This document discusses key concepts of the income-expenditure model including equilibrium output, planned expenditures, the consumption function, autonomous consumption, and the marginal propensity to consume. It also examines how the consumption function is affected by changes in consumer wealth and confidence. Furthermore, it defines fiscal multipliers and provides the formulas for the tax multiplier and government spending multiplier.

1. Chapter 11
The
Income-Expenditure
Model

2. 11-2
• equilibrium output
The level of GDP at which
planned expenditure equals the
amount that is produced.
• planned expenditures
Another term for total demand
for goods and services.
11.1 A SIMPLE INCOME-EXPENDITURE
MODEL (cont.)

3. 11-3
Consumer Spending and Income
• autonomous consumption
The part of consumption that does not
depend on income.
• marginal propensity to consume (MPC)
The fraction of additional income that
is spent.
11.2 THE CONSUMPTION FUNCTION

4. 11-4
Changes in the Consumption Function
Two factors that can cause autonomous
consumption to change:
• Increases in consumer wealth will cause an
increase in autonomous consumption.
• Increases in consumer confidence will increase
autonomous consumption.
11.2 THE CONSUMPTION FUNCTION
(cont.)

5. 11-5
Fiscal Multipliers
The consumption function with taxes is
The formula for the tax multiplier is
multiplier for government spending =
1
(1− MPC)
C = Ca + b(y − T )
tax multiplier =
−MPC
(1− MPC)
11.4 GOVERNMENT SPENDING
AND TAXATION (cont.)

6. 11-6
autonomous consumption
consumption function
equilibrium output
marginal propensity to consume (MPC)
marginal propensity to import
planned expenditures
savings function
K E Y T E R M S

7. 11-6
autonomous consumption
consumption function
equilibrium output
marginal propensity to consume (MPC)
marginal propensity to import
planned expenditures
savings function
K E Y T E R M S