Page 76 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 4: Theories of Income, Output and Employment: Keynesian Theory

Aggregate Expenditure (AE) Notes

Given AE = C + I without government, add government consumption expenditure to it to get AE
with government.
AE = C + I + G

Equilibrium Y = AE approach
With inclusion of government sector, AE is now the sum of C, I and G. The equilibrium level of
national income is where

Y = C + I + G
Government expenditure is assumed to be an autonomous expenditure. It implies that G is not
influenced by Y and remains the same at all the levels of income.
Figure 4.7

Graphically (Figure 4.7) it means that AE curve is now C+I+G curve and is parallel to the C+I
curve. The equilibrium level of Y is determined at the intersection of AE curve and the 45° line.
It is at E with OM equilibrium level of Y.

Leakages/Injections Approach

With inclusion of government sector this approach is no longer the saving investment equality
approach. It is so because aggregate income is now disposed on C, S and net taxes (T).
Net taxes = taxes - transfer payment by government.
Therefore, Y = C+S+T
The leakage/injections approach is derived as follows:
Given Y = C+I+G (AE) ...(1)
Y = C+S+T (Agg. Y) ...(2)
From (1) and (2), we get
C+S+T = C+I+G
or S+T = I+G

or Leakages = Injections

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