Chapter 14. Macroeconomic Theory: Classical and Keynesian Models. Copyright 2011 Pearson Addison-Wesley. All rights reserved.
|
|
- Ann Payne
- 6 years ago
- Views:
Transcription
1 Chapter 14 Macroeconomic Theory: Classical and Keynesian Models
2 The Debate Over Long Run Adjustment: the Classical & Keynesian Models Classical Model: Economy is always selfadjusting; there is no need for government intervention. Keynesian Model: Economy is not selfcorrecting; proper fiscal and monetary policies can improve the functioning of the market system. 14-2
3 1 st Pillar of the Classical Model: Quantity Theory of Money Equation of Exchange: M * V = P * Q M = M1=Money Supply V = Velocity = # of times per year, on average, $1 is spent or paid as income P = Price Index = GDP Deflator Q = Real GDP P * Q = Nominal GDP 14-3
4 1 st Pillar of the Classical Model: Quantity Theory of Money Classical Economists believed that, since Velocity (V) is stable, the Money Supply (M) determines Nominal GDP. Expanding the money supply when the economy is at its normal capacity is ineffective: The economy is in long run equilibrium so increasing M1 only leads to inflation. And since the economy adjusts quickly, there is no need to increase M1 in recessions due to the other pillars of classical economic theory. 14-4
5 Second Pillar of classical economics: Say s Law, Supply Creates Demand Based on the circular flow model Production always generates enough income to purchase all goods produced. Markets never overproduce. FIGURE 14.BP.5 Simple Circular Flow Copyright 2008 Pearson Addison-Wesley. All rights reserved. 14-5
6 3rd Pillar of classical economics: Savings is always equal to Investment If people save more b/c of worries about the economy, the supply of savings increases, decreasing interest rates, and increasing Investment. So the more some people save the more other folks invest. Therefore, a lower level of spending (and higher levels of savings) does not necessarily cause a recession 14-6
7 FIGURE 14.BP.1 Saving and Investment in the Classical Model 14-7
8 FIGURE 14.1 The Classical Credit Market 14-8
9 4th Pillar of classical economics: All markets, including labor markets, adjust quickly and efficiently In recessions, wages and input prices will fall quickly. This decreases the costs of production for firms, which increases their profitability. Firms then supply more, creating more jobs and income and moving the economy back to Potential Real GDP. 14-9
10 FIGURE 14.BP.2 Labor Market Adjustment in the Classical Model 14-10
11 Classical Model in an overheated economy Wages and input prices increase dramatically due to the economy operating beyond its normal capacity Firms cannot find the skilled workers they need, and they must pay higher wages to attract new workers; inputs get more expensive due to high demand. This increase in the costs of production then causes firms to supply less until the economy reaches equilibrium back at its normal capacity at a higher price level
12 Classical model when consumption decreases In a (temporary) downturn, increases in savings (from a decrease in consumption) lead to increases in investment, so there will only be a temporary downturn. The C is offset by the I and AD returns to its normal capacity 14-12
13 Classical Model: in a full-fledged recession If the economy stays in the downturn for any length of time, wages and input prices tend to fall due to high levels of unemployment and slack demand. This decrease in the costs of production causes firms to increase production, increasing GDP until the economy reaches equilibrium at its normal capacity and at a lower price level
14 Classical Model Redux In the long run, the economy always returns to its normal capacity In small downturns, increases in savings are offset by increases in investment. In recessions, wages & input prices fall, reducing costs and causing production to increase back to its normal level. In an overheated economy, wages & input prices increase, raising costs and reducing production back to its normal capacity
15 Flaws in the Classical Model: our economy has not proved to be stable, and we have regular business cycles Great Depression proved once and for all that the economy is not self-adjusting Decline in the money supply DID decrease Real GDP, so money was not neutral. Supply exceeded demand due to declines in investment even though savings had increased, so Say s Law did not hold and investment did not equal savings. Balanced Budget adopted in the early 1930s was a disaster as it contributed to the problems of the Depression. Wages took several years to decline, and after that the lower costs did not stimulate new production
16 FIGURE 14.2 Business Cycles 14-16
17 The Classical Model could not explain the depression, but Keynes could Say s Law does not hold unless Injections = Leakages In equilibrium, injections = leakages: I + G + X = S + T + M But in the Depression, S > I, leakages were greater than injections More money was leaving the economy than was being put in This led to lower spending, which led producers to reduce supply, which reduced incomes, which lowered GDP even further Firms would not invest despite low interest rates; lower wages reduced spending so firms would not produce more despite lower costs 14-17
18 KEYNES on RECESSIONS 1. Increases in savings do not lead to increases in investment just because interest rates fall. Firms don t invest when expected sales are low. 2. Wages and input prices are sticky (they do not fall quickly, if at all) 3. Even if wages do fall, firms will not increase supply because there is no demand for their goods
