National income

National incomes

The circular flow of income:

Income is a flow wealth is a stock

Equilibrium and real national output

Short term

Long term

Classical LRAS

• Perfectly inelastic

• Shifts in AD would not affect long run national output

• favour supply side policies

• Long run aggregate supply is likely to lead to lower prices and higher output

Keynesian LRAS

• there can be equilibrium at less than full employment

• Shift after full employment in AD is purely inflationary (AD3 to AD4)

• During recession government needs to work to increase AD (AD1 to AD2)

• 

The multiplier

Idea of increase in AD because of an increased injection

Effects on economy

• Growth can occur quicker

• Targeted at those with biggest MPC

• time lag

Multiplier:

• 1/(1-MPC)

• 1/ MPW

Effects on AD

• must be spare capacity

• The more elastic the curve the smaller the change

• Depends on shape of AS and wether it’s long run or short run