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

2. Equilibrium National Income
Chapter 22
Equilibrium National Income
7/30/2018
©1999 South-Western College Publishing

3. This chapter discusses principles associated with
The relationship between Saving and Investing
The relationship between Aggregate Expenditure & Aggregate Demand
The Equilibrium Level of National Income
Aggregate Expenditure
The Income Multiplier
The Paradox of Thrift
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4. What is the purpose of this chapter?
To build an economic model to represent an economy tending toward or being in equilibrium
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5. What is Aggregate Expenditure?
The total spending by consumers, investors, government, and foreigners
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6. What assumption do we make in this chapter?
There is no government spending or foreign trade - disposable income is the same as total income
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7. At what point is the Equilibrium?
Where intended Investment equals intended Savings
I = S
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8. Why is intended I = intended S an equilibrium?
I > S (the economy grows)
I < S (the economy shrinks)
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9. What happens when intended I > intended S?
The optimism of investors concerning the future leads to more investments and economic growth
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10. What happens when intended I < intended S?
There is a shrinkage in the circulation of money, spending declines, leading to an economic slump
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11. Can actual Investment be greater than Saving?
No!
Every dollar invested has to come from savings
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12. What is the Aggregate Expenditure Curve?
A curve that shows the quantity of aggregate expenditures at different levels of national income or GDP
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13. Income - Expenditure Model
(C+I) C
Aggregate Expenditure
45o
National Income
1313

14. Income - Expenditure Model
Aggregate expenditure function
C+I
Saving
Aggregate Expenditure
Equilibrium (Ii =Si)
45o
National Income
1414

15. What are Unwanted Inventories?
Goods produced for consumption that remain unsold
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16. What is Actual Investment?
Intended investment plus or minus unintended changes in inventory
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17. What causes Unemployment?
Unwanted inventories
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18. When Ia > Ii unemployment increases
What happens when actual Investment is greater than intended Investment?
When Ia > Ii unemployment increases
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19. What happens when actual Investment is less than intended Investment?
When Ia < Ii unemployment decreases
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20. What happens when actual Investment equals intended Investment?
When Ia = Ii the economy is in equilibrium
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21. The Bureau of Economic Analysis has data on current income
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22. What happens when Consumption or Investment change?
The equilibrium level of national income changes
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23. Shift in Aggregate Expenditure
C2+I2
C1+I1
Aggregate Expenditure
original equilibrium
new employment
45o
National Income 23

24. What is the Income Multiplier?
The multiple by which income changes as a result of a change in aggregate expenditure
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25. Change in Y change in AE Multiplier = 2525
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26. 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. $100
$90
$81
$74
MPC = 9/10 MPS = 1/10
...
$1,000
2727

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

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

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

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

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

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

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

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

36. 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
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37. What is Aggregate Expenditure?
At what point is the 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?

38. 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 decreases what happens to AE?
What is the Paradox of Thrift?

39. END
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