19 KEYNES on RECESSIONS Economy can linger in a recession for many years. When the economy does finally pull out of recession, It will be led by Demand (especially consumer spending), not Supply. Since the government can affect Demand through fiscal policy (G or T) or monetary policy (changes in interest rates affect C, I), the government can shorten the length and severity of recessions. Copyright 2011Pearson Addison-Wesley. All rights reserved
20 Keynes on an Overheated Economy We should avoiding an overheated economic state by Reducing government spending, increasing taxes, or increasing interest rates. Keeping the economy from growing too quickly can prevent booms from accelerating unsustainably and turning into busts. Wages and input prices do increase in an overheated economy, and this does cause a decrease in supply. But the economy won t stop at its normal capacity: Layoffs and stock market declines undermine consumer and business confidence, decreasing demand. So overheated economies are usually followed by recessions. Careful macroeconomic policy can almost always improve on the outcomes of an unregulated market
21 Concept Check What do proponents of the classical model think will happen to the economy if there is a decrease in consumption and an increase in savings? How would Keynes respond? 14-21
22 Concept Check What do classical economist think will happen to the economy in a recession? How would Keynes respond? What do classical economists think will happen to an overheated economy? How would Keynes respond? 14-22
23 FIGURE 14.3 The Circular Flow with Leakages (L) and Injections (IN) 14-23
24 Banks Savings (S) Investment (I) Consumption (C) Households Product Markets Govt. Spending (G) Exports (X) Imports (IM) Rest of the World Businesses Disposable Income (DI) Govt. Resource Markets Net Taxes (T) Income (Y) Dollar Flow Real Flow 14-24
25 Banks Savings (S) Investment (I) Consumption (C) Households either consume (C) or save (S) their disposable income. Banks take Savings and loan it out for Investment purchases (I). Product Markets Households Businesses Resource Markets Income (Y) Dollar Flow Real Flow 14-25
26 Banks Savings (S) Investment (I) Consumption (C) Export (X) purchases increase spending on US goods, Imports (IM) decrease spending. Product Markets Exports (X) Imports (IM) Rest of the World Households Businesses Resource Markets Income (Y) Dollar Flow Real Flow 14-26
27 Banks Savings (S) Investment (I) Consumption (C) Households Product Markets Govt. Spending (G) Exports (X) Imports (IM) Rest of the World Businesses Disposable Income (DI) Govt. Resource Markets Net Taxes (T) The government takes money out of the flow in net taxes (T), & returns it to the flow via govt. spending on goods & services (G). Income (Y) Dollar Flow Real Flow Copyright 2008 Pearson Addison-Wesley. All rights reserved
28 Banks Savings (S) Investment (I) Consumption (C) Households Product Markets Govt. Spending (G) Exports (X) Imports (IM) Rest of the World Businesses Disposable Income (DI) Govt. Resource Markets Total Spending = Aggregate Demand (AD) Net Taxes (T) Income (Y) Dollar Flow Real Flow Copyright 2008 Pearson Addison-Wesley. All rights reserved AD = C + I + G + X - IM
29 Banks Savings (S) Investment (I) Consumption (C) Households Product Markets Govt. Spending (G) Exports (X) Imports (IM) Rest of the World Businesses Disposable Income (DI) Govt. Resource Markets Net Taxes (T) Total Income = Y = DI + T and DI = C + S, so Income (Y) Dollar Flow Real Flow Copyright 2008 Pearson Addison-Wesley. All rights reserved Y = C + S + T
30 GDP = Total Income (Y) = Total Expenditure (AD) AD = C + I + G + X IM Y = C + S + T C + I + G + X IM = C + S + T I + G + X IM = S + T I + G + X = S + T + IM Injections = Leakages 14-30
31 Banks Savings (S) Investment (I) Consumption (C) Households Product Markets Govt. Spending (G) Exports (X) Imports (IM) Rest of the World Businesses Disposable Income (DI) I + G + X = S + T + IM Injections = Leakages Govt. Resource Markets Net Taxes (T) Income (Y) Dollar Flow Real Flow Copyright 2008 Pearson Addison-Wesley. All rights reserved
32 The Multiplier Shows how a $1 change in spending causes AD & GDP to change by more than $1 Example: With a marginal propensity to consume of.8 (mpc=0.8), $100 of spending (C=$100) becomes $100 of income for someone. The people receiving the $100 will then spend $80 (C=$80) of this $100, saving $20. But the $80 in spending is income for someone else, who then spends 80% of $80 (C=$64, S=$16).» The $64 in spending is income for yet another person, who then spends 80% of $64 (C=$51.20), which is then income for someone else
33 The total change in consumption using the multiplier The total change in consumption from the initial change in consumer spending is: $100+$80+$64+$ = $100 ( ) = $100 (1/(1-.8)) = $100 * 5 = $500 In this example, the multiplier is 5. This means that each $1 change in spending ultimately generates $5 in total spending. Note: this analysis excludes the presence of 2 leakages -- taxes and imports
34 FIGURE 14.BP.9 The Keynesian Multiplier Effect 14-34
35 FIGURE 14.BP.10 The Keynesian Multiplier 14-35
36 Actual formula for the multiplier: multiplier = 1/(1-mrr) Where mrr is the marginal respending rate (the amount of each dollar that actually gets respent on US goods and services). mrr = mpc(1-t)-mpm, Where mpc is the marginal propensity to consume, t is the tax rate, and mpm is the marginal propensity to import Some of each $1 of spending will be respent, depending on the amount consumers save, the amount the government takes in taxes, and the amount that flows overseas to pay for imports
