1. 8. Determination of National Income and the role of Fiscal Policy

2. The Equilibrium Level of National Income
The circular flow of income

3. The circular flow of income

4. The circular flow of incomeCd

5. The circular flow of income
Incomes Cd

6. The circular flow of income
Incomes Cd
W = S + T + M

7. The circular flow of income
J = I + G + X
Incomes Cd
W = S + T + M

8. The Equilibrium Level of National Income
Effect on national income of a change in injections and/or withdrawals
J>W : national income rises
W>J : national income falls
The Keynesian diagram: the withdrawals and injections approach
the withdrawals curve

9. Deriving equilibrium national income
Cd, W, J W O Y

10. The Equilibrium Level of National Income
Effect on national income of a change in injections and/or withdrawals
J>W : national income rises
W>J : national income falls
The Keynesian diagram: the withdrawals and injections approach
the withdrawals curve
the injections curve

11. Deriving equilibrium national income
Cd, W, J W J O Y

12. The Equilibrium Level of National Income
Effect on national income of a change in injections and/or withdrawals
J>W : national income rises
W>J : national income falls
The Keynesian diagram: the withdrawals and injections approach
the withdrawals curve
the injections curve
equilibrium

13. Deriving equilibrium national income
Cd, W, J W a J b O Y1 Y

14. Deriving equilibrium national income
Cd, W, J W c Y2 J d O Y

15. Deriving equilibrium national income
Cd, W, J W x J O Ye Y

16. The Equilibrium Level of National Income
The Keynesian diagram: the income and expenditure approach
the 45° line

17. Deriving equilibrium national income
Cd, W, J
Y = Cd + W W J O Y

18. The Equilibrium Level of National Income
The Keynesian diagram: the income and expenditure approach
the 45° line
the expenditure curve

19. Deriving equilibrium national income
Cd, W, J
Y = Cd + W
E = Cd + J Cd J W J O Y

20. The Equilibrium Level of National Income
The Keynesian diagram: the income and expenditure approach
the 45° line
the expenditure curve
equilibrium

21. Deriving equilibrium national income
Cd, W, J
Y = Cd + W
E = Cd + J Cd e W f J O Y1 Y

22. Deriving equilibrium national income
Cd, W, J
Y = Cd + W
E = Cd + J g h Cd W J O Y2 Y

23. Deriving equilibrium national income
Cd, W, J
Y = Cd + W
E = Cd + J Cd z W x J O Ye Y

24. The Multiplier The multiplier: introduction
the circular flow of income and effects of changes in injections
definition of the multiplier: ΔY/ΔJ
The withdrawals and injections approach
graphical analysis: shift in the J line

25. The multiplier: (a) a shift in injections
W, J W a J1
Ye1 O Y

26. The multiplier: (a) a shift in injections
W, J W b J2
Ye2 a J1 O
Ye1 Y

27. The multiplier: (a) a shift in injections
W, J
Multiplier = DY / D J
= DY / DW
= c-a / b-c W b J2 J2
D J
D W a J1 J1 c O
Ye1
Ye2 Y DY

28. The Multiplier The multiplier: introduction
the circular flow of income and effects of changes in injections
definition of the multiplier: ΔY/ΔJ
The withdrawals and injections approach
graphical analysis: shift in the J line
the formula : 1/mpw
or : 1/(1–mpcd)

29. The multiplier: (a) a shift in injections
W, J
Multiplier = DY / D J
= DY / DW
= c-a / b-c
= 1/mpw W b J2 J2
D J
D W a J1 J1 c O
Ye1
Ye2 Y DY

30. The Multiplier The multiplier: introduction
the circular flow of income and effects of changes in injections
definition of the multiplier: ΔY/ΔJ
The withdrawals and injections approach
graphical analysis: shift in the J line
the formula : 1/mpw
or : 1/(1–mpcd)
graphical analysis: shift in the W line

31. The multiplier: (b) a shift in withdrawals
W, J W1 a J O
Ye1 Y

32. The multiplier: (b) a shift in withdrawals
W, J W1 W2 a c J O
Ye1
Ye2 Y

33. The multiplier: (b) a shift in withdrawals
W, J
Multiplier = DY / DW
= c-a / a-b W1 W2 a c J DW b O
Ye1
Ye2 Y DY

34. The Multiplier The multiplier: introduction
the circular flow of income and effects of changes in injections
definition of the multiplier: ΔY/ΔJ
The withdrawals and injections approach
graphical analysis: shift in the J line
the formula : 1/mpw
or : 1/(1–mpcd)
graphical analysis: shift in the W line
The income and expenditure approach

