Macroeconomics by O' Blanchard

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Macroeconomics by O. Blanchard

• Chapter 3 The Goods Market

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Learning Objectives

• Understanding short run economic fluctuations
• What cause them?
• The demand side
• The Keynesian cross

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The national income identity

• Y C I G NX
• where Y GDP the value of total output
• C I G NX aggregate expenditure

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US consumption

• of the GDP ?
• Mostly services

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US investment

• Volatile component of GDP
• Its components?

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US government spending

• Varies across time
• What it includes and does not include

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US Net exports (NX EX - IM)

• def the value of total exports (EX) minus the
  value of total imports (IM)

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Assumptions

• Closed economy
• SHORT RUN
• prices fixed
• output/income is determined by expenditure.

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Elements of the Keynesian Cross
Planned expenditure
Consumption function
Govt policy variables
For now, planned investment is exogenous
Equilibrium condition
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Graphing planned expenditure
E planned expenditure
income, output, Y
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Graphing the equilibrium condition
E planned expenditure
45º
income, output, Y
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The equilibrium value of income
E planned expenditure
E Y
E
income, output, Y
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An increase in government purchases
E Y
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The government purchases multiplier

• - Definition the increase in income resulting
  from a 1 increase in G.
• In this model, the G multiplier equals

• Example
• Why is the multiplier greater than 1 ?

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An increase in taxes
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The Tax Multiplier

• Def the change in income resulting from a 1
  increase in T

• Example
• Comparing the government purchase multiplier and
  the tax multiplier

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Investment equals Saving

• Alternative way of thinking about the goods
  market equilibrium
• Total saving
• Propensity to save