This document discusses macroeconomic equilibrium. It defines macroeconomic equilibrium as being determined by aggregate demand and aggregate supply. Equilibrium occurs when aggregate demand equals aggregate supply (AD=AS) and income equals expenditure (Y=E). The document provides details on the components of aggregate demand (consumption, investment, government spending, exports) and aggregate supply (consumption, savings, taxes, imports). It also discusses concepts like the consumption function, marginal propensity to consume, and how equilibrium can be shown using schedules, equations, and graphs.

1. Macro
economic
equilibrium
UNIT 05

2. Prepared by;
RASHAIN PERERA
077 059 37 52
rashainperera@gmail.com

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.

4. At the equilibrium
AD = AS
Y = E
W = J
Price
Quantity
S
D

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

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

23. Circular flow of income
PRESENTATION OF EQUILIBRIUM

24. Simple economy-2 sector
Bank
S
I

25. Closed economy-3 sector
Bank
S I
State
S
T

26. Open economy-4 sector
Bank
S I
State
S
T
M
X

27. Equation method
TO PRESENT THE EQUILIBRIUM

28. Simple economy
Y = E
Y = C + I
W = J
S = I

29. Closed economy
Y = E
Y = C + I + G
W = J
S + T = I + G

30. Open economy
Y = E
Y = C + I + G + NX
W = J
S + T + M = I + G + X

31. Schedule method
TO PRESENT MACRO EQUILIBRIUM

32. Simple economy
Y C(MPC=.8) S/W I/J E
500 400 100 200 600
600 480 120 200 680
700 560 140 200 760
800 640 160 200 840
900 720 180 200 920
1000 800 200 200 1000
1100 880 220 200 1080

33. Closed economy
Y C(MPC
=.8)
S I G E W J
500 400 100 100 40 540 100 140
600 480 120 100 40 620 120 140
700 560 140 100 40 700 140 140
800 640 160 100 40 780 160 140
900 720 180 100 40 860 180 140
1000 800 200 100 40 940 200 140
1100 880 220 100 40 1020 220 140

34. Open economy
Y C(MP
C=.8)
S I G X M E W J
500 400 100 100 40 1000 960 600 1060 1140
600 480 120 100 40 1000 960 660 1080 1140
700 560 140 100 40 1000 960 740 1100 1140
800 640 160 100 40 1000 960 820 1120 1140
900 720 180 100 40 1000 960 900 1140 1140
1000 800 200 100 40 1000 960 980 1160 1140
1100 880 220 100 40 1000 960 1060 1180 1140

35. Graphical method
TO PRESENT MACRO EQUILIBRIUM

36. Multiplier effect

37. Multiplier
Tax
multiplier
Investment
multiplier
= MPC/MPS = 1 / MPS

38. Investment rounds