Bachelor in Economics (S.E): ManajemenCourse : Pengantar Ilmu Ekonomi (1508PIE12)online.uwin.ac.idSession Topic : Equilibrium National IncomeCourse: Pengantar Ilmu EkonomiBy Tovan Krisdianto, S.E., M.M.UWIN eLearning ProgramPowered by HarukaEdu.com - 1508PIE12-S.3Content Part 1 Equilibrium National Income Part 2 Changes in Equilibrium National IncomePart1: Equilibrium National IncomePowered by HarukaEdu.com - 1508PIE12-S.5Equilibrium: Desired Consumption & National IncomeEquilibrium National IncomeDesired Consumption & National Income With taxation, YDis less than Y. Recall we now have a government that taxes private incomeC = a + bYDWhere, YD = Y - T& T= tYso that C = a + b(Y-tY) orC = a + b(1-t)YPowered by HarukaEdu.com - 1508PIE12-S.6Equilibrium: Desired Consumption & National Income (Cont.)Example:If T = (0.1)Y, then YD= Y-T= Y- (0.1)Y = (0.9)Y& a = 30, b = 0.8If C = a + bYD& YD= Y - T then YD = Y - (0.1)Y = 0.9 Y & C = 30 + (0.8)YDC = 30 + (0.8)(0.9)YC = 30 + (0.72)YThe MPC out of national income (0.72) is less than the MPC out of disposable income (0.8).Powered by HarukaEdu.com - 1508PIE12-S.7Equilibrium: Desired Consumption & National Income (Cont.)The simple consumption function with taxes is written as:C = a + b(1-t)YIf t increases then the slope of the consumption function, b(1-t), decreases. YaC = a + b(1-t)Yslope = b(1-t)CNote, this will cause the slope of the AE line to decrease also.C = a + b(1-t)Yslope = b(1-t)where t > tPowered by HarukaEdu.com - 1508PIE12-S.8Equilibrium: The AE FunctionWe then expand the AE function:AE = C + I + G + NXRecall that the slope of the AE function is, the marginal propensity to spend out of national income we call this z.In this model, we get:z = MPC(1 - t) MPM = b(1 - t) mClearly, t > 0 & m > 0 lead to a lower value of z.Powered by HarukaEdu.com - 1508PIE12-S.9Equilibrium: The AE Function (Cont.)Total desired expenditure on Indonesian goods & services from all sourcesAE = C + I + G + NXRecall that the slope of the AE function is, the marginal propensity to spend out of national income we label this z.AEY45oline (AE=Y)AE = C + I + G + NXY0AE0Powered by HarukaEdu.com - 1508PIE12-S.10Equilibrium: The AE Function (Cont.)The slope of the AE functionAE = C + I + G + NXIf C = a +bYD& YD= Y - tY I = I autonomous (not influenced by Y) G = G autonomous (not influenced by Y) X= X autonomous (not influenced by Y) & M = mY whereNX = X - M Then AE = C + I + G + NX substituting for the various expenditure components= a + bYD+ I + G + (X - mY)= a + b(Y - tY) + I + G + (X - mY) AE = a +I + G + X + [b(1 - t) - m]YRecall b is the MPC,m is the MPM,t is the tax ratePowered by HarukaEdu.com - 1508PIE12-S.11Equilibrium: The AE Function (Cont.)The intercept & slope of the AE functionAE = C + I + G + NXAE = a +I + G + X + [b(1 - t) - m]Y the intercept isa + I + G + X(autonomous expenditure) the slope is [b(1 - t) - m] b is the MPC t is the tax rate m is the MPMIn this more complete model, we get:z = b(1 - t) - m or z = MPC(1-t) MPMClearly, t > 0 & m > 0 lead to a lower value of z.Powered by HarukaEdu.com - 1508PIE12-S.12Equilibrium: The AE Function (Cont.)AE = C + I + G + NXChanges in,1. a, I, G or X will cause the AE curve to shift2. b, t or m will cause the AE curve to rotateAEY45oline (AE=Y)AE = C + I + G + NXY0Intercepta + I + G + Xslope[b(1 - t) - m]Powered by HarukaEdu.com - 1508PIE12-S.13Equilibrium: Equilibrium National IncomeAs before, output is assumed to be demand determined in this model:equilibrium condition is Y = AE(Y)In words, equilibrium Y occurs where desired aggregate expenditure equals actual national income.Whenever AE is not equal to Y, there are unintended changes in inventories & firms have an incentive to change production.Powered by HarukaEdu.com - 1508PIE12-S.14Equilibrium: The Aggregate Expenditure FunctionDesired Aggregate ExpendituresActual National IncomeThe addition of, government & foreign trade does not change the logic of the equilibrium!PointActual National Income (Y)Desired Expenditure onConsumption(C=30+0.72Y)Investment (I=75)Government (G=51)Net Export (X-IM=72-0.1Y)Aggregate (AE=C+I+G+X -IM)A 0 30 75 51 72 228B 150 138 75 51 57 321C 300 246 75 51 42 414D 600 462 75 51 12 600E 900 678 75 51 -18 786Powered by HarukaEdu.com - 1508PIE12-S.15Equilibrium: Equilibrium National Income (Cont.)How to Determine Equilibrium National IncomeDesired Aggregate