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Short-Term Economic Fluctuations - Short-term equilibrium output

3 important questions on Short-Term Economic Fluctuations - Short-term equilibrium output

We can define total autonomous expenditures, denotes by ā, as:

Abar = Cbar - cubar + Ibar + Gbar + NXbar, hence PAE = Abar + cY

The Keynesian cross shows graphically:

How short-run equilibrium output is determined in a world in which producers meet demand at predetermined prices. The short-run equilibrium is determined at the intersection of two lines:

a 45 degrees line representing the equation Y = PAE
the expenditure line, showing the relationship between planned aggregate expenditure PAE and output Y

The marginal propensity to import is:

The proportion of a change in income that is spent on imports, defined by the parameter m (0 < m < 1) so that Y = (1/(1 - c + m)) * ā . The multiplier is the term 1/(1 - c + m). It follows that the greater the marginal propensity to import the lower the value of the multiplier. So, the more important imports are in domestic expenditure the lower the multiplier is likely to be.