Principles of Economics: © Oxford Fajar Sdn. Bhd. (008974-T), 2013 12 - 1

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 12– 1

CHAPTER 12
NATIONAL INCOME
EQUILIBRIUM

NATIONAL INCOME
EQUILIBRIUM
 TWO APPROACHES TO DETERMINE EQUILIBRIUM:
1. AGGREGATE DEMAND – AGGREGATE SUPPLY
APPROACH (AD = AS)
–Aggregate demand or aggregate expenditure is the total
demand for goods and services in the economy.
–There are four components in aggregate demand namely
consumption, investment, government sector and foreign
sector (net exports).
–Aggregate supply or aggregate output is the total quantity of
goods and services produced in an economy in a given
period of time.
–Equilibrium occurs when AD = AS
NATIONAL INCOME
EQUILIBRIUM (cont.)
2. LEAKAGE – INJECTION APPROACH

– Leakage is a withdrawal from the income – expenditure
stream.
– Leakages include savings, taxes and imports.
– Injection is an addition of spending to the income-
expenditure stream.
– Injections include investment, government expenditures
and exports.
– Equilibrium occurs when leakages are equal to injections.

CONSUMPTION AND
SAVINGS
 CONSUMPTION THEORY
– Consumption refers to the purchase of goods and services by
individuals or households that are produced by firms.
– Income (Y) is divided into two parts, consumption (C) and
savings (S).
Y=C+S
CONCEPT
OF
CONSUMPTION

CONSUMPTION AND
SAVINGS (cont.)
 CONSUMPTION FUNCTION
– Consumption function refers to the relationship between
consumption level and income level.
– The general equation for a linear consumption function can
be written as below:
C = a + b Yd
Disposable
income
Consumption Autonomous
expenditure MPC
consumption

CONSUMPTION AND
SAVINGS (cont.)
 SAVINGS THEORY
– Savings is divided into autonomous savings and induced
savings.
– Autonomous savings refers to the part of savings that does
not depend on the level of income and occurs when there
is autonomous consumption.

CONSUMPTION AND
SAVINGS (cont.)
 CONSUMPTION AND SAVINGS SCHEDULE
– Table below shows some relationship between
consumption and savings.
– The sum of APC and APS must be equal to 1.
APC + APS = 1
– The sum of MPC and MPS must also equal to one. The
equation is as below:
MPC + MPS = 1

CONSUMPTION AND
SAVINGS (cont.)
MPC= (200 -125)/(200-100) =0.75
Disposabl Consumption Savin APC APS MPC MPS

e Income (C) g (C/ Yd) (S/ Yd) (C/ Yd) (S/
(Yd) (S) Yd )
0 50 -50 - - - -
100 125 -25 1.25 -0.25 0.75 0.25
200 200 0 1.00 0 0.75 0.25
300 275 25 0.92 0.08 0.75 0.25
400 350 50 0.88 0.12 0.75 0.25
500 425 75 0.85 0.15 0.75 0.25
MPS= (50 -25)/(400-300) =0.25
APC = 125/100 = 1.25
APS= 25/300 =0.08

CONSUMPTION AND
SAVINGS (cont.)
 SAVINGS FUNCTION
– Saving function refers to the relationship between savings
and income level.
– The general equation for a linear consumption function can
be written as below.
S = -a + (1- b) Yd
Disposable income
Autonomous
Savings savings MPS
DERIVE SAVINGS FUNCTION FROM CONSUMPTION FUNCTION

 Given the consumption function: C = 100 + 0.65Yd
 Saving function : S = -100 + 0.35Yd
CONSUMPTION AND
SAVINGS (cont.)
C
Y=C
Each point on the 45 degree

line indicates a point C = 100 + 0.65Yd
where disposable income
equals to consumption.
a=100
National Income
O
200
Saving schedule is vertical

difference between the S = -100 + 0.35Yd
Consumption schedule
and the 45 degree line.
National Income
200 Break-even income is the level at which households

-100
consume all their incomes. At the point of break-even,
(i) Y = C (ii) S = 0 (iii) APC = 1 (iv) APS = 0

CONSUMPTION AND
SAVINGS (cont.)
Price and wage levels
Changes in
Distribution consumers’
of wealth taste and
fashion
Consumer Change in
credit expectations
Rate of interest

INVESTMENT
 Investment refers to the spending on purchases and

accumulation of capital goods such as buildings,
equipments and addition to inventories.
 There are two types of investment:
1. Autonomous Investment
– Autonomous investment is fixed and independent of
income.
– The amount of investment can be influenced by other
factors such as interest rate, repayment rate, business
expectation and technology developments.

