B.

National Income Determination

1. Aggregate Demand (AD) & Aggregate Supply (AS)

AD = C + I + G + X (or X-M)

AS is a measurement of total output of real goods and services in an

economy (AS = C + S + T)

AD = AS, (In equilibrium)

Therefore in a simple economy that does not trade or have a government

I=S

AS (Aggregate Supply)
Prices

AD (Aggregate Demand)

Output
Q

8
2. Classical View of Equilibrium (a.k.a. Classical Theory of Employment)

Based on Say's Law "Supply creates its own demand"

Self-adjusting process

Supply driven economic model

a. Saving/Investment Equilibrium

Interest Rate Savings

Investment

$ $$$

b. Wages and prices are flexible or self-adjusting in the broader

economy

3. The Keynesian System

Product of the times (Great Depression)

Questioned whether the process is always Self Adjusting

Demand Driven economic model

9
 a. Saving/Investment Equilibrium?

These are different people with different motives.

Savers (Why Do They Save?) Investors(Why Do They Invest?)

Future purchases Rate of profit

Precaution Interest rate
Large purchases

b. Wage/price flexibility?

Market concentration prevents falling price

Minimum wage
Labor Unions resist wage declines

c. Consumption

i. Historically

Consumption

D.P.I.
ii. Theoretical Aggregate

Y C MPC S MPS

0 100 --- -100 ---

200 250 .75 -50 .25
400 400 .75 0 .25
600 550 .75 50 .25
800 700 .75 100 .25
1000 850 .75 150 .25

10
Consumption

iii. Shifts due to

Price expectations
Changes in taxes
Level of consumer debt
Interest rate
Many Others (this list is not exhaustive)

iv. Related Measures

Personal Income (Employment)

Stock Market

Housing Prices FHFA, Case-Shiller

Consumer Credit G19 series

Consumer Confidence Survey (Conference Board)

Consumer Sentiment Survey (U. of Michigan)

Retail Sales (MARTS)

Internet Sales
Vehicle Sales

11
 d. Investment

i. Based on the MPK Marginal Productivity of Capital

NK TPPK MPPK MVPK Dep Net MVPK MEK

0 0 --- --- -- --- --------

1 100 100 400 100 300 300/2000
2 190 90 360 100 260 260/2000
3 270 80 320 100 220 220/2000
4 340 70 280 100 180 180/2000
5 400 60 240 100 140 140/2000
6 450 50 200 100 100 100/2000
7 490 40 160 100 60 60/2000

ii. Graphed

iii. Shifts

Technological change (MPPK)

Business tax (Px)

Changes in operating costs (PK)

Expectations about the future

12
iv. Instability of Investment

Irregularity of innovation

Variability of profits

Variations of expectations

v. Related measures/Indicators

Corporate Profits

Interest Rates

I.S.M. Manufacturing

I.S.M. Non-Manufacturing

Industrial Production

Capacity Utilization

Construction Spending

Durable Goods Orders

13