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Goods Market Equilibrium

demand for goods (Z)  

  • Z = C+I+G+X-IM
  • demand = sum of consumption, investment, gov't spending, exports, minus imports
  • closed economy >> X = IM = 0 >> Z = C+I+G

equilibrium output - where production (Y) equal to demand (Z)  

  • Y = Z = C+I+G
    • Y = (c0+c1(Y-T)) + (I+G)
    • Y = [I+G+c0-c1T] / (1-c1)
  • note that changes to I and G impact output Y more than equivalent changes to T, which is decreased by c1(<1)
  • multiplier = 1 / (1-c1), always greater than 1
    • propensity to consume (c1) increases >> multiplier effect increases
    • augments the effect of G,I,T >> more bang for your buck
    • autonomous spending = (I+G+c0-c1T), doesn't depend on output

 

  • production Y=Y
    • production line always has slope 1 (income is consumer's production)
  • demand Z
  • equilibrium Y=Z

 

  • note that a shift in the demand produces a greater shift in the equilibrium points
  • demand shift = change in autonomous spending (c0-c1T+I+G)
  • slope again depends on c1

Calculate the multiplier and equilibrium if G = g0-g1Y instead of being exogenous.  

  • Z = Y = C+I+G = (c0+c1(Y-T)) + I + (g0-g1Y)
  • Y(1-c1+g1) = c0 - c1T + I + g0
  • Y = 1 / (1-c1+g1) * (c0-c1T+I+g0) = equilibrium
    • multiplier = 1 / (1-c1+g1), smaller than original
Subject: 
Economics
Subject X2: 
Economics

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