Equilibrium income and expenditures.

1.] Equilibrium income and expenditures.

A.] expenditure and Income

                Circular flow of income refers to a simple economic model which describes the reciprocal circulation of income between producers and consumers. In the circular flow model, the inter-dependent entities of producer and consumer are referred to as "firms" and "households" respectively and provide each other with factors in order to facilitate the flow of income. Firms provide consumers with goods and services in exchange for consumer expenditure and "factors of production" from households. More complete and realistic circular flow models are more complex. They would explicitly include the roles of government and financial markets, along with imports and exports.

B.] Leakage and injection

Leakage is the non-consumption uses of income, including saving, taxes, and imports. In the Keynesian injection-leakage or circular flow model, leakages are combined with injections to identify equilibrium aggregate output. The model is best viewed as a circular flow between national income, output, consumption, and factor payments. Savings, taxes, and imports are "leaked" out of the main flow, reducing the money available in the rest of the economy.

Leakage is any diversion of income from the domestic spending stream

Injection is any payment of income other than by firms, or any spending other than by domestic households

Leakage and injection have 6 components.

1.  Saving [S]                                        2. Investment [I]

3. Tax [T]                                               4. Government spending [G]

5. Export [X]                                         6. Import [M]

2.] Change in equilibrium income and expenditure

Spending multiplier is simply the ratio of the change in real GDP to initial change in spending. Spending multiplier effect works in positive and negative directions. An initial decrease spending, then GDP will decrease, or an initial increase spending, then GDP will increase.

                   In figure 11-10 show about change in income-expenditure equilibrium GDP

3.] Aggregate expenditure and aggregate demand.

A] Aggregate Expenditures Curves and Price Levels

An aggregate expenditures curve assumes a fixed price level. If the price level were to change, the levels of consumption, investment, and net exports would all change, producing a new aggregate expenditures curve and a new equilibrium solution in the aggregate expenditures model. The tendency for price level changes to change real wealth and consumption is called the wealth effectwealth effectThe tendency for price level changes to change real wealth and consumption., because changes in the price level also affect the real quantity of money, we can expect a change in the price level to change the interest rate. A reduction in the price level will increase the real quantity of money and thus lower the interest rate. A lower interest rate, all other things unchanged, will increase the level of investment. Similarly, a higher price level reduces the real quantity of money, raises interest rates, and reduces investment; this is called the interest rate effectinterest rate effectThe tendency for a higher price level to reduce the real quantity of money, raise interest rates, and reduce investment.. And, a change in the domestic price level will affect exports and imports. A higher price level makes a country’s exports fall and imports rise, reducing net exports. A lower price level will increase exports and reduce imports, increasing net exports. This impact of different price levels on the level of net exports is called the international trade effectinternational trade effectThe impact of different price levels on the level of net exports..

B] Driving the aggregate demand curve

 The amount of changes is aggregate demand involve 2 component; the amount of the initial change in one of the determinants, and a multiplier effect that multiplier the initial change. Driving aggregate demand curve depend on 4 factor

1.       Consumer spending: AD will increase, then consumer spends increase and AD will decrease, then consumer spends decrease.

2.       Investment spending: AD will increase, then businesses spend increase on investment and AD will decrease then, businesses spend decrease on investment.

3.       Government spending: AD will increases, then government more spending and AD will decreases, then government less spending.

4.       Net export spending: AD will increase, then net exports [export-import] are increase, and AD will decrease, then net exports are negative.

C] A fixed price AD-AS Model

                Aggregate demand and supply are the tools used to determine the economy’s real output and price level.

                Aggregate demand is total quantity of goods and service that will be purchased at different price levels. Aggregate demand is negative relationship between real output and price level, so aggregate demand curve is downward sloping, and depend on real-balance effect, interest rate effect, and foreign purchase effect.

                Aggregate supply is total quantity of goods and service that will be produced at different price. Aggregate supply in short-run is positive relationship between real output and price levels, so aggregate supply in short-run curve is upward sloping, and depend on change input prices, change in productivity, and change in the legal and institutional environment in the economy.