3. What is macro economic
equilibrium?
Macro economic equilibrium is determined
by aggregate demand (aggregate
expenditure) and aggregate supply (total
output).
Macro economic equilibrium could be shown
in terms of a graph simply as shown below.
5. Y = E condition
Y represents the income
E represents the expenditure
As explained in chapter 04, Y = E
Y = C + S + T + M
E = C + I + G + X
6. (Y) Aggregate income/
supply
Aggregate supply is the total amount of
goods and services supplied or produced
by an economy in a given period of time
usually a year at a given overall price
level. In other words it is the total
output of the economy
7. Y = C + S + T + M
Consumption ; the amount that is spend on day to
day activities from the disposable income is simply
known as the consumption expenditure
Yd. = income – direct taxes (T) +
state benefits (Tr)
Yd.
Consumption Savings
8. Consumption function
Consumption function shows the relationship
between planned consumption and disposable
income. There is a direct or positive
relationship between planned consumption and
disposable income.
C = a + b (Yd)
𝒃 =
𝚫𝑪
𝚫𝒀𝒅
a- autonomous consumption
9.
10. Marginal propensity to consume
This is the proportion of the extra income which is spent on
consumption. In other words it is the extra spending on
consumption out of the additional income.
MPC = change in consumption / change in income
Average propensity to consume
This can be calculated by simply dividing consumption by
income.
11. Factors influencing consumption or MPC
other than income
Distribution of income
The rate of interest
The availability of credit
Taxation
Wealth
expectations
12. Y = C + S + T + M
Savings ; It is the balance income part, after
paying for consumption and taxes. Savings could be
defined as income minus consumption
S = Yd – C
Yd.
Consumption Savings
13. Savings function
Savings function shows the relationship
between planned savings and disposable
income. The savings function is the converse
or opposite of consumption function.
S = -a + b(Y)
14. Marginal propensity to save
This is the proportion of the extra income which is
saved. In other words it is the percentage change in
income which will go to savings. It is equal to change in
planned savings divided by change in disposable income.
MPS = change in S / change in Y
Average propensity to save
This is the proportion of disposable income which is
saved.
APS = savings / income
15. The factors determining savings other
than income
interest rates
inflation
expectations
16. The relationship between MPC and MPS
Consumption plus savings must equal income.
Thus the change in disposable income is either
consumed or saved.
MPC + MPS = 100% of the change
MPC + MPS = 1
1 – MPC = MPS
1 – MPS = MPC
17. The relationship between APC and APS
APC + APS = 100% of the total
APC + APS = 1
1 – APC = APS
1 – APS = APC
18. (E) Aggregate Exp./
Demand
Aggregate demand is the sum of all
planned expenditures in the economy.
The aggregate demand shows the amount
of goods and services in the whole
economy that are demanded by all macro
economic agents at any given price level.
19. E = C + I + G + X
Investment; is the addition to the capital stock. In other words
it is the expenditure incurred by business firms for investments.
Investment function
I = I0
The planned level of investment varies inversely with the rate of
interest in i.e. higher the rate of interest; lower will be the level
of planned investment and vice versa
The determinants of planned investment
the relative price of capital and labor
technological changes
government policies
attractiveness of the country for foreign investments
20. W = J condition
W represents the Withdrawals
J represents the injection
W = J
W = S + T + M
J = I + G + X
21. (W) Withdrawals
Leakages subtract from the total volume
of the basic circular flow of income.
That is they leak income away from the
product markets.
W = S + T + M
22. (J) Injections
Injections add to the total volume of the
basic circular flow of income. That is
they inject revenue into the market
J = I + G + X
