Short run macroeconomic equationsL2

circular flow of income, Keynesian model, withdrawals, equilibrium

withdrawals =

= savings (S) + taxes (T) + import (M)

injections (J) =

= investments (I) + government (G) + exports (X)

National income (Y) =

= domestic consumption (Cd) + Withdrawals (W)

Aggregate demand (AD) =

= Consumption (C) + Investments (I) + government (G) + exports (X) - imports (M) = domestic consumption (Cd) + injections (J)

Income =

= aggregate expenditure (E) = domestic consumption (Cd) + injections (J)

what does the Keynesian model depict?

AD determines the level of economic activity (employment, production)

what are the assumptions made for the Keynesian model to work?

• The interest rate is fixed

• Consumption and withdrawals depend on national income, Endogenous

• Injections do not depend on national income, Exogenous

what is the consumption function? What does it measure?

C = f(Y)

The relationship between consumption and nation income

injections

money entering the circular flow of income

withdrawals

money taken out of the circular flow of income

what is the saving consumption function? What does it measure?

mps = change in saving/ change in national income

proportion of an increase in income saved

mpcd + mpw = ?

mpcd + mpw = 1et n

net taxes function

mpt = change in taxes/ change in national income

import function

mpm = change in imports/ change in national income

expenditures (E) =

= domestic consumption (Cd) + injections (J)

(injections) multiplier formula

k = 1/mpw (marginal propensity to withdraw)

marginal propensity meaning

the proportion of increase

frictional unemployment is a result of

imperfect information (lacks information to benefit in goods or services) in the labour market

Assume that under a floating exchange​ rate system, a country initially has a balanced current account and a​ balanced capital-plus-financial account.​ Now assume that there is an increase in the domestic interest rate.  What will happen to the exchange rate and the balance of ​payments?

increase in domestic rates = increase in exchange rate but that means that exports (made within the initial country) are more expensive than imports (goods from another country). but it means that financial and capital assets are in surplus (rich!! country!! as everyone wants the initial country’s domestic goods)