INVESTMENT (cont.)
– Example of autonomous investment is the capital

depreciation.
2. Induced Investment
– Induced investment depends on the national income.
– As national income increases, the induced investment will
also increase since higher national income attracts more
investors to invest.

INVESTMENT (cont.)
Rate of
Rate of return
interest
Government
Policies
Expectation of
the future Technological
Changes

GOVERNMENT SECTOR
 Government sector is another sector that has a

major impact on the economy because of its
expenditure.
 Government spending can be classified into two
categories, purchases of goods and services and
transfer payment.
 National income can be increased through
government spending (as we discussed on the
expenditure approach).

GOVERNMENT SECTOR
(cont.)
 Government spending is an injection into the
spending stream.
 Government also can reduce the national income
through imposing taxes.
 There are various tax imposed by the government
such as direct taxes and indirect taxes.
 Taxes are leakages from the spending stream.

FOREIGN SECTOR
 Exports are goods and services that are sold to

foreign countries.
 For example, Malaysian made DVD player is sold
to Thailand.
 Exports increase the national income and therefore
export is an injection into the spending stream.
 Imports are goods and services that are purchased
from foreign countries.
 For example, Malaysia buys cars from Germany.

FOREIGN SECTOR (cont.)
 Imports reduce the national income and an import

is a leakage from the spending stream.
 Net export is the difference between exports and
imports.
 If net export is positive, exports are greater than
imports and if net export is negative, exports are
less than imports.

EQUILIBRIUM IN
TWO-SECTOR ECONOMY
 Equilibrium in a two-sector economy is a simple economy, which
consists of 2 agents only, namely households and firms.
 Equilibrium occurs when the AD = AS or Leakage = Injection.
Factor Market
Y = rent, wages, profit, interest
HOUSEHOLD FIRM
Consumption (C)
(1) (2)
Saving (S) Product Market Investment (I)
Financial Market
EQUILIBRIUM IN
TWO-SECTOR ECONOMY (cont.)
AD –AS APPROACH
Equilibrium is achieved when aggregate demand is equal to aggregate supply.
AS = AD
Y = C+I
Algebra Analysis
Given the following information. Autonomous consumption = 100; MPC = 0.7; Autonomous
Investment = 500
Solution
Consumption function, C = 100 + 0.7Yd (In two sector economy, Yd = Y since no tax)
Y = C+I
= 100 + 0.7Y + 500
Y – 0.7Y = 600
0.3Y = 600
Y = 600/0.3
Y = 2000 EQUILIBRIUM INCOME

EQUILIBRIUM IN
AD–AS APPROACH
AS = AD
Graphic Analysis Y = C+I
Y=AD
AD (C,I) C +I
C = 100 + 0.7Yd
I=500
a=100
National Income
2,000
The equilibrium occurs when the consumption and 45 degree line intersects at RM2000

EQUILIBRIUM IN
LEAKAGE - INJECTION APPROACH
Equilibrium is achieved when leakage is equal to injection.
Injection = Leakage
I = S
Algebra Analysis
Given the following information. Autonomous consumption = 100; MPC = 0.7; Autonomous
Investment = 500
Solution:
Consumption function, C = 100 + 0.7Yd , so saving function is S = -100 + 0.3Y d
I = S
500 = -100 + 0.3Y
0.3Y = 600
Y = 600/0.3

EQUILIBRIUM IN
LEAKAGE - INJECTION APPROACH

Injection = Leakage
Graphic Analysis I = S
Leakage-Injection
S = -100 + 0.3Yd
I=500
National Income
2,000
a=100
The equilibrium occurs when the saving function and investment function intersect at RM2000.