35. The Multiplier The multiplier: introduction
the circular flow of income and effects of changes in injections
definition of the multiplier: ΔY/ΔJ
The withdrawals and injections approach
graphical analysis: shift in the J line
the formula : 1/mpw
or : 1/(1–mpcd)
graphical analysis: shift in the W line
The income and expenditure approach
graphical analysis: shift in the E line

36. The multiplier: (c) a shift in the expenditure curve
E, W, J Y E1
Ye1 O Y

37. The multiplier: (c) a shift in the expenditure curve
E, W, J Y E2 E1 O
Ye1
Ye2 Y

38. The multiplier: (c) a shift in the expenditure curve
E, W, J Y
Multiplier = DY / D J
= c-a / b-a E2 E1 c DY b
D J a O
Ye1
Ye2 Y

39. The Keynesian Analysis of Unemployment and Inflation
'Full-employment' national income
'Gap' analysis
the deflationary gap

40. The deflationary gap
W, J W J O Ye Y

41. The deflationary gap
W, J
Deflationary gap W c J d O Ye YF Y

42. The deflationary gap
W, J, E Y E O Ye YF Y

43. The deflationary gap
W, J, E Y E a
Deflationary gap b O Ye YF Y

44. The deflationary gap Y E W J W, J, E Y a b Deflationary gap c d O YeYF Y

45. The Keynesian Analysis of Unemployment and Inflation
'Full-employment' national income
'Gap' analysis
the deflationary gap
the inflationary gap

46. The inflationary gap
W, J W J O Ye Y

47. The inflationary gap
W, J W J O YF Ye Y

48. The inflationary gap
W, J
Inflationary gap W g J h O YF Ye Y

49. The inflationary gap
W, J, E Y E O Ye Y

50. The inflationary gap
W, J, E Y E O Ye Y

51. The inflationary gap
W, J, E Y E e
Inflationary gap f O YF Ye Y

52. The inflationary gap Y E W J W, J, E Y e f Inflationary gap g h O YF

53. The Keynesian Analysis of Unemployment and Inflation
'Full-employment' national income
'Gap' analysis
the deflationary gap
the inflationary gap
policy implications

54. The Keynesian Analysis of Unemployment and Inflation
'Full-employment' national income
'Gap' analysis
the deflationary gap
the inflationary gap
policy implications
Inflation and unemployment together

55. The Keynesian Analysis of Unemployment and Inflation
'Full-employment' national income
'Gap' analysis
the deflationary gap
the inflationary gap
policy implications
Inflation and unemployment together
inflationary pressures before the full-employment level of income

56. The Keynesian Analysis of Unemployment and Inflation
'Full-employment' national income
'Gap' analysis
the deflationary gap
the inflationary gap
policy implications
Inflation and unemployment together
inflationary pressures before the full-employment level of income
implications for shape of AS curve

57. Unemployment and inflation
AS1
Price level O YF Y

58. Unemployment and inflation
AS2
AS1
Price level O YF Y

59. The Keynesian Analysis of Unemployment and Inflation
'Full-employment' national income
'Gap' analysis
the deflationary gap
the inflationary gap
policy implications
Inflation and unemployment together
inflationary pressures before the full-employment level of income
implications for shape of AS curve
effect of an increase in aggregate demand

60. The effects of increases in aggregate demand on national output
Price level O YP
National output

61. The effects of increases in aggregate demand on national output
AD4 AS
AD3
AD2
Price level
AD1 O Y1 Y2 Y3 Y4 YP
National output

62. The Keynesian Analysis of Unemployment and Inflation
The Phillips curve
the shape of the curve

63. The original Phillips curve
Wage inflation (%)
Unemployment (%)

64. The Keynesian Analysis of Unemployment and Inflation
The Phillips curve
the shape of the curve
the position of the curve

