Models of Macro Economic Equilibrium

TOPIC III: Equilibrium & the Multiplier: The Simple Income-Expenditure Model Model

OBJECTIVES: 
  1. identify and define equilibrium output and national income.
  2. explain the adjustments to supply and demand that lead to equilibrium.
  3. graph and explain income product line's and planned expenditure lines.
  4. explain and calculate the multiplier.
  5. define and calculate the marginal propensity to consume and save.
  6. define and calculate the average propensity to consume and save.
  7. explain and illustrate the paradox of thrift.
  8. explain and illustrate inflationary and recessionary gaps.

KNOW THE FOLLOWING TERMS

APS 

APC

MPC 

MPS

multiplier

45 degree line 

KEY CONCEPTUAL QUESTIONS

  1. What does the total planned expenditure curve indicate?
  2. Why does the equilibrium level of real national income occur at the intersection of the total planned expenditure curve and the 45-degree reference line?
  3. What is the concept of the multiplier, how does it work, and what is the main determinant of the multiplier?
  4. What are leakages and injections in the national economy?
  5. What is the paradox of thrift and what policy prescriptions does it imply?