Macroeconomics

Goods Market

Rayees Ahmad Sheikh

6th October 2023
 The Goods Market

Agenda

•Determinants of National Income

•Role of Government

•Multiplier

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Introduction

•In short run assume that prices are constant

• Firms are willing to sell anything at given price levels

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Aggregate Demand and Equilibrium Output

• Aggregate Demand – “total amount of goods and

services demanded in economy”

• AD = C + I + G + NX

• At equilibrium level

•Y = AD = C + I + G + NX

• When there is difference between Y and AD ….What

happens? 4
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Consumption Function

• cf is…..“relationship between consumption and income”

Share of Consumption Demand in GDP?

• higher the income higher is the consumption

• C = + cY

•Where > 0 and 0 < c < 1

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Consumption Function

• is Consumption when income is “zero”

• c is the change in consumption with increase in

income

• c is popularly known as?

• Marginal Propensity Consume

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Consumption and Savings

• What happens to portion of income remaining after

consumption?

• S = Y – C (Budget Constraint)

• S = Y – C = Y – ( + cY) = - + (1-c)Y

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Consumption, AD and Autonomous Spending

• YD = Y – TA + TR

• C = + cYD = + c (Y + TR –TA)

• AD = C + I + G + NX

= + c (Y + TA –TR) + + +

= [ + c ( – ) + + + ] + cY

= + cY
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Equilibrium Income and Output

• Y = AD

• Y = + cY

• ∆Y

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Savings and Investment

• In simple Market we have

S=I
Y=C+S
Y=C+I
If Government come in;
Y = C+ S + TA -TR

C + I + G + NX = C+ S +TA - TR
I = S - (TA - TR – G) - NX

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Multiplier

• The Multiplier is the amount by which equilibrium

output changes when autonomous aggregate demand
increases by one unit.

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Multiplier in Practice

• Size of Multiplier?

• https://youtu.be/W4lXJyNKuQs

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Government Sector

• Fiscal policy is the policy of the government with

regard to the

level of government purchases

the level of transfers

the tax structure.

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Tax
• Let us assume G is constant “” and so is the level of transfers “”
• tY
“t” being tax rate

• C = + c(Y + - tY)

= + c + c(1-t)Y

• AD = C + I + G + NX

= [ + c + c(1-t)Y ] + + +

= [ + c + + + ] + c(1-t)Y

= + c(1-t) Y
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Equilibrium Income

Y= + c(1-t) Y

What will be the impact of tax on Multiplier?

Income Tax acts as Automatic Stabilizers

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Effects of a Change in Fiscal Policy

• increase in government purchases is a change in

autonomous spending
∆Y = + c(1-t) ∆Y

∆Y =

=
•

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Changes in government spending and taxes affect

• changes in government spending and taxes affect

• During Recession?

• During Boom?

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Budget Deficit

Source: Trading Economics.com 18

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Budget Deficit/Surplus

BD(S) = TA - -

BD(S) = t(Y) - -

• Effect of G and t on Budget Surplus?

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Thank You

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