In this simulation of the National Income Model, you can observe the effects of government policies and shocks to the economy. When you change one or more exogenous variables in the model, the computer shifts the S and I curves and calculates the new values for each endogenous variable.

The National Income Model presented in the textbook consists of 3 equations:

Y = C + I + G The demand for output Y equals consumption C plus investment I plus government purchases G.

C = C(Y - T) Consumption depends on disposable income.

I = I(r) Investment depends on the interest rate.

These three equations can be combined to give a single condition for equilibrium in the economy:

Y - C(Y - T) - G = I(r) or total saving = total investment.

The exogenous variables of the model are

the level of output Y or GDP
the level of government purchases G
the level of taxes T

The endogenous variables of the model are

the level of consumption C
the level of investment I
the interest rate r

The downward sloping curve labelled "I" shows the relation between the level of investment and the interest rate. The vertical curve labelled "S" shows the level of saving. The intersection of the two curves determined the equilibrium levels of investment and the interest rate.

Any shock to the model that changes the level of saving shifts the "S" curve. Thus, changes in output, government spending, taxes, or a shock to the consumption function will shift the "S" curve.

Any shock to the economy that changes the level of investment at every interest rate will shift the "I" curve.