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    Lecture Outline - 11b - Keynesian Economics - MACHEMATICS

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    Dhanushka Rajapaksha
    The document discusses Keynesian economic models to determine national income. It presents a two-sector model where consumption (C) equals 100 + 0.75 times income (Y), investment (I) equals 200. This yields an equilibrium income of 1200 and consumption of 1000. A three-sector model includes taxes, yielding an equilibrium income of 1500, consumption of 1000, taxes of 300, and savings of 200. The multiplier process is explained, showing how an initial change in investment is multiplied across rounds of spending.

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    Lecture Outline - 11b - Keynesian Economics - MACHEMATICS

    Uploaded by

    Dhanushka Rajapaksha
    88 views6 pages
    The document discusses Keynesian economic models to determine national income. It presents a two-sector model where consumption (C) equals 100 + 0.75 times income (Y), investment (I) equals 200. This yields an equilibrium income of 1200 and consumption of 1000. A three-sector model includes taxes, yielding an equilibrium income of 1500, consumption of 1000, taxes of 300, and savings of 200. The multiplier process is explained, showing how an initial change in investment is multiplied across rounds of spending.

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    econ

    Original Title

    Lecture Outline- 11b- Keynesian Economics -MACHEMATICS

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    The document discusses Keynesian economic models to determine national income. It presents a two-sector model where consumption (C) equals 100 + 0.75 times income (Y), investment (I) equals 200. This yields an equilibrium income of 1200 and consumption of 1000. A three-sector model includes taxes, yielding an equilibrium income of 1500, consumption of 1000, taxes of 300, and savings of 200. The multiplier process is explained, showing how an initial change in investment is multiplied across rounds of spending.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    88 views6 pages

    Lecture Outline - 11b - Keynesian Economics - MACHEMATICS

    Uploaded by

    Dhanushka Rajapaksha
    The document discusses Keynesian economic models to determine national income. It presents a two-sector model where consumption (C) equals 100 + 0.75 times income (Y), investment (I) equals 200. This yields an equilibrium income of 1200 and consumption of 1000. A three-sector model includes taxes, yielding an equilibrium income of 1500, consumption of 1000, taxes of 300, and savings of 200. The multiplier process is explained, showing how an initial change in investment is multiplied across rounds of spending.

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    © All Rights Reserved
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    of 6

    Determination of Income

    Prof. ND Samarawickreme
    Keynesian Economics
    Keyness consumption function
    C = f (Y)
    C=a+bY
    When income is zero people still consume using their savings.
    Let us assume that the Consumption function takes the following form:
    TWO- SECTOR ECONOMY
    C= 100 + 0.75 Y
    I= 200
    Y=C+I
    Y = 100 + 0.75 Y + 200
    Y 0.75 Y = 100+200
    Y (1 - 0.75) = 300
    Y=

    300
    =
    (1 0.75)

    300
    =
    0.25

    300
    4
    = 300 *
    1
    1
    4

    C = 100 + 0.75 (1200) = 1000


    S=YC
    S = Y- (100 + 0.75 Y)
    S = Y 100 0.75 Y
    = -100 +Y 0.75 Y
    S = - 100 + 0.25 Y
    S = 1200 1000 = 200
    In this economy S = I and is in equilibrium.

    = 1200

    S = 200 and I = 200

    Aggregate expenditure

    C= 100 + 0.75 Y + 200

    45 0

    2200
    2000
    1800
    1600

    C= 100 + 0.75 Y

    1400
    1200

    S= I =200

    1000
    800
    600
    400

    THREE SECTOR MODEL

    200 Y

    =C+I+G

    -100C= 100
    200+ 0.75
    400 Yd
    600

    S
    -I

    800

    1000 1200 1400 1600 1800 2000 2200


    National Income = National output =Y

    I= 200
    G = 300
    Yd = Y T
    T=tY
    If t= 20 %
    Yd = Y 0.2 Y
    Y=C+I+G
    Y = 100 + 0.75 (Y 0.2Y) + 200 + 300
    Y = 100 + 0.75Y 0.15Y + 200 + 300
    Y 0.75 Y + 0.15 Y= 100+200 +300
    Y (1 - 0.75 + 0.15) = 600

    Y=

    600
    =
    (1 0.75 + 0.15)