37 Typical numbers for the MRR MPC = 0.9 T = 0.2 MPM = 0.12 mrr = mpc(1-t)-mpm = (.9)(.8)-(.12) = 0.6 Multiplier = 1/(1-mrr) = 1/(1-.6) = 1/(0.4) =
38 FIGURE 14.4 The Consumption Function Consumption increases as disposable income increases 14-38
39 FIGURE 14.5 The 45 Line Tells us when expenditure (C) equals income 14-39
40 FIGURE 14.6 The Consumption Function and the 45 Line Expenditure equals income at $3.0 trillion 14-40
41 FIGURE 14.7 Your Consumption Function What would your consumption function look like over time? How would your income and spending patterns change? 14-41
42 TABLE 14.1 Data for Hypothetical Consumption Function 14-42
43 FIGURE 14.8 Marginal Propensity to Consume 14-43
44 TABLE 14.2 Derivation of Saving Function from Consumption Data 14-44
45 Consumption, Savings and Disposable Personal Income Disposable Personal Income = Total Income (RGDP) - Net Taxes (T) Disposable Personal Income (DPI) is either consumed (C) or saved (S): DPI = C + S Marginal Propensity to Consume: mpc=δc/δdpi Marginal Propensity to Save: mps=δs/δdpi mpc+mps=1 (disposable income is either consumed or saved) 14-45
46 FIGURE 14.9 The Saving Function If the slope of C is 0.75, then the slope of S is
47 TABLE 14.3 Data for Hypothetical Saving Example 14-47
48 FIGURE The Investment Function Investment shifts the expenditure curve up by the amount of investment 14-48
49 Data for Hypothetical Investment Function What is the mpc in this example? What is the mps? What is the multiplier? 14-49
50 FIGURE Equilibrium Level of Income Equilibrium occurs where AE is equal to Real GDP, which is where the AE curve intersects the 45 degree line. Savings is equal to investment at the equilibrium level of Real GDP
51 FIGURE An Increase in Investment Spending An increase of investment of $0.2 trillion causes an increase in Real GDP of $0.4 trillion The mpc is 0.5, so the multiplier in this case is
52 FIGURE 14.BP.3 Saving, Consumption, and Income 14-52
53 FIGURE 14.BP.4 Savings, Investment, and Income in the Keynesian Model 14-53
54 FIGURE 14.BP.6 Saving Leakage from the Circular Flow 14-54
55 FIGURE 14.BP.7 Investment Injection into the Circular Flow 14-55
56 FIGURE 14.BP.8 Initial Investment Received as Income 14-56
57 TABLE 14.5 Keynesian Respending Effect 14-57
58 FIGURE The Government Spending Function 14-58
59 FIGURE The Keynesian Model with C, I, and G Spending 14-59
60 FIGURE Effects of Increased Government Spending on the Equilibrium Level of Income 14-60
61 FIGURE 14.BP.11 The Keynesian Model Four Sectors 14-61
62 FIGURE A Problem on the Keynesian Model 14-62
63 14-63
The Goods Market and the Aggregate Expenditures Model
The Goods Market and the Aggregate Expenditures Model Chapter 8 The Historical Development of Modern Macroeconomics The Great Depression of the 1930s led to the development of macroeconomics and aggregate
More informationIntroduction. Learning Objectives. Learning Objectives. Chapter 12. Consumption, Real GDP, and the Multiplier
Chapter 12 Consumption, Real GDP, and the Multiplier Introduction Investment spending by businesses is a key component of economic growth. Expenditures on information technology were once expected to provide
More informationThe Aggregate Expenditures Model. A continuing look at Macroeconomics
The Aggregate Expenditures Model A continuing look at Macroeconomics The first macroeconomic model The Aggregate Expenditures Model What determines the demand for real domestic output (GDP) and how an
More information2.2 Aggregate demand and aggregate supply
The business cycle Short-term fluctuations and long-term trend Explain, using a business cycle diagram, that economies typically tend to go through a cyclical pattern characterized by the phases of the
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand. Lecture
The Influence of Monetary and Fiscal Policy on Aggregate Demand Lecture 10 28.4.2015 Previous Lecture Short Run Economic Fluctuations Short Run vs. Long Run The classical dichotomy and monetary neutrality
More informationTextbook Media Press. CH 27 Taylor: Principles of Economics 3e 1
CH 27 Taylor: Principles of Economics 3e 1 The Building Blocks of Keynesian Analysis Keynesian economics is based on two main ideas: a) aggregate demand is more likely than aggregate supply to be the primary
More informationTHE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND
21 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND LEARNING OBJECTIVES: By the end of this chapter, students should understand: the theory of liquidity preference as a short-run theory
More informationDisputes In Macroeconomics
No G G & T 3-5% Monetary Rule Expectations negate fiscal and monetary Policy. Adam Smith John M. Keynes Milton Friedman Classicals Keynesians Monetarists Robert Lucas Get the G off of our backs. Ronald
More informationTHE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND
20 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND LEARNING OBJECTIVES: By the end of this chapter, students should understand: the theory of liquidity preference as a short-run theory
More informationSticky Wages and Prices: Aggregate Expenditure and the Multiplier. 5Topic
Sticky Wages and Prices: Aggregate Expenditure and the Multiplier 5Topic Questioning the Classical Position and the Self-Regulating Economy John Maynard Keynes, an English economist, changed how many economists
