KEYNESIAN Income Expenditure Model
PAE
Consumption expenditure: spending by households on
final goods and services
Investment: spending by firms on new capital goods, such as office buildings, factories and equipment.
Spending on new houses and apartment buildings (residential investment) and increases in inventories (inventory investment)
Government purchase: spending by governments (national, state and local) on goods and services
Net exports
Actual vs PAE
Exogenous consumption vs induced consumption
Actual investment= amount produced - amount sold + new equipment purchase
Planned investment= planned production - planned sales + planned new equipment purchase
Fiscal policy
Fiscal policy: policy introduced by the government that affects the government spending
Australia & GFC
Housing market did not collapse
Because unlike the US, Oz generally be able to pay their loan -> little increase in the stock of houses for sale
Long run increase in D for housing
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- Strength of fin sys
Banks does not succumb to excesses, does not hold toxic A
- strong export performance
- Aggressive coordinated fiscal and monteray policy response
Government spending
Taxes, transfers
works indirectly by affecting household disposable income (Y-T)
T consists of exogenous component T bar and induced component tY
T bar includes payment
Balanced budget multiplier
Supply side effects
AVOID large and persistent deficits
reduce national saving, which in turn reduces investment in new capital goods
to keep deficits under control: increase spending or cutting taxes
Automatic stabilisers
Taxes and transfer payment respond automatically to output gap:
*GDP ⬇, income tax collections ⬇ , UE and other welfare benefits ⬆ -> increase PAE during contractions and reduce PAE during expansions, without delay
The multiplier
each one-unit change in exogenous expenditure leads to a five-unit change in short-run equilibrium output in the same direction
The multiplier arises because a given initial change in spending changes the incomes of
producers, which leads them to adjust their spending, changing the incomes and spending of other producers, and so on