EQUILIBRIUM IN
Tabular Analysis
• The equilibrium is achieved when AD = AS or I = S
• When both the AS and AD is same at one level, this is called as
equilibrium income.
Aggregate Consumption Saving Investment Aggregat Tendency of
Supply (C) (S) (I) e employment,
(Y) Demand output and
(C + I) income
0 100 -100 500 600 Increase
1000 800 200 500 1400 Increase
1500 1150 350 500 1650 Increase
2000 1500 500 500 2000 EQUILIBRIUM
2500 1850 650 500 2350 Decrease
3000 2200 800 500 2700 Decrease
AS = AD and I =S
EQUILIBRIUM IN
THREE-SECTOR ECONOMY
 Equilibrium in a three-sector economy consists households, firms
and government.
Factor Market
Government
Transfer Payment Expenditure (G)
(G)
HOUSEHOLD GOVERNMENT FIRM
Taxes (T) Taxes (T)
Consumption (C)
(1)
(2)
Savings (S)
Product Market Investment (I)
Financial Market
EQUILIBRIUM IN
(cont.)
AD –AS APPROACH
Equilibrium is achieved when aggregate demand is equal to

aggregate supply.
AS = AD
Y = C+I+G
In three-sector economy, we need to focus on two types of taxes.
1. Autonomous Taxes
– Autonomous taxes refer to the amount of tax that is independent
of income.
– If the income increases or decreases, autonomous taxes remain
constant.
– For example, Tax = RM100

EQUILIBRIUM IN
(cont.)
2. Induced Taxes
 Induced taxes refer to the amount of tax that depends on
income.
 If income increases, induced tax will increase and vice
versa.
 For example, Tax = 0.6Y

EQUILIBRIUM IN
(cont.)
AD –AS APPROACH
Algebra Analysis
Equilibrium using autonomous tax Equilibrium using induced tax
Given the following information: Given the following information. :
C = 200 + 0.75Yd ; I = 100; G = 50; T = 100 C = 200 + 0.75Yd ; I = 100; G = 50; T = 0.2Y
Solution Solution
Y = C+I+G Y = C+I+G
= 200 + 0.75Yd + 100 + 50 = 200 + 0.75Yd + 100 + 50
= 350 + 0.75(Y –T) = 350 + 0.75(Y –T)
= 350 + 0.75(Y – 100) = 350 + 0.75(Y – 0.2Y)
Y – 0.75Y = 275 = 350 + 0.75(0.8Y)
0.25Y = 275 = 350 + 0.6Y
Y = 275/0.25 Y – 0.6Y = 350
Y = 1100 0.4Y = 350
Y = 350/0.4
Y = 875
EQUILIBRIUM IN
(cont.)
AD –AS APPROACH
Graphic Analysis
Y=AD Y=AD
AD (C,I,G) C +I + G AD (C,I,G) C +I + G
C = 200 + 0.75Yd
C = 200 + 0.75Yd
(BEFORE TAX)
(BEFORE TAX)
325 350
C = 175 + 0.75Y C = 200 + 06Y
(AFTER TAX) (AFTER TAX)
200 200
175
National Income National Income

1100 875
The equilibrium occurs when AD curve The equilibrium occurs when AD curve
and 45 degree line intersects at RM1100. and 45 degree line intersects at RM875.