More informationAggregate Demand and the Powerful Consumer
Aggregate Demand and the Powerful Consumer Dr. Ashraf Samir Website: ashraffeps.yolasite.com Contents I) Introduction II) Factors Determining Actual GDP III) The Circular Flow of Spending, Production,
More informationIntroduction. Learning Objectives. Learning Objectives. Economics Today Twelfth Edition. Chapter 12 Consumption, Income, and the Multiplier
Roger LeRoy Miller Economics Today Twelfth Edition Chapter 12 Consumption, Income, and the Multiplier Introduction Consumption spending by households is the largest component of U.S. GDP. To the extent
More informationTHE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND. Chapter 34
1 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND Chapter 34 Importance of economic policy Economic policy refers to the actions of the government that have a direct impact on the macroeconomic
More informationChapter 11 1/19/2018. Basic Keynesian Model Expenditure and Tax Multipliers
Chapter 11 Basic Keynesian Model Expenditure and Tax Multipliers This chapter presents the basic Keynesian model and explains: how aggregate expenditure (C,I,G,X and M) is determined when the price level
More informationAggregate Supply and Aggregate Demand
Aggregate Supply and Aggregate Demand Econ 120: Global Macroeconomics 1 1.1 Goals Goals Specific Goals Define the expenditure multiplier and how to compute it. Explain how recessions and expansions can
More informationEQ: What are the Assumptions of Keynesian Economic Theory?
EQ: How is Keynesian Theory Different from Classical Theory? Classical Theory Supply-Focused (SRAS) Say s Law Economy is self-regulating Laissez-Faire Wages can go up or down Businesses will borrow & invest
More informationChapter 10 Aggregate Demand I CHAPTER 10 0
Chapter 10 Aggregate Demand I CHAPTER 10 0 1 CHAPTER 10 1 2 Learning Objectives Chapter 9 introduced the model of aggregate demand and aggregate supply. Long run (Classical Theory) prices flexible output
More informationEconomics 1012A: Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Third Midterm Examination November 15, 2007
Economics 1012A: Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Third Midterm Examination November 15, 2007 Answer all of the following questions by selecting the most appropriate answer on
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand
The Influence of Monetary and Fiscal Policy on Aggregate Demand Chapter 34 Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be
More informationY = 71; :5Y (1 0:5)Y = 71; 500 0:5Y = 71; 500 Y = 143; 000. Note that you can get the same result if you use the formula
Basic Keynesian Model (Chapter 0): () C 4; 000 + 0:5(Y T ) since Y D Y T T 5; 000; I P 55; 000; G 20; 000 NX T otal Exports T otal Im ports 5; 000 20; 000 5; 000 AE C+I P +G+NX 4; 000+0:5(Y 5; 000)+55;
More informationIMPORTANT INFORMATION:
Economics 1B ECS1601 Semester 1 Department of Economics IMPORTANT INFORMATION: This tutorial letter contains solutions to assignment 03 BARCODE SOLUTIONS TO ASSIGNMENT 03 QUESTIONS SEMESTER 1, 2017 3.1
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand P R I N C I P L E S O F. N. Gregory Mankiw. Introduction
C H A P T E R 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand P R I N C I P L E S O F Economics N. Gregory Mankiw Introduction This chapter focuses on the short-run effects of fiscal
More informationTWO VIEWS OF THE ECONOMY
TWO VIEWS OF THE ECONOMY Macroeconomics is the study of economics from an overall point of view. Instead of looking so much at individual people and businesses and their economic decisions, macroeconomics
More informationFEEDBACK TUTORIAL LETTER
FEEDBACK TUTORIAL LETTER 2 ND SEMESTER 2018 ASSIGNMENT 1 INTERMEDIATE MACRO ECONOMICS IMA612S 1 Course Name: Course Code: Department: INTERMEDIATE MACROECONOMICS IMA612S ACCOUNTING, ECONOMICS AND FINANCE
More informationLecture 7. Fiscal Policy
Lecture 7 Fiscal Policy The role of government spending and taxes Fiscal policy: government spending and tax policy AD = C + II + G What if G changes? What is the effect on Y? How large is (government)
More informationObjectives of Macroeconomics ECO403
Objectives of Macroeconomics ECO403 http//vustudents.ning.com Actual budget The amount spent by the Federal government (to purchase goods and services and for transfer payments) less the amount of tax
More informationLecture 22. Aggregate demand and aggregate supply
Lecture 22 Aggregate demand and aggregate supply By the end of this lecture, you should understand: three key facts about short-run economic fluctuations how the economy in the short run differs from the
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Exam - Version A Name 1) Full-employment output is: A) the level of output that is produced when there is no voluntary unemployment. B) the level of output that is produced when the unemployment rate is
More informationIII. 9. IS LM: the basic framework to understand macro policy continued Text, ch 11
Objectives: To apply IS-LM analysis to understand the causes of short-run fluctuations in real GDP and the short-run impact of monetary and fiscal policies on the economy. To use the IS-LM model to analyse
More informationPrinciples of Macroeconomics December 15th, 2005 name: Final Exam (100 points)
EC132.01 Serge Kasyanenko Principles of Macroeconomics December 15th, 2005 name: Final Exam (100 points) This is a closed-book exam - you may not use your notes and textbooks. Calculators are not allowed.
