When the foreign sector, government spending, and taxes are added to the simple Keynesian model, at equilibrium, all injections must equal all withdrawals, as stated by the equation I + G + X = S + T + M.

Question

Quizplus · Accepted Answer

This is known as the national income identity equation, which is a fundamental principle of macroeconomics stating that total output (income) in an economy is equal to total expenditure. In the context of the Keynesian model, injections (I = investment, G = government spending, X = exports) represent spending that adds to the economy's aggregate demand, while withdrawals (S = saving, T = taxes, M = imports) represent spending that subtracts from aggregate demand. At equilibrium, total injections must be equal to total withdrawals, hence the equation I + G + X = S + T + M.

When the Foreign Sector, Government Spending, and Taxes Are Added