It implies that ΔY is 1/1-b times of ΔI and 1/I-b is termed as multiplier (m).In mathematical terms, the multiplier is defined as the ratio of change in national income that occurs due to change in investment. In such a case, the rate of multiplier would be one. meaning export less import (net export) ; however if the external sector is added to the Keynesian equation the resultant equation is the open economy using Keynesian model.Which variables differentiate a closed economy from an open economy under the National income determination?An open economy is represented by the equations belowY = C + I + G + X – M (1.1)Equation (1.4) explains tax revenue. Therefore, consumption (C) acts as the major determinant or function of income (Y).Where, a = constant (representing consumption when income is zero)By substituting the value of consumption in the equation of AD, we get:In Table-1, the column of income represents the aggregate supply and the column of aggregate demand represents expenditure.

[latex]\begin{array}{lcl}\text{C}&=&\$20+0.9\left(\text{Y}-\text{T}\right)\\&=&\$20+0.9\left(\$300-\$60\right)\\&=&\$236\end{array}[/latex][latex]\begin{array}{lr}\text{After-tax income}&\$240\\\text{Imports of 0.2 or 20% of Y}-\text{T}&\times0.2\\\text{Imports}&\$48\end{array}[/latex][latex]\begin{array}{rcl}\text{Y}&=&\text{AE}\\&=&\text{C}+\text{I}+\text{G}+\text{X}-\text{M}\\&=&\$20+0.9\left(\text{Y}-\text{T}\right)+\$70+\$80+\$50-0.2\left(\text{Y}-\text{T}\right)\\&=&\$220+0.0\left(\text{Y}-\text{T}\right)-0.2\left(\text{Y}-\text{T}\right)\end{array}[/latex]Since T is 0.2 of national income, substitute T with 0.2 Y so that:[latex]\begin{array}{rcl}\text{Y}&=&\$220+0.9\left(\text{Y}-0.2\text{Y}\right)-0.2\left(\text{Y}-0.2\text{Y}\right)\\&=&\$220+0.9\text{Y}-0.18\text{Y}-0.2\text{Y}+0.04\text{Y}\\&=&\$220+0.56\text{Y}\end{array}[/latex][latex]\begin{array}{rcl}\text{Y}&=&\$220+0.56\text{Y}\\\text{Y}-0.56\text{Y}&=&\$220\\0.44\text{Y}&=&\$220\\\frac{0.44\text{Y}}{0.44}&=&\frac{\$200}{0.44}\\\text{Y}&=&\$500\end{array}[/latex] The Keynesian AS curve is drawn based on an assumption that total income is equal to total expenditure. For example, in Figure-6, the shift in the equilibrium position from EIn case of static multiplier, when the equilibrium position shifts from one point to another, the aggregate MPC does not show any change.

If there is any type of increase or decrease in the aggregate supply/demand, then they themselves fluctuate in a manner, so that they reach back at the equilibrium point.Saving-investment approach refers to the method in which the saving (S) and investment (I) are used for the determination of national income. Here 1/1 – b is called the multiplier. 100 then the aggregate demand is Rs.

Keynes pointed out that any change in autonomous spending would lead to a change in equilibrium income. While the first term (a) measures the autonomous component of consumption expenditures, the second term (-bT) measures the autonomous effect of tax collections on aggregate demand, which also works through consumption. That said, now we need a set of equations which describe the economy: (a) C = 0.8(DI) + 480 (b) I = 1,000 Comprises only two sectors, namely, households and businesses. To understand how the national income equilibrium is determined in an open economy; Understanding the concept of Multiplier and how it can be calculated when the economy is an open; Understand the numerical analysis of determining national income; 3.0 Main Content National income determination in an open economy The initial change was an increase in investment expenditure depicted as income denoted as ∆y. Before publishing your Articles on this site, please read the following pages: Aggregate demand and aggregate supply schedule intersect each other at point E and the Income level at this point is Rs. Step 11. The first condition for an equilibrium level of income (output) from equation (2) is Y = C + I + G Equilibrium income (Y) is the endogenous variable to be determined. Therefore, the shift in AD schedule is because of the shifts in investment schedule.For understanding the impact of shift in AD schedule on equilibrium point, let us assume that the AD schedule is showing an upward shift due to a permanent upward shift in the investment schedule. National income attains its new equilibrium value Y̅ 1, where Y̅ 1 = C + I 1, + G 0. So as they hire (employ) more factors, their factor payments (in the form of wages, rent, interest, and dividends) increase. The AS curve is also named as Aggregate Expenditure (AE) curve.AD refers to the effective demand that is equal to the actual expenditure. The second term in the expression is the level of autonomous expenditures. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. 200 billion; therefore, households are not willing to buy them.Therefore, the supply of products and services exceeds their demand.

Consumption consists of N1.5m autonomous and 0.037YProactive, problem solver and smart. 80(= 100*0.8) Now, the expenditure of Rs.

Suppose the autonomous investment increases by Rs. As some firms make this additional investment expenditure, other firms find that the demand for their goods is rising.

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