More informationIntroduction to Macroeconomics. Introduction to Macroeconomics
C H A P T E R 17 Introduction to Macroeconomics Prepared by: Fernando Quijano and Yvonn Quijano Introduction to Macroeconomics Microeconomics examines the behavior of individual decision-making units business
More informationAggregate Demand and Aggregate Supply
Aggregate Demand and Aggregate Supply Chapter 19 Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department,
More informationUnit 3.3 Macroeconomic Models Unit Overview
Unit 3.3 Unit Overview 3.3 Macroeconomic models Aggregate demand - components Aggregate supply >>short-run >>long-run (Keynesian versus neo-classical approach) Full employment level of national income
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand
The Influence of Monetary and Fiscal Policy on Aggregate Demand 34 Aggregate Demand Many factors influence aggregate demand besides monetary and fiscal policy. In particular, desired spending by households
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand. Premium PowerPoint Slides by Ron Cronovich
C H A P T E R 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand Economics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich 2009 South-Western, a part
More informationMcGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
The Aggregate Expenditures Model McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Assumptions and Simplifications Use the Keynesian aggregate expenditures model
More informationAggregate Demand and Economic Fluctuations
Outline Macroeconomic Theory and Policy Chapter 9 Aggregate Demand and Economic Fluctuations Section 1 Business Cycle Section 2 Macroeconomic Modeling and Aggregate Demand Section 3 Keynesian Model Aggregate
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Final Exam Practice Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In an economy with no government or foreign sector, it is always true
More informationThe fixed money supply is represented by a vertical supply curve.
Chapter 20 The Influence of Monetary and Fiscal Policy on Aggregate Demand OUTLINE: 1. The theory of liquidity preference. 2. How monetary policy affects aggregate demand. 3. How fiscal policy affects
More informationMACROECONOMICS. Aggregate Demand I: Building the IS-LM Model. N. Gregory Mankiw. PowerPoint Slides by Ron Cronovich
11 : Building the IS-LM Model MACROECONOMICS N. Gregory Mankiw PowerPoint Slides by Ron Cronovich 2013 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: the IS curve and its relation
More informationPractice Test 2: Multiple Choice
Practice Test 2: Multiple Choice 1. The expenditure multiplier equals A. 1/(slope of APE curve). B. APC-APS where APC is the average propensity to consume and APS is the average propensity to save. C.
More informationAP Macroeconomics Formulas and Definitions: Key Formulas
AP Macroeconomics Formulas and Definitions: Key Formulas 1. Rule of 70: Used to determine how many years it takes for a value to double, given a particular annual growth rate. For example, if you put $20,000
More informationDetermining the Quantity Demanded of an Asset
Determining the Quantity Demanded of an Asset Wealth the total resources owned by the individual, including all assets Expected Return the return expected over the next period on one asset relative to
More informationECON 102 Tutorial 3. TA: Iain Snoddy 18 May Vancouver School of Economics
ECON 102 Tutorial 3 TA: Iain Snoddy 18 May 2015 Vancouver School of Economics Questions Questions 1-3 set-up Y C I G X M 1.00 1.00 0.5 0.7 0.45 0.15 2.00 1.65 0.5 0.7 0.45 0.30 3.00 2.30 0.5 0.7 0.45 0.45
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand
The Influence of Monetary and Fiscal Policy on Aggregate Demand Chapter 20 Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be
More informationChapter 23. The Keynesian Framework. Learning Objectives. Learning Objectives (Cont.)