Expenditure is AE = C + I + G + NXFrom a previous slide we know,AE = a +I + G + X + [b(1 - t) - m]YNow if, a = 30, b = 0.8, Then, AE = a +I + G + X + [b(1 - t) - m]Y,& AE = 228 + 0.62Y In equilibrium Y must equal AE (what firms produce must equal what economic agents want to buy)Y = AE so that in equilibriumY = 228 + 0.62Y(AE from above)Y - 0.62Y = 228Y(1 - 0.62) = 228 Y = 228/(1 - 0.62) = 228/0.38 = 600 t = 0.1, m = 0.1 I = 75, G = 51 X = 72 Powered by HarukaEdu.com - 1508PIE12-S.16Equilibrium: How to CheckHow to check that your answer is correctIn equilibrium Desired Aggregate Expenditure, must exactly equal the level of national income Y We know that in our example, AE = a +I + G + X + [b(1 - t) - m]YAE = 228 + 0.62Y(after substituting for the parameter values for this example)If Y = 600 (our estimate of equilibrium national income) Q: What will desired aggregate expenditure by?A:AE = 228 + 0.62Y(AE from above)AE = 228 + 0.62 (600)AE = 228 + 372AE = 600so we did the calculations correctly Part2: Changes in Equilibrium National IncomePowered by HarukaEdu.com - 1508PIE12-S.18Equilibrium: Changes in Equilibrium National IncomeChanges in,1. a, I, G or X will cause the AE curve to shift2. b, t or m will cause the AE curve to rotateAEY45oline (AE=Y)AE = C + I + G + NXY0Intercepta + I + G + Xslope[b(1 - t) - m]Powered by HarukaEdu.com - 1508PIE12-S.19Equilibrium: Changes in Equilibrium National Income (Cont.)Changes in a, I, G or X will cause the AE curve to shiftAEY45oline (AE=Y)AE = C + I + G + NXYIntercepta + I + G + XShift in AEAE0( a, I, G &/or X increase)Y0Powered by HarukaEdu.com - 1508PIE12-S.20Equilibrium: Changes in Equilibrium National Income (Cont.)Changes in b, t or m will cause the AE curve to rotateAEY45oline (AE=Y)AE = C + I + G + NXYRotation in AEAE0(b increased or t or m decreased)Y0slope[b(1 - t) - m]Powered by HarukaEdu.com - 1508PIE12-S.21The Multiplier: Taxes & ImportsThe Multiplier with Taxes & ImportsImports & taxes make z smallerthe simple multiplier is also smallerz = b(1 - t) mz = AE/Y- slope of the AE curveThe value of z is determined by:z = b(1-t) - mFor example, suppose b = 0.9 , t = 0.3 & m = 0.4 Thenz = 0.9 (1 - 0.3) 0.4= 0.23 & the multiplier is 1 / (1-z)or 1 / (1 - 0.23) = 1.30a. z increases as MPC increases & decreases as t & m increase.b. Try different values for MPC, t, m & recalculate the multiplier.c. How does the picture change?YYY1Y0e1AE1e0AE = YE0E1AEAEPowered by HarukaEdu.com - 1508PIE12-S.22Net Exports: FunctionNet ExportsAs with other elements of AE:If NX function shifts,a. upward, equilibrium Y risesb. downward, equilibrium Y fallsExports are, autonomous with respect to domestic GDP, but they depend on:a. Foreign incomeb. Domestic & foreign pricesc. Exchange rated. TastesPowered by HarukaEdu.com - 1508PIE12-S.23Fiscal Policy: DefinitionFiscal policy. Defn:The use of the governments spending & tax policies.Any policy that, attempts to stabilize Y at or near Y* is called stabilization policy. (lots of problems with this but lets do the theory anyway)It is often clear in, which direction fiscal policy could be adjusted, but less clear how much is necessary.Powered by HarukaEdu.com - 1508PIE12-S.24Fiscal Policy: The Use of Fiscal Stabilization PolicyDesired Aggregate Expenditures (AE)Actual National Income (Y)Desired Aggregate Expenditures (AE)Actual National Income (Y)(i) Equilibrium Y < Y* (i) Equilibrium Y > Y*Powered by HarukaEdu.com - 1508PIE12-S.25Equilibrium National Income: MultiplierConsider some G < 0.Equilibrium national income will fall:Y = G x simple multiplier Y = 228 + 0.62Y (AE from above)Y - 0.62Y = 228Y(1 - 0.62) = 228 Multiplier = 1/(1 - 0.62) = 2.63For example: suppose z = 0.62 multiplier = 2.63. Y = - $263 millionG = -$100 million.e1Y1Y0e1AE1AE0e0 AE =YE0E1GYYAEPowered by HarukaEdu.com - 1508PIE12-S.26Equilibrium National Income: AE FunctionThe government, may attempt to change national income by changing the net tax rate.1. A lower t causes the AEfunction to become steeper2. A higher t causes the AEfunction to become flatterAE0Y0Y1AE1E1E0e0e2AE=Y AEYPowered by HarukaEdu.com - 1508PIE12-S.27Reference Ragan, Christopher T.S. & Lipsey, Richard G. (2010). Macroeconomics, Thirteenth Canadian Edition. MyEconLab. Powered by HarukaEdu.com - 1508PIE12-S.28online.uwin.ac.idAssociate Partners :Powered by HarukaEdu.comCourse : Pengantar Ilmu Ekonomi (1508PIE12)