Keynesian Analysis of Macroeconomic Equilibrium

8/7/2019 Keynesian Analysis of Macroeconomic Equilibrium

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CHAPTER

Keynesian Analysis of

Macroeconomic Equilibrium

recessions, inflation,and the multiplier

Copyright 2010 Pearson Education, Inc. All rights reserved. 1


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Box 2. Equilibrium Real GDP and

Income in a Given Year


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In equilibrium, real GDP equals aggregatepurchases.

Assuming no government and no

international trade, equilibrium requires thatC+ S= C + IP.

Saving must equal planned investment in

equilibrium,S

=

IP.

Recessions can be caused by declines in

aggregate purchases.


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Box 5. How a Decline in Aggregate Purchases in a

Given Year Causes a Recessionary GDP Gap


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The Multiplier

Multiplier = Change in real GDP/Change inautonomous purchases.

Multiplier = 1/(1 Marginal respending rate).

When theres no government and nointernational trade, MPC is the marginal

respending rate.

With government and international trade, the

marginal tax rate and marginal propensity to

import must be taken into account when

calculating the marginal respending rate.


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Inflation and Aggregate Purchases

When aggregate purchases increase, an

inflationary GDP gap can open up.

When equilibrium real GDP exceeds potentialreal GDP, the price level will rise and the

aggregate purchases line will shift down until

equilibrium real GDP = Potential real GDP.


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Box 11. An Inflationary GDP Gap


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Box 10. Deriving an Aggregate Demand Curve


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Box 1. Aggregate Production, Aggregate

Purchases, and Determination of

Macroeconomic Equilibrium Real GDPin a Simple Economy


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Box 3. Saving and Investment and Macroeconomic

Equilibrium


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Box 4. Macroeconomic Equilibrium: The Response

to a Decline in Planned Investment


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Box 6. Macroeconomic Equilibrium: The Response

to a Decline in Consumer Spending


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Box 7. The Multiplier Process


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Box 8. The Multiplier Effect and



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Box 9. Government Spending, International Trade,

and Macroeconomic Equilibrium


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The Global Economy


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Appendix Box 1. Aggregate Production, Aggregate

Purchases, and Macroeconomic

Equilibrium

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Keynesian Analysis of Macroeconomic Equilibrium