7. Circular Flow of National Income Model

12. Marginal Propensity to Consume (MPC)

18. AGGREGATE INCOME, Y (BILLIONS OF DOLLARS) AGGREGATE CONSUMPTION, C (BILLIONS OF DOLLARS) 0 100 80 160 100 175 200 250 400 400 600 550 800 700 1,000 850

20. C > Y S (-ve) C < Y S (+ve) Y - C = S AGGREGATE INCOME (Billions of Dollars) AGGREGATE CONSUMPTION (Billions of Dollars) AGGREGATE SAVING (Billions of Dollars) 0 100 -100 80 160 -80 100 175 -75 200 250 -50 400 400 0 600 550 50 800 700 100 1,000 850 150

29. Planned aggregate < output Keynesian cross Planned aggregate > output

30. Y > C + I aggregate output > planned aggregate expenditure inventory investment is greater than planned actual investment is greater than planned investment Disequilibria: C + I > Y planned aggregate expenditure > aggregate output inventory investment is smaller than planned actual investment is less than planned investment aggregate output: Y planned aggregate expenditure: AE = C + I equilibrium: Y = AE , or Y = C + I

31. By substituting (2) and (3) into (1) we get: There is only one value of Y for which this statement is true. We can find it by rearranging terms: (1) (2) (3)

32. Calculate the equilibrium level of national income Consumption (C) 0.5Yd Net investment (I) 100 Government spending (G) 200 Income Tax (T) 20

33. Calculate the equilibrium level of national income Consumption (C) 0.5Yd Net investment (I) 100 Government spending (G) 200 Export (X) 50 Import (M) 0.35Y Income Tax (T) 0.2Y

37. THANK YOU