Chapter 23 The Keynesian Framework Learning Objectives See the differences among saving, investment, desired saving, and desired investment and explain how these differences can generate short run fluctuations
More informationMacroeconomics Mankiw 6th Edition
N. Gregory Mankiw Lecture notes, ECON 1150 Macroeconomics Mankiw 6th Edition 21 & 22 The Influence of Monetary and Fiscal Policy on Aggregate Demand Premium PowerPoint Slides by Ron Cronovich 2012 UPDATE
More informationIn recessions the aggregate demand of economies falls. John Maynard Keynes
In recessions the aggregate demand of economies falls. John Maynard Keynes Total spending doesn t always match total output at the desired full-employment price-stability level. The circular flow of income
More informationIn this chapter, look for the answers to these questions
In this chapter, look for the answers to these questions How does the interest-rate effect help explain the slope of the aggregate-demand curve? How can the central bank use monetary policy to shift the
More informationMACROECONOMICS - EXAM IV
MACROECONOMICS - EXAM IV Fall 2004 G. Garesché 1. a. Define a speculative bubble. What conditions must exist for a speculative bubble to occur? Give two examples of speculative bubbles which have occurred
More informationShort run Output and Expenditure
Short run Output and Expenditure Short-run Output and Expenditure The Learning Objectives in this presentation are covered in Chapter 19: Output and Expenditure in the Short Run LEARNING OBJECTIVES 1 To
More informationMACROECONOMICS 201 (Fall 2018) NOTES 9
MACROECONOMICS 201 (Fall 2018) NOTES 9 The Multiplier and its Application to Stabilization Policy Readings: See notes 8 Our primary topic in this set of notes is the multiplier. This is an important Keynesian
More informationKeynesian Theory (IS-LM Model): how GDP and interest rates are determined in Short Run with Sticky Prices.
Keynesian Theory (IS-LM Model): how GDP and interest rates are determined in Short Run with Sticky Prices. Historical background: The Keynesian Theory was proposed to show what could be done to shorten
More informationMacroeconomics. Lecture 4: IS-LM model: A theory of aggregate demand. IES (Summer 2017/2018)
Lecture 4: IS-LM model: A theory of aggregate demand IES (Summer 2017/2018) Section 1 Introduction Why we study business cycles Recall the discussion about economy in the long-run Does it apply to e.g.
More information1. The most basic premise of the aggregate expenditures model is that:
1. The most basic premise of the aggregate expenditures model is that: A. The total output produced in the economy depends directly on the level of total spending B. The level of employment in the economy
More informationOCR Economics A-level
OCR Economics A-level Macroeconomics Topic 2: Aggregate Demand and Aggregate Supply 2.1 Circular flow of income Notes The circular flow of income Firms and households interact and exchange resources in
More informationChapter 11 Aggregate Demand I: Building the IS -LM Model
Chapter 11 Aggregate Demand I: Building the IS -LM Model Modified by Yun Wang Eco 3203 Intermediate Macroeconomics Florida International University Summer 2017 2016 Worth Publishers, all rights reserved
More informationChapter 7. Fiscal Policy. These slides supplement the textbook, but should not replace reading the textbook
Chapter 7 Fiscal Policy These slides supplement the textbook, but should not replace reading the textbook Who were the classical economists? A group of the 18 th and 19 th centuries, including Adam Smith
More informationECON MACROECONOMIC PRINCIPLES Instructor: Dr. Juergen Jung Towson University. J.Jung Chapter 9 - AD and AS Towson University 1 / 20
ECON 202 - MACROECONOMIC PRINCIPLES Instructor: Dr. Juergen Jung Towson University J.Jung Chapter 9 - AD and AS Towson University 1 / 20 Disclaimer These lecture notes are customized for the Macroeconomics
More informationPrinciple of Macroeconomics, Summer B Practice Exam
Principle of Macroeconomics, Summer B 2017 Practice Exam 1) If real GDP in a small country in 2015 is $8 billion and real GDP in the same country in 2016 is $8.3 billion, the growth rate of real GDP between
More informationEcon 102 Exam 2 Name ID Section Number
Econ 102 Exam 2 Name ID Section Number 1. Suppose investment spending increases by $50 billion and as a result the equilibrium income increases by $200 billion. The investment multiplier is: A) 10. B)
More informationChapter 15: Fiscal Policy Section 2
Chapter 15: Fiscal Policy Section 2 Objectives 1. Compare and Contrast classical economics and Keynesian economics. 2. Explain the basic principles of supplyside economics. 3. Describe the role that fiscal
More informationKeynesian Fiscal Policy and the Multipliers
Lecture Notes for Chapter 11 of Macroeconomics: An Introduction Keynesian Fiscal Policy and the Multipliers Copyright 1999-2008 by Charles R. Nelson 03/04/2008 In this chapter we will discuss - Keynes
More informationCHAPTER 28: THE AGGREGATE EXPENDITURES MODEL
CHAPTER 28: THE AGGREGATE EXPENDITURES MODEL Introduction Now that you have a basic understanding of how changes in disposable income, investment, and decisions about consumption and saving affect real
More informationECO 2013: Macroeconomics Valencia Community College
ECO 2013: Macroeconomics Valencia Community College Exam 3 Fall 2008 1. The most important determinant of consumer spending is: A. the level of household debt. B. consumer expectations. C. the stock of
More informationOVERVIEW. 1. This chapter presents a graphical approach to the determination of income. Two different graphical approaches are provided.
