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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  1. Strength of fin sys
    Banks does not succumb to excesses, does not hold toxic A
  1. strong export performance
  1. 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