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

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

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

4. 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

5. 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

6. 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

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

8. C + Ii C
C = a + bY a Y Ii Ii Y

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

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

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

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

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

14. C + Ii C y* Y S Ii y* Y

15. 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 .

16. 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

17. Y=
…………….
(.8)(1000)
+ (.8)(.8)(1000)
Y=
1000 +
+ (.8)(.8)(.8)(1000)
+ ……..
Y=
(1000) + (.8)2(1000) + (.8)3(1000) + ……….

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

19. Income Multiplier =

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

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

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

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