24 KEYNESIAN CROSS OVERVIEW 1. This chapter presents a graphical approach to the determination of income. Two different graphical approaches are provided. 2. Initially, both the consumption function and
More informationMacroeconomics: Principles, Applications, and Tools
Macroeconomics: Principles, Applications, and Tools NINTH EDITION Chapter 11 The Income- Expenditure Model Learning Objectives 11.1 Discuss the income-expenditure model. 11.2 Identify the two key components
More informationWebnote 228. Aggregate demand (AD) U-tube. Item hl sl Must Know Must know very well! Here are the details of what you need to know.
Webnote 228 2.2 Aggregate demand and Big Questions: 1. What factors cause changes (shifts + movements) in AS and AD? 2. What can the AS/AD model show in the macro economy?. Draw + explain the 2 schools
More informationEconomics 1012 A : Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Second Midterm Examination October 19, 2007
Economics 1012 A : Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Second Midterm Examination October 19, 2007 ================================================================================
More informationchapter: >> Income and Expenditure WHAT YOU WILL LEARN IN THIS CHAPTER Krugman/Wells The Multiplier: An Informal Introduction
chapter: 11 >> Income and Expenditure Krugman/Wells WHAT YOU WILL LEARN IN THIS CHAPTER The nature of the multiplier, which shows how initial changes in spending lead to further changes. The meaning of
More informationDisclaimer: This resource package is for studying purposes only EDUCATION
Disclaimer: This resource package is for studying purposes only EDUCATION Ch 26: Aggregate Demand and Aggregate Supply Aggregate Supply Purpose of aggregate supply: aggregate demand model is to explain
More informationTest Review. Question 1. Answer 1. Question 2. Answer 2. Question 3. Econ 719 Test Review Test 1 Chapters 1,2,8,3,4,7,9. Nominal GDP.
Question 1 Test Review Econ 719 Test Review Test 1 Chapters 1,2,8,3,4,7,9 All of the following variables have trended upwards over the last 40 years: Real GDP The price level The rate of inflation The
More informationLecture 7: Introduction to Economic Fluctuations, The Keynesian Cross
Macroeconomics 1 Lecture 7: Introduction to Economic Fluctuations, The Keynesian Cross Dr Gabriela Grotkowska Tomasz Gajderowicz Based on slides by Mankiw, Macoreconomcis, 5e Key questions What determines
More informationLecture 8: The Aggregate Expenditures Model Reference - Chapter 7
Lecture 8: The Aggregate Expenditures Model Reference - Chapter 7 VII. Changes in Equilibrium GDP and the Multiplier A. Equilibrium GDP changes in response to changes in the investment schedule or to changes
More informationFEEDBACK TUTORIAL LETTER
FEEDBACK TUTORIAL LETTER 2 nd SEMESTER 2017 ASSIGNMENT 1 INTERMEDIATE MACRO ECONOMICS IMA612S 1 FEEDBACK TUTORIAL LETTER ASSIGNMENT 1 SECTION A [20 marks] QUESTION 1 [20 marks, 2 marks each] Correct answer
More informationEconomics 102 Discussion Handout Week 13 Fall Introduction to Keynesian Model: Income and Expenditure. The Consumption Function
Economics 102 Discussion Handout Week 13 Fall 2017 Introduction to Keynesian Model: Income and Expenditure The Consumption Function The consumption function is an equation which describes how a household
More informationIntroduction. Learning Objectives. Chapter 11. Classical and Keynesian Macro Analyses
Chapter 11 Classical and Keynesian Macro Analyses Introduction The same basic pattern has repeated four times in recent U.S. history: 1973-1974, 1979-1980, 1990, and 2001. First, world oil prices jump.
More informationChapter 47: HL extension the Keynesian multiplier (2.3)
Chapter 47: HL extension the Keynesian multiplier (2.3) HL extensions Circular flow revisited Calculation of the multiplier (k) Diagrammatical illustration Evaluation of the multiplier The nature of the
More informationArchimedean Upper Conservatory Economics, October 2016
Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The marginal propensity to consume is equal to: A. the proportion of consumer spending as a function of
More informationa) Calculate the value of government savings (Sg). Is the government running a budget deficit or a budget surplus? Show how you got your answer.
Economics 102 Spring 2018 Answers to Homework #5 Due 5/3/2018 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework
More informationOVERVIEW. 4. Equilibrium occurs at the level of income where the inflows equal the outflows, I + G = S + T.