EQUILIBRIUM IN
(cont.)
LEAKAGE–INJECTION APPROACH
Equilibrium is achieved when leakages are equal to injections
Injection = Leakage
I+G = S+T
Algebra Analysis
Given the following information. : Given the following information. :
C = 200 + 0.75Yd ; I = 100; G = 50; T = 100 C = 200 + 0.75Yd ; I = 100; G = 50; T =
Solution 0.2Y
I+G = S+T Solution
100 + 50 = -200 + 0.25Yd + 100 I + G = S+T
100 + 50 = - 200+ 0.25Yd + 0.2Y
150 = -100 + 0.25(Y – T)
150 = - 200 + 0.25(Y – 0.2Y) + 0.2Y
150 = -100 + 0.25(Y – 100)
150 = -200 + 0.25(0.8Y) + 0.2Y
150 = -125 + 0.25Y 150 = -200 + 0.2Y + 0.2Y
0.25Y = 275 0.4Y = 350
Y = 1100 Y = 875
EQUILIBRIUM IN
(cont.)
LEAKAGE–INJECTION APPROACH
Graphic Analysis
Leakages/Injections Leakages/Injections
S = -200 + 0.25Yd S = -200 + 0.25Yd
(BEFORE TAX) (BEFORE TAX)
S +T = -225 + 0.25Y S +T = -200 + 0.2Y

(AFTER TAX) (AFTER TAX)
150
150
I +G I +G
National Income National Income

1100
-200 -200 875
-225
The equilibrium occurs when I+G schedule The equilibrium occurs when I+G schedule
Intersects with S+T at RM1100. Intersects with S+T at RM875.

EQUILIBRIUM IN
(cont.)
Tabular Analysis
 The equilibrium is achieved when AD = AS or I + G = S + T
 When both the AS and AD is same at one level, this is called as equilibrium income.
Aggregate Taxes Disposable Consumption Saving Investment Government Aggregate Tendency of
Supply (T) Income (Yd) (C) (S) (I) Expenditure Demand employment,
(Y) (Yd = Y-T) (C = 200+0.75Yd) (G) (C+ I+G) output and
income
100 100 0 200 -200 100 50 350 Increase
300 100 200 350 -150 100 50 500 Increase

600 100 500 575 -75 100 50 725 Increase
900 100 800 800 0 100 50 950 Increase
1100 100 1000 950 50 100 50 1100 EQUILIBRIUM
1300 100 1200 1100 100 100 50 1250 Decrease

1500 100 1400 1250 250 100 50 1400 Decrease
AS = AD and I+G = S+T

EQUILIBRIUM IN
FOUR-SECTOR ECONOMY
 Equilibrium in a three-sector economy consists households, firms,
government and foreign sector.
Foreign Sector
Export (X)
Import (M) Factor Market
Govt Expenditure
Transfer Payment
(G)
(G)
HOUSEHOLD GOVERNMENT FIRM
Taxes (T) Taxes (T)
Consumption (C)
(1)
(2)
Savings (S)
Product Market Investment (I)
Financial Market
EQUILIBRIUM IN
FOUR-SECTOR ECONOMY
(cont.)
AD–AS APPROACH
AS = AD
Y = C + I + G + (X-M)
Algebra Analysis
Given the following information. C = 200 + 0.75 Y d ; I = 100; G = 50; T = 100 ;
X = 100; M = 50
Solution
Y = C + I + G + (X – M)
= 200 + 0.75(Y – T) + 100 + 50 + (100 – 50)
= 400 + 0.75 (Y –100)
= 400 + 0.75Y – 75
Y – 0.75Y = 325
0.25Y = 325
Y = 325/0.25
EQUILIBRIUM IN
FOUR-SECTOR ECONOMY
(cont.)
AD–AS APPROACH
AS = AD
Y = C + I + G + (X- M)
Graphic Analysis Y=AD
AD (C,I)
C +I+G + (X-M)
325
National Income
1300
The equilibrium occurs when the aggregate demand (C+I+G+(X-M))

and 45 degree line intersects at RM1300.
EQUILIBRIUM IN
FOUR-SECTOR ECONOMY
(cont.)
LEAKAGE-INJECTION APPROACH

Injection = Leakage
I + G+ X = S + T+ M
Algebra Analysis
Given the following information. C = 200 + 0.75 Y d ; I = 100; G = 50;
T = 100 ; X = 100; M = 50

Solution
I + G+ X = S+T+M
100 + 50 + 100 = -200 + 0.25(Y-100) + 100 + 50
250 = -75 + 0.25Y
0.25Y = 325

EQUILIBRIUM IN
FOUR-SECTOR ECONOMY
(cont.)
LEAKAGE-INJECTION APPROACH
Injection = Leakage
I+G+X = S +T+M
Graphic Analysis
Leakage-Injection
S +T+M
250 I+G+X
National Income
1300
-75
The equilibrium occurs when the I+G+X schedule

and S+T+M schedule intersect at RM1300.

