The Macroeconomic System and Sector Financial Balances
The previous chapter explained the basic Keynesian macroeconomic system, but we cannot fully understand the working of a modern economy until we see how the consumption function/multiplier/final expenditure mechanism affects the income and expenditure of each sector to create that sector’s financial surplus or deficit. Chapter 12 is therefore concerned to explain how the financial balance equations for each sector relate to the working of the macroeconomic system as a whole and why, in principle, the sum of sectors’ financial balances (including the residual error in the national accounts) must be zero. All this is a complex issue, so we proceed through a staged series of simple ‘model’ economies: first, a two-sector household/enterprise economy; then a three-sector household/enterprise/government economy (which introduces the impact on the multiplier of ‘leakages’ into taxes); and finally a four-sector household/enterprise/government/overseas sector model economy.
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