22 GOVERNMENT OVERVIEW 1. Both consumers and business pay taxes. For consumers, taxes have the impact of reducing the amount of income. they can spend. Income minus taxes is disposable income, which consumers
More information1. STUDENTS WILL BE ABLE TO DEFINE AND EXPLAIN THE CONCEPT OF FISCAL POLICY
LIGHTHOUSE CPA SOCIAL SCIENCES DEPARTMENT AP ECONOMICS STUDY GUIDE # 18 - FISCAL POLICY & MANAGEMENT CHAPTER LEARNING OBJECTIVES STUDENTS WILL BE ABLE TO DEFINE AND EXPLAIN THE CONCEPT OF FISCAL POLICY
More informationGovernment Budget and Fiscal Policy CHAPTER
Government Budget and Fiscal Policy 11 CHAPTER The National Budget The national budget is the annual statement of the government s expenditures and tax revenues. Fiscal policy is the use of the national
More informationAggregate Expenditure and Equilibrium Output. The Core of Macroeconomic Theory. Aggregate Output and Aggregate Income (Y)
C H A P T E R 8 Aggregate Expenditure and Equilibrium Output Prepared by: Fernando Quijano and Yvonn Quijano The Core of Macroeconomic Theory 2of 31 Aggregate Output and Aggregate Income (Y) Aggregate
More informationEXPENDITURE MULTIPLIERS
27 EXPENDITURE MULTIPLIERS After studying this chapter, you will be able to: Explain how expenditure plans are determined Explain how real GDP is determined at a fixed price level Explain the expenditure
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand
Chapter 32 The Influence of Monetary and Fiscal Policy on Aggregate Demand Test B 1. Of the effects that help explain why the U.S. aggregate demand curve slopes downward the a. wealth effect is most important
More informationThe Aggregate Expenditures Model
and the 9 The Aggregate s Model 9-1 Copyright 08 The McGraw-Hill Companies and the Chapter Objectives Understand How Economists Combine to Depict an Aggregate s Schedule for a Private Closed Economy. Three
More informationI. Learning Objectives II. The Income-Consumption and Income-Saving Relationships
I. Learning Objectives In this chapter students will learn: A. How changes in income affect consumption (and saving). B. About factors other than income that can affect consumption. C. How changes in real
More informationGovernment Expenditure
Fiscal Policy Part I Much fiscal policy is implemented, not through spending increases, but through tax credits and other so-called tax expenditures. The markets should respond to them as they do spending
More information2. THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME
Ph: 98851 25025/26 www.mastermindsindia.com 2. THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME Q.No.1. Define Keynes concepts of equilibrium aggregate Income and output in an economy. (A) The
More informationWhat is Macroeconomics?
Introduction ti to Macroeconomics MSc Induction Simon Hayley Simon.Hayley.1@city.ac.uk it What is Macroeconomics? Macroeconomics looks at the economy as a whole. It studies aggregate effects, such as:
More information9. ISLM model. Introduction to Economic Fluctuations CHAPTER 9. slide 0
9. ISLM model slide 0 In this lecture, you will learn an introduction to business cycle and aggregate demand the IS curve, and its relation to the Keynesian cross the loanable funds model the LM curve,
More informationmacro macroeconomics Aggregate Demand I N. Gregory Mankiw CHAPTER TEN PowerPoint Slides by Ron Cronovich fifth edition
macro CHAPTER TEN Aggregate Demand I macroeconomics fifth edition N. Gregory Mankiw PowerPoint Slides by Ron Cronovich 2002 Worth Publishers, all rights reserved In this chapter you will learn the IS curve,
More informationArchimedean Upper Conservatory Economics, November 2016 Quiz, Unit VI, Stabilization Policies
Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The federal budget tends to move toward _ as the economy. A. deficit; contracts B. deficit; expands C.
More informationDerived copy of The Expenditure-Output Model *
OpenStax-CNX module: m64665 1 Derived copy of The Expenditure-Output Model * Rick Reid Based on The Expenditure-Output Model by OpenStax This work is produced by OpenStax-CNX and licensed under the Creative
More informationLesson 12 The Influence of Monetary and Fiscal Policy on Aggregate Demand
Lesson 12 The Influence of Monetary and Fiscal Policy on Aggregate Demand Henan University of Technology Sino-British College Transfer Abroad Undergraduate Programme 0 In this lesson, look for the answers
More informationECON 3312 Macroeconomics Exam 2 Spring 2017 Prof. Crowder
ECON 3312 Macroeconomics Exam 2 Spring 2017 Prof. Crowder Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose the economy is currently
More informationEconomics 102 Homework #7 Due: December 7 th at the beginning of class
Economics 102 Homework #7 Due: December 7 th at the beginning of class Complete all of the problems. Please do not write your answers on this sheet. Show all of your work. 1. The economy starts in long
More informationAP Macroeconomics review. By: Maria Villasmil. Economis: The study of how people, firms, and government make decisions when faced with scarcity.
AP Macroeconomics review By: Maria Villasmil Economis: The study of how people, firms, and government make decisions when faced with scarcity. Factors of Production: 1)Land: natural resources 2) Labor:
More informationThe Government and Fiscal Policy
The and Fiscal Policy 9 Nothing in macroeconomics or microeconomics arouses as much controversy as the role of government in the economy. In microeconomics, the active presence of government in regulating
More information