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TOPIC 5
NATIONAL INCOME DETERMINATION
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Planned Aggregate Expenditure (AE)
• Planned aggregate
expenditure is the
total amount the
economy plans to
spend in a given
period. It is equal to
consumption plus
planned investment.
AE  C  I
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Equilibrium Aggregate
Output (Income)
• Equilibrium occurs when there is no tendency
for change. In the macroeconomic goods
market, equilibrium occurs when planned
aggregate expenditure is equal to aggregate
output.
Aggregate output = Planned aggregate
expenditure
Y = AE ( C + I )
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Equilibrium Aggregate
Output (Income)
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Equilibrium Aggregate
Output (Income)
Deriving the Planned Aggregate Expenditure Schedule and Finding Equilibrium (All Figures in Billions of
Dollars) The Figures in Column 2 are Based on the Equation C = 100 + .75Y.
(1)
(3)
(4)
(5)
(6)
AGGREGATE
CONSUMPTION (C)
PLANNED
INVESTMENT (I)
PLANNED
AGGREGATE
EXPENDITURE (AE)
C+I
UNPLANNED
INVENTORY
CHANGE
Y - (C + I)
EQUILIBRIUM
(Y = AE)
100
175
25
200
- 100
No
200
250
25
275
- 75
No
400
400
25
425
- 25
No
500
475
25
500
0
Yes
600
550
25
575
+ 25
No
800
700
25
725
+ 75
No
1,000
850
25
875
+ 125
No
AGGREGATE
OUTPUT
(INCOME) (Y)
(2)
Equilibrium Aggregate
Output (Income)
(1) Y=C+I
( 2 ) C = 100 + 0.75Y
( 3 ) I = 25
By substituting (2) and (3)
into (1) we get:
Y = 100 + 0.75 Y + 25
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There is only one value
of Y for which this
statement is true. We
can find it by
rearranging terms:
Y - 0.75 Y = 100 + 25
0.25 Y = 125
Y = 125 / 0.25
Y = 500
The Saving/Investment
Approach to Equilibrium
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If planned investment is exactly equal to saving,
then planned aggregate expenditure is exactly
equal to aggregate output, and there is equilibrium.
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The S = I Approach to Equilibrium
• Aggregate output will be equal to planned
aggregate expenditure only when saving equals
planned investment (S = I).
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The Multiplier
• The multiplier is the ratio of the change in the
equilibrium level of output to a change in some
autonomous variable.
– An autonomous variable is a variable that is
assumed not to depend on the state of the economy
- that is, it does not change when the economy
changes.
• In this chapter, for example, we consider
planned investment to be autonomous
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The Multiplier
• The multiplier of autonomous investment
describes the impact of an initial increase in
planned investment on production, income,
consumption spending, and equilibrium income.
• The size of the multiplier depends on the slope
of the planned aggregate expenditure line.
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The Multiplier Equation
• The marginal propensity to save may be
expressed as:
DS
MPS 
DY
• Because DS must be equal to DI for equilibrium
to be restored, we can substitute DI for DS and
solve:
•
•
DI
MPS 
DY
therefore
1
multiplier 
MPS
or
1
DY  DI 
MPS
1
multiplier 
1 - MPC
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The Multiplier
• After an increase in
planned investment,
equilibrium output is
four times the
amount of the
increase in planned
investment.