Keynesian economics

Multiplier Model

Short run -> Business sentiments keep changing -> change in autonomous spending = change in Y by
multiplier effect

GDP INCREASE > AUTONOMOUS SPENDING INCREASE => MULTIPLIER EFFECT

Yd = Y – TA + TR

Y = Cbar + cTR + I + G + NX + cY – ctY

 Y = a BAR + c(1-t)Y
 A bar = Y – c(1-t)Y
 Delta A = Delta Y (1-c(1-t))
 Delt Y / delt A = 1/(1-c(1-t)) = delta g = fiscal policy multiplier (tax rate = fiscal aspect)

Taxes = tY

C = Cbar + c(Y – tY + TR)

Automatic stabilizer

 Tax rate – helps to reduce the multiplier effect

Y – cY + ctY = cTR

Y / TR = c/ (1-c+Ct) = c/ (1-c(1-t))

Budget Surplus

BS = tY – G – TR [ TA = tY ]

High income = BS

Low income = BS -ve

BS = - [(1-c)(1-t)/ (1-c(1-t))] delta G

QS

1) Y = 50 + 0.8 (Y + 100 – 0.2Y) + 70 + 200

= 400 + 0.8 Y – 0.16Y

 Y = 1111.11
2) BS = 0.2(1111.1) – 300 = - 77.78
3) Y = 50 + 0.8 (Y + 100 – 0.25Y) + 70 + 200
= 400 + 0.8Y – 0.2Y => 0.4 Y = 400

Money Supply & Demand

Medium of exchange, store of value

Double coincidence of needs

Money: conveniently divisible

Standard of deferred payment

Demand for money: transacns demand for money, Precautionary demand for money, speculative
demand (manage to increase gains)

Diff lending rates -> loans as wts, interest rate as main var -> weighted avg, representative rate of
return

Money Supply

Reserve money, narrow money, broad money

M0, M1, M2, M3, M4