium National Income 10/2/2016 © ©1999 South-Western College Publishing

4. 3 This chapter discusses principles associated with © ©1999 South-Western College Publishing The Paradox of Thrift The relationship between Aggregate Expenditure & Aggregate Demand The Income Multiplier The relationship between Saving and Investing The Equilibrium Level of National Income Aggregate Expenditure

5. 4 What is the purpose of this chapter? To show how the equilibrium level of national income is derived © ©1999 South-Western College Publishing

6. 5 What is Aggregate Expenditure? The total spending by consumers, investors, government, and foreigners © ©1999 South-Western College Publishing

7. 6 Why is disposable income equal to national income in the chapter’s model of national income determination? Because we assume no government or foreign sectors. AE is simply C+I © ©1999 South-Western College Publishing

8. 7 What is the relationship between saving and investment when the economy is in equilibrium? Intended investment equals saving I = S © ©1999 South-Western College Publishing

9. 8 What happens when intended investment > saving? Consumption goods produced < spending on consumption goods so that inventories are drawn down. This triggers increases in production, employment, and national income. © ©1999 South-Western College Publishing

10. 9 What happens when intended investment < saving? Consumption goods produced > spending on consumption goods so that unwanted inventories accumulate. This triggers a decrease in production, employment, and national income. © ©1999 South-Western College Publishing

11. 10 Can actual Investment > Saving? No! Actual investment always equals saving because what isn’t sold as consumption goods is called investment. © ©1999 South-Western College Publishing

12. 11 What is the Aggregate Expenditure Curve? A curve that shows the quantity of aggregate expenditures at different levels of national income or GDP © ©1999 South-Western College Publishing

13. 12 Income - Expenditure Model National Income C 45 o Aggregate Expenditure 12 AE =(C+I)

14. 13 Income - Expenditure Model National Income C+I = AE 45 o Saving Aggregate expenditure function Equilibrium (I i =S) Aggregate Expenditure 13

15. 14 What are Unwanted Inventories? Goods produced for consumption that remain unsold © ©1999 South-Western College Publishing

16. 15 What is Actual Investment? Intended investment plus or minus unintended changes in inventory © ©1999 South-Western College Publishing

17. 16 What causes Unemployment? S > I i © ©1999 South-Western College Publishing

18. 17 What happens when actual Investment is greater than intended Investment? When I a > I i unemployment increases and national income falls © ©1999 South-Western College Publishing

19. 18 What happens when actual Investment is less than intended Investment? When I a < I i unemployment decreases and national income increases © ©1999 South-Western College Publishing

20. 19 What happens when actual Investment equals intended Investment? When I a = I i the economy is in equilibrium © ©1999 South-Western College Publishing

21. 20 The Bureau of Economic Analysis has data on current income http://www.bea.doc.gov/bea/dn1.htm © ©1999 South-Western College Publishing

22. 21 What happens when Consumption or Investment change? The equilibrium level of national income changes © ©1999 South-Western College Publishing

23. 22 Shift in Aggregate Expenditure C 1 +I 1 =AE 1 45 o original equilibrium C 2 +I 2 =AE 2 new employment 22 Aggregate Expenditure National Income

24. 23 What is the Income Multiplier? The multiple by which income changes as a result of a change in aggregate expenditure © ©1999 South-Western College Publishing

25. 24 24 © ©1999 South-Western College Publishing Multiplier = Change in Y change in AE

26. 25 If investors increase spending by $100 billion, will GDP increase by $100 billion? NO, it will increase by more than $100 billion because of the multiplier

27. 26 $100 $90 $81 $74 $1,000... 26 MPC = 9/10 MPS = 1/10

28. 27 How do we measure the multiplier? 1/MPS

29. 28 If MPC equals 9/10, what is MPS? 1/10

30. 29 One divided by one tenth equals 10 1 1.. 10 = 1 X 1 = Simple Multiplier 10 29

31. 30 MPC =.9 MPS =.1 C+I 30 90 100 Aggregate Expenditure National Income

32. 31 If the multiplier is 10, how much does GDP increase when investment increases by $1billion? 10 x $1bil = $10 billion

33. 32 If the multiplier is 10, how much does GDP decrease when investment decreases by $1billion? 10 x -$1bil = -$10 billion

34. 33 If the price level increases what happens to AE? Aggregate expenditure will decrease lowering equilibrium GDP

35. 34 If the price level decreases what happens to AE? Aggregate expenditure will increase raising equilibrium GDP

36. 35 What is the Paradox of Thrift? The more people try to save, the more income falls, leaving them with no more and perhaps with even less saving © ©1999 South-Western College Publishing

37. 36 What is Aggregate Expenditure? At what point is the Equilibrium? Why is intended I = intended S an equilibrium?Why is intended I = intended S an equilibrium? What is Actual Investment? What happens when actual Investment > intended Investment?What happens when actual Investment > intended Investment? What happens when actual Investment < intended Investment?What happens when actual Investment < intended Investment?

38. 37 What happens when Consumption or Investment change?What happens when Consumption or Investment change? What is the Income Multiplier? If the price level increases what happens to AE?If the price level increases what happens to AE? If the price level decreases what happens to AE?If the price level decreases what happens to AE? What is the Paradox of Thrift?

39. 38 ENDEND © ©1999 South-Western College Publishing