EQUILIBRIUM IN
FOUR-SECTOR ECONOMY
(cont.)
Tabular Analysis
 The equilibrium is achieved when AD = AS or I + G + X = S + T + M
 When both the AS and AD is same at one level, this is called as equilibrium income.
Aggregate Taxes Disposable Consumption Saving Investment Government Exports Imports Aggregate Tendency of
Supply (T) Income (C) (S) (I) Expenditure (X) (M) Demand employment,
(Y) (Yd) (G) (C+ I+G+ output and
[X – M]) income
100 100 0 200 -200 100 50 100 50 400 Increase

300 100 200 350 -150 100 50 100 50 550 Increase
600 100 500 575 -75 100 50 100 50 775 Increase
900 100 800 800 0 100 50 100 50 1000 Increase
1100 100 1000 950 50 100 50 100 50 1150 Increase
1300 100 1200 1100 100 100 50 100 50 1300 EQUILIBRIUM
1500 100 1400 1250 250 100 50 100 50 1450 Decrease
AS = AD and I+G+X = S+T+M

MULTIPLIER CONCEPT
 The multiplier is the ratio of the change in income to the change in

AD.
 Multiplier shows how many times the effect of an initial change in AD
is multiplied by causing changes in consumption and finally in the
aggregate income.
 The formula for multiplier (K) is,
K = Change in Income (Y)
Change in Aggregate Demand (AD)
 The size of multiplier depends upon the size of the marginal
propensity to consume (MPC).
 Higher the MPC, higher is the size of the multiplier and lower the
MPC, lower shall be the size of multiplier.
K = 1
1 - MPC All Rights Reserved
PRINCIPLES OF ECONOMICS Third Edition
MULTIPLIER CONCEPT (cont.)
INVESTMENT MULTIPLIER
 Investment multiplier refers to the ratio of the change in the equilibrium income to a
change in investment. The formula for investment multiplier (Ki) is,
Ki = Change in Income (Y)
Change in Investment (I)
 Investment multiplier can also derived as follows:
Investment Multiplier (Ki) = 1 = 1
1-MPC MPS
Example
Given, C = 200 + 0.75Y and I = 100. What is the equilibrium income level when there is an
increase in investment by 50 million?
Solutions:
Y = Ki x I New equilibrium income level = Y + Y
= 1/(1-MPC) x I = 1100 + 200
= 1 /(1-0.75) x 50 = 1300 m
Y = 200 million
GOVERNMENT EXPENDITURE MULTIPLIER
 The government expenditure multiplier refers to the ratio of the change in the
equilibrium income to a change in government expenditure assuming there is
no change in taxes.
Kg = Change in Income (Y)
Change in Government Expenditure (G)
 Government expenditure multiplier can also derived as follows:
Government Expenditure Multiplier (Kg) = 1 = 1
1-MPC MPS
Example
Given, C = 200 + 0.75Y; I = 100 and G = 50. What is the equilibrium income level when there is
an increase in government spending by 50 million?
Solutions:
Y = Kg x G New equilibrium income level = Y + Y
= 1/(1-MPC) x G = 1100 + 400
= 1 /(1-0.75) x 100 = 1500 m
Y = 400 million
TAX MULTIPLIER
 Tax multiplier refers to the ratio of the change in the equilibrium income to a
change in taxes assuming there is no change in government expenditure.
Kt = Change in Income (Y)
Change in Taxes (T)
 Tax multiplier can also derived as follows:
Tax Multiplier (Kt) = - MPC
MPS
Example
Given, C = 200 + 0.75Y; I = 100; G = 50 and T = 100. What is the equilibrium income level
when there is a tax cut of 50 million?
Solutions:
Y = Kt x T New equilibrium income level = Y + Y
= -MPC/(MPS) x T = 1100 + 150
= -0.75/(0.25) x 50 = 1250 m
Y = 150 million

