M2- Keynesian Economics

Front 1

Expenditure Line PAE; Equilibrium, Uniqueness, Stability

Back 1

C + mpc(Y-T) + I + G + NX

Intercept = C - mpc(T) + I + G+ NX

Equilibrium Exists if:
1. intercept is positive

Uniqueness - mpc must always be less than 1 to ensure uniqueness

Stability - If expenditures > production, unplanned DECREASE in inventories (generates signals to increase production)
If production > expenditures, unplanned INCREASE in inventories
--> Not equilibrium impacts change in production

Front 2

Y = PAE; Multiplier

Back 2

1/ 1-mpc (C - mpcT + I + G + NX)

If I, C, G, NX increases by an amount - what happens to Y?
- Multiply the increase in C, I, G, or NX by multiplier and add that to original Y

Ex./ G increases by 40; Y increases by 160
change in Y = 4 x 40 = 160; multiplier = 4

Increase Extra Spending; Increase Multiplier

Front 3

Taxes and the Multiplier

Back 3

For taxes:

Change in Y = (-mpc/ 1- mpc) x change in T

Front 4

Balanced Budget Multiplier

Back 4

Suppose govt. increases taxes and govt. spending (equally) --> budget deficit is unchanged

1 = balanced budget multiplier