65. The original Phillips curve
Wage inflation (%)
Unemployment (%)

66. The Keynesian Analysis of Unemployment and Inflation
The Phillips curve
the shape of the curve
the position of the curve
policy implications of the curve

67. The Keynesian Analysis of Unemployment and Inflation
The Phillips curve
the shape of the curve
the position of the curve
policy implications of the curve
the breakdown of the curve

68. The Keynesian Analysis of Unemployment and Inflation
The Phillips curve
the shape of the curve
the position of the curve
policy implications of the curve
the breakdown of the curve
recent relationship between inflation and unemployment

69. The breakdown of the Phillips curve?
Inflation (%)
The breakdown of the Phillips curve? 65 62 66 61 64 67 63 60
Unemployment (%)

70. Original Phillips curve
Inflation (%)
The breakdown of the Phillips curve?
Original Phillips curve 65 62 66 61 64 67 63 60
Unemployment (%)

71. The breakdown of the Phillips curve?
Inflation (%)
The breakdown of the Phillips curve? 74 71 73 72 70 69 65 62 68 66 61 64 67 63 60
Unemployment (%)

72. The breakdown of the Phillips curve?
Inflation (%)
The breakdown of the Phillips curve? 75 76 74 77 79 71 73 78 72 70 69 65 62 68 66 61 64 67 63 60
Unemployment (%)

73. The breakdown of the Phillips curve?
Inflation (%)
The breakdown of the Phillips curve? 75 80 76 74 77 79 81 71 73 82 78 72 70 85 69 84 65 62 68 83 66 61 64 67 63 60
Unemployment (%)

74. The breakdown of the Phillips curve?
Inflation (%)
The breakdown of the Phillips curve? 75 80 76 74 77 79 81 90 71 73 82 78 89 72 70 91 85 69 84 65 88 62 68 83 87 66 95 92 86 61 64 67 94 63 93 60
Unemployment (%)

75. The breakdown of the Phillips curve?
Inflation (%)
The breakdown of the Phillips curve? 75 80 76 74 77 79 81 90 71 73 82 78 89 72 70 91 85 69 84 65 88 83 62 68 98 87 66 97 95 92 86 61 64 67 94 96 63 01 00 99 93 60
Unemployment (%)

76. Keynesian Analysis of the Business Cycle
The accelerator
changes in national income and induced investment
the accelerator effect
the instability of investment
The multiplier/accelerator interaction
Fluctuations in stocks

77. Keynesian Analysis of the Business Cycle
Determinants of the course of the business cycle
why do booms and recessions persist?
time lags
'bandwagon' effects
why do booms and recessions end?
ceilings and floors
echo effects
the accelerator
random shocks
changes in government policy

78. The Role of Fiscal Policy
The purpose of fiscal policy
correcting a fundamental disequilibrium
fine tuning
Deficits and surpluses
central government deficits and surpluses
public-sector deficits and surpluses
the PSNCR
the national debt

79. The Role of Fiscal Policy
The use of fiscal policy
automatic fiscal stabilisers
discretionary fiscal policy

80. Effectiveness of Fiscal Policy
Factors determining the effectiveness of fiscal policy
accuracy of forecasting
effect on J and W
effect of changes in J and W on national income
timing of the effects
effects on the various macro objectives

81. Effectiveness of Fiscal Policy
Discretionary policy
problems of forecasting the magnitude of the effects
effects of changes in government expenditure
crowding out
effects of changes in taxes
size of the multiplier and accelerator effects
random shocks
problems of timing and time lags
various time lags
policy may be destabilising

82. Fiscal policy: stabilising or destabilising?
Path (a): no intervention 3 4
Real national income 3 2 4 2 1 1 O
Time

83. Fiscal policy: stabilising or destabilising?
Path (a): no intervention
Path (b): policy stabilises 3 4
Real national income 3 2 4 2 1 1 O
Time

84. Fiscal policy: stabilising or destabilising?
Path (a): no intervention
Path (b): policy stabilises
Path (c): policy destabilises 3 4
Real national income 3 2 4 2 1 1 O
Time

85. Effectiveness of Fiscal Policy
Side-effects of discretionary policy
cost inflation
welfare and distributive justice
incentives
A rules-based approach to fiscal policy
a 'steady-as-you-go' policy
the EU Stability and Growth Pact
UK Labour government's 'Golden Rule'