BALANCE BUDGET MULTIPLIER
 Balanced budget multiplier refers to the change in the equilibrium income by the
same amount as the changes in taxes and government expenditure.
Kb = 1
Example
Given, C = 200 + 0.75Y; I = 100; G = 50 and T =100. What is the equilibrium income level
when there is an increase in government spending and taxes by 50 million?
Solutions:
Tax multiplier
Y = Kt x T Net increase in income, Y = -150+200
= -MPC/MPS x T = 50 million
= -0.75 /0.25 x 50
Y = -150 million
Government Expenditure multiplier
Y = Kg x G New equilibrium income level = Y + Y
= 1/(1-MPC) x G = 1100 + 50
= 1/(1-0.75) x 50 = 1150 m
Y = 200 million
INFLATIONARY GAP
 Inflationary gap occurs when national income exceeds the full employment level.
 Inflationary gap can be caused by the increase in aggregate expenditure.
 The inflationary gap is measured as the excess of the aggregate expenditure over
the full employment aggregate supply, Yfe. Y=AD
Aggregate Demand
C+I+G +(X-M)
Inflationary Gap C+I+G +(X-M)fe

Y fe < Y A
The inflationary gap of AB will

B
increase the general price level.
National Income
0 Yfe Y
To reduce the inflationary gap of AB, contractionary policy can be implemented. Government can
practice contractionary fiscal policy through reducing government expenditure and raise taxes.

DEFLATIONARY GAP
 Deinflationary gap occurs when national income below the full employment level.
 The deflationary gap is measured as the difference between the aggregate
expenditure over the full employment aggregate supply, Yfe.
Y=AD
Aggregate Demand
C+I+G+(X-M)fe
C C +I+G + (X-M)
D
Deflationary Gap
Yfe > Y
National Income
0 Y Yfe
To reduce the deflationary gap of CD, expansionary policy can be implemented. Government can
practice expansionary fiscal policy through increase in government expenditure and tax cut.


Principles of Economics: © Oxford Fajar Sdn. Bhd. (008974-T), 2013 12 - 1

Uploaded by

Copyright:

Available Formats

You might also like

Principles of Economics: © Oxford Fajar Sdn. Bhd. (008974-T), 2013 12 - 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Principles of Economics: © Oxford Fajar Sdn. Bhd. (008974-T), 2013 12 - 1

Uploaded by

Copyright:

Available Formats

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 12– 1

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

2. LEAKAGE – INJECTION APPROACH

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

MPC= (200 -125)/(200-100) =0.75

Disposabl Consumption Savin APC APS MPC MPS

APS= 25/300 =0.08

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

DERIVE SAVINGS FUNCTION FROM CONSUMPTION FUNCTION

Each point on the 45 degree

Saving schedule is vertical

200 Break-even income is the level at which households

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

Price and wage levels

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

 Investment refers to the spending on purchases and

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

– Example of autonomous investment is the capital

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

 Government sector is another sector that has a

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

 Exports are goods and services that are sold to

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

 Imports reduce the national income and an import

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

Y = rent, wages, profit, interest

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

Equilibrium is achieved when leakage is equal to injection.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

HOUSEHOLD GOVERNMENT FIRM

Taxes (T) Taxes (T)

Equilibrium is achieved when aggregate demand is equal to

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

National Income National Income

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

S +T = -225 + 0.25Y S +T = -200 + 0.2Y

National Income National Income

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

100 100 0 200 -200 100 50 350 Increase

300 100 200 350 -150 100 50 500 Increase

1300 100 1200 1100 100 100 50 1250 Decrease

AS = AD and I+G = S+T

HOUSEHOLD GOVERNMENT FIRM

Taxes (T) Taxes (T)

The equilibrium occurs when the aggregate demand (C+I+G+(X-M))

Equilibrium is achieved when leakage is equal to injection.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

The equilibrium occurs when the I+G+X schedule