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 [1]
Subject X2:
Economics [1]