    600
    =
    0.4

    600
    =
    4
    10

    600 *

    10
    4

    = 600 *

    5
    = 1500
    2

    C = 100 + 0.75 (1200 0.2Y) = 1000


    S = Yd C
    S = (Y- 0.2Y) - (100 + 0.6 Y)
    S = 0.8Y (100 + 0.6 Y)
    = -100 +0.8Y 0.6 Y
    S = - 100 + 0.2 Y
    S = -100 +0.2 (1500) = 200
    T = 0.2 Y
    T = 0.2 (1500) = 300
    LEAKAGES

    INJECTIONS

    200

    300

    200

    300

    Aggregate expenditure

    45 0

    2200
    2000
    C= 100 + 0.6 Y + 200 +300

    1800
    1600

    C= 100 + 0.6 Y

    1400
    S + T= I + G
    =200

    1200
    1000
    800
    600

    FOUR-SECTOR MODEL

    400

    S = -100 +0.2 Y

    200
    -200

    T = 0.2Y

    200

    400

    600

    800

    1000 1200 1400 1600 1800 2000 2200

    Y = C + I + G +(X-M)
    C= 100 + 0.75 Yd
    I= 200
    G = 300
    X = 600
    M = 200
    Yd = Y T
    T=tY
    If t= 20 %
    Yd = Y 0.2 Y
    Y = C + I + G + (X M)
    Y = 100 + 0.75 (Y 0.2Y) + 200 + 300 + (600 -200)
    Y = 100 + 0.75Y 0.15Y + 200 + 300 + 400
    Y 0.75 Y + 0.15 Y= 100+200 +300 + 400
    Aggregate expenditure

    Y (1 - 0.75 + 0.15) = 1000


    1000
    Y=
    =
    (1 0.75 + 0.15)

    1000
    =
    0.4

    2600

    1000
    10
    = 1000 *
    4
    4
    10

    5
    = 1000 * = 2500
    2

    45 0

    2400
    2200

    T = 0.2 Y

    S = - 100 + 0.2 Y

    2000

    T = 0.2 (2500) = 500

    S = -100 +0.2 (2500) = 400

    1800
    1600
    1400
    1200
    1000

    I + G + (X M)
    C= 100 + 0.6 Y

    LEAKAGES

    INJECTIONS

    + M

    + X

    400

    500

    + 200

    200

    300 + 600

    800
    T = 0.2Y
    S = -100 +0.2 Y

    600
    400
    T =500

    200
    -200

    200

    400

    600

    800

    S= 400

    1000 1200 1400 1600 1800 2000 2200 2400 2600 Y

    C= 100 + 0.6 Y + 200 +300 + 400

    C= 100 + 0.6 Y + 200 +300

    Working of multiplier process


    Assume that b= 0.8, I = 100
    Round of income
    Generation
    First round
    Second round
    Third round
    Fourth round
    Fifth round
    ------Last round
    Total Income

    Consumer
    spending
    -75.00
    64.00
    51.20
    40.96

    Income
    generation

    Symbolically

    100
    80.00
    64.00
    51.20
    40.96

    I
    bI
    b2I
    b3I
    b4I

    0.00

    bn I

    500.00

    Y = I + b I + b2I + b3I+ b4I .. bn I


    = I (1 + b + b2 + b3 + b4 + . bn )
    Geometric series can be approximated as: (1 + b + b2 + b3 + b4 + . bn )

    1
    = (1 b)
    I *

    1
    (1 b)

    = 100 *

    1
    1
    =
    (1 0.8) (0.2)

    1
    1
    = 100 *
    (1 0.8)
    (0.2)

    = 100 *

    1 5
    =
    1 1
    5

    1
    5
    = 100 * = 500
    1
    1
    5

    Our model
    Y =a +b Y +I
    a +I
    1
    =
    * (a + I)
    (1 b )
    (1 b)
    Y =100 + 0.75 Y + 200
    100 + 200
    1
    1
    Y* =
    =
    * (100 + 200) =
    * (300) =1200
    (1 0.75)
    (1 0.75)
    0.25
    1
    1
    4
    Multiplier is :
    =
    =
    1
    0.25
    1
    4
    Y* =

    With Tax:
    Y* =

    a +I
    (1 b +bt )

    1
    * (a + I)
    (1 b +b t)

    Y =100 + 0.75 Y + 200 + 300


    100 +200 +300
    1
    1
    Y* =
    =
    * (100 + 200 +300) =
    * (600) =1500
    (1 0.75 +0.15 )
    (1 0.6)
    0.4
    1
    1
    2.5
    Multiplier is :
    =
    =
    4
    0.4
    1
    10

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