Income-Expenditure Model
Consider an economy with the following economic
agents:
• Households/Consumers who earn income from
the factor market, pay taxes to the
government, purchase goods and services from
firms in the market for goods and services, and
save money in the loanable funds market
• Households spend $10,000 when they
have no income
• Households save 20% of any increase in
their disposable income
• Consumer behavior is characterized by
the equation C = A + mpc x $Y_o$
• Firms/Producers who pay households in the
factor market, sell to households and the
government in the market for goods and
services, and engage in investment spending
using money borrowed in the market for
loanable funds
• Firms plan to buy $5,000 worth of
physical capital and have $15,000 in
unsold inventory
• Firm investment spending is
characterized by the equation I = $I_{planned}$ + $I_{unplanned}$
• The Government who receives taxes from
consumers, buys goods and services from firms
in the market for goods and services, and saves
or dissaves in the market for loanable funds
• The government receives $5,000 in taxes
• The government buys $30,000 worth of
goods and services
• There are no social safety nets in the
economy, so the government does not
pay any social security payments,
unemployment payments, etc
• The economy is a closed economy
