The Keynesian Model: Government and Foreign Sector

Government Expenditure (G)

Purchases of goods/services by the government.

Taxation (T)

Government's collection of revenue from individuals/businesses.

Fiscal Policy

Government actions influencing economic activity through G and T.

Exogenous Factors

Variables determined outside the economic model.

Multiplier Effect

Change in income resulting from change in expenditure.

Marginal Propensity to Consume (MPC)

Percentage of additional income spent on consumption.

Equilibrium Income (Ye)

Income level where total spending equals total production.

Net Exports (NX)

Difference between exports (X) and imports (Z).

Autonomous Spending

Expenditure independent of income levels.

Marginal Propensity to Import (m)

Percentage of additional income spent on imports.

Leakages

Outflows from the circular flow model, e.g., savings.

Total Expenditure (E)

Sum of consumption, investment, government spending, and net exports.

Consumption (C)

Total spending by households on goods and services.

Investment (I)

Expenditure on capital goods for future production.

Gross Capital Formation

Total investment in fixed assets and changes in inventories.

Exhaustive Expenditure

Government spending that directly contributes to output.

Tax Multiplier

Effect of tax changes on overall income, smaller than expenditure multiplier.

Income (Y)

Total earnings in the economy from production.

Autonomous Expenditure Increase

Initial rise in spending independent of income changes.

Graphical Representation

Visual depiction of economic relationships and equilibrium.

Circular Flow Model

Framework illustrating economic transactions between sectors.

Complete Multiplier Formula

KE = ΔY / ΔE, showing income change per expenditure change.

Impact of Government Spending

Increased G raises equilibrium income directly.

Impact of Tax Changes

Changes in T influence disposable income and consumption.

Aggregate Expenditure (A)

Total spending in the economy, including G, C, I, and NX.

Consumption Function

Relationship between disposable income and consumption levels.