Chapter 17: Short-Run Macroeconomic Equilibrium

Keynesian Cross Model Assumptions

• Short-run focussed

• AD is the primary driver of economic activity

• prices are assumed as fixed

MPC (marginal propensity to consume)

the proportion of any increase in income that is spent on consumption

MPW (marginal propensity to withdraw)

the proportion of any increase in income that is withdrawn from the circular flow

national income will rise

if aggregate expenditure exceeds national income

national income will fall

if national income exceeds aggregate expenditure

Y = E (and W + J)

equilibrium national income

Y (national income)

represents the total income generated in the economy (Cd + W)

AD (aggregate demand)

represents the total demand for goods and services in the economy

Multiplier effect

occurs when an initial injection into the economy causes a bigger final increase in national income

multiplier (K)

Change in real GDP (Y)/ Change in Injections (J)

Keynesian Cross Model

the consumption function

the withdrawals and Domestic Consumption Function

Equilibrium national income

the multiplier; a shift in injections

the multiplier; shift in expenditure

the multiplier; a shift in withdrawal

deflationary (recessionary) gap

inflationary gap