The Short – Run Macro Model. The Short-Run Macro Model. In short-run, spending depends on income, and income depends on spending. The more income households have, the more they will spend. The more households spend, the more output firms will produce
Since Yd = Y – T,
C = a + b(Y – T)
So,C = (a- bT) + bY
For instance, insufficient spending causes business firms to decrease their demand for labor.
ΔIP, the increase in total income (GDP) is calculated as: