Question

–Principles of Macroeconomics

Construct the National Income Accounting Identity Equation in terms of Aggregate Expenditure (GDP) and Aggregate Income (AI)? Identify each component of the identity? Describe three (3) of the economic agents acting in this National Income Accounting Model and briefly explain their 'modus operanadi - objective function.' How is the 'Keynesian Multiplier' calculated? Why is the "Keynesian Multiplier" important for Government fiscal policy?

Answer 1

National income identity or the expenditure:

AE = C+G+I+Xn

C: consumption expenditure

G: government expenditure.

I: investment expenditure.

Xn : net export.

Y= C+S.

The government, household and business firms are the key economic agents in the Keynesian model.

Keynesian model emphasize aggregate demand in deciding the level of output and employment in the short run.

The Keynesian multiplier= 1/1-MPC.

The vale of multiplier depends on the MPC. Higher the value of MPC , higher would be multiplier.

The multiplier value makes the fiscal policy more successful in raising the level of output. Initial rise in the expenditure would lead to the multiple rise in the income level.