C HAPTER

Keynesian Analysis of
Macroeconomic Equilibrium

recessions, inflation,
and the multiplier

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Box 2. Equilibrium Real GDP and
Income in a Given Year

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Macroeconomic Equilibrium
 In equilibrium, real GDP equals aggregate
purchases.
 Assuming no government and no
international trade, equilibrium requires that
C + S = C + I P.
 Saving must equal planned investment in
equilibrium, S = IP.
 Recessions can be caused by declines in
aggregate purchases.

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Box 5. How a Decline in Aggregate Purchases in a
Given Year Causes a Recessionary GDP
Gap

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The Multiplier
 Multiplier = Change in real GDP/Change in
autonomous purchases.
 Multiplier = 1/(1 – Marginal respending rate).
 When there’s no government and no
international trade, MPC is the marginal
respending rate.
 With government and international trade, the
marginal tax rate and marginal propensity to
import must be taken into account when
calculating the marginal respending rate.
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Inflation and Aggregate Purchases

 When aggregate purchases increase, an

inflationary GDP gap can open up.
 When equilibrium real GDP exceeds potential
real GDP, the price level will rise and the
aggregate purchases line will shift down until
equilibrium real GDP = Potential real GDP.

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Box 11. An Inflationary GDP Gap

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Box 10. Deriving an Aggregate Demand Curve

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Box 1. Aggregate Production, Aggregate
Purchases, and Determination of
Macroeconomic Equilibrium Real GDP
in a Simple Economy

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Box 3. Saving and Investment and Macroeconomic
Equilibrium

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Box 4. Macroeconomic Equilibrium: The Response
to a Decline in Planned Investment

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Box 6. Macroeconomic Equilibrium: The Response
to a Decline in Consumer Spending

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Box 7. The Multiplier Process

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Box 8. The Multiplier Effect and
Macroeconomic Equilibrium

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Box 9. Government Spending, International Trade,
and Macroeconomic Equilibrium

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The Global Economy

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Principles in Practice
The Paradox of Thrift

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Appendix Box 1. Aggregate Production, Aggregate
Purchases, and Macroeconomic
Equilibrium

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