ECO LECTURE 27 1 OKAY. WELL, WHAT WE WERE DOING LAST TIME, WE WERE TALKING ABOUT THIS KEYNESIAN MODEL OF THE MACROECONOMY.

Transcription

1 ECO LECTURE 27 1 OKAY. WELL, WHAT WE WERE DOING LAST TIME, WE WERE TALKING ABOUT THIS KEYNESIAN MODEL OF THE MACROECONOMY. IF YOU'LL REMEMBER, WE HAD A DIAGRAM THAT LOOKED LIKE THIS FOR TOTAL EXPENDITURES. BY THE WAY, WE JUST KEEP ACCUMULATING TERMS, DON'T WE, DOWN HERE ON THE HORIZONTAL AXIS. WE'RE TALKING ABOUT REAL GDP, WHETHER KEYNES USED THIS TERM OF Y. AND WE'VE ALREADY BEEN USING THESE OTHER TERMS, SO REALLY YOU CAN USE WHICHEVER YOU LIKE. DON'T LET IT CONFUSE YOU. WE'RE TALKING ABOUT EXPENDITURES HERE AND HERE IS TOTAL EXPENDITURES. OKAY. AND THIS TOTAL EXPENDITURE AMOUNT, THE CURVE STARTS OFF AT THIS POINT -- THE VERTICAL INTERCEPT, THEY CALL THAT. THAT IS C0. THAT IS AUTONOMOUS CONSUMPTION PLUS INVESTMENT SPENDING PLUS GOVERNMENT SPENDING PLUS NET EXPORTS. AND I'LL PUT A LITTLE ZERO NEXT TO EACH ONE OF THESE TO SHOW YOU THAT THIS IS AN AUTONOMOUS AMOUNT OF SPENDING. THIS IS TOTAL AUTONOMOUS SPENDING. AND THIS TERM "AUTONOMOUS," WE -- I USED IT LAST TIME BUT JUST TO REMIND YOU AGAIN. AUTONOMOUS SPENDING DOES NOT DEPEND ON THE LEVEL OF INCOME OR GDP. IT'S JUST A CERTAIN AMOUNT. IT'S INDEPENDENT. I COULD'VE USED THE TERM "INDEPENDENT" BUT AUTONOMOUS IS WHAT ECONOMISTS NORMALLY SAY. IT'S INDEPENDENT OF INCOME. INDEPENDENT OF INCOME OR Q. OKAY. AND THEN WHAT WE HAVE ABOVE THAT, ANY INCREASE IN SPENDING,

2 ECO LECTURE 27 2 THEY CALL THIS INDUCED SPENDING. IT'S INDUCED AS THE LEVEL OF GDP GOES UP OR INCOME GOES UP, THEN THE SPENDING LEVEL RISES. AND, IF YOU'LL REMEMBER, WE TALKED ABOUT THAT A LITTLE BIT LAST TIME. WE SAID THAT CONSUMPTION SPENDING HAS GOT AN AUTONOMOUS COMPONENT PLUS, IN ADDITION TO THE AUTONOMOUS -- I THINK I USED THAT LETTER Y LAST TIME, DIDN'T I? COULD USE A Y, COULD USE A Q. I'LL JUST PUT THAT ONE ABOVE. BUT THIS IS THE KEYNESIAN TERMINOLOGY AND HERE IS THE ONE THAT WE'VE BEEN USING UP UNTIL NOW. BUT ANYWAY, THIS IS THE INDUCED PART OF SPENDING. IT'S INDUCED BY GROWING LEVEL OF INCOME AND GROWING LEVEL OF PRODUCTION IN THE ECONOMY, AND THEN THERE'S A GREATER SPENDING AMOUNT. BUT THE POINT IS, WE'VE GOT AUTONOMOUS SPENDING AND THEN THE GROWTH THAT OCCURS IS -- WE USE THE TERM "INDUCED." OKAY. SO LET ME GET THAT OUT OF HERE. WE DID THAT MAINLY LAST TIME. WHAT WE DID AT THE VERY END OF THE HOUR IS I WAS TALKING ABOUT TOTAL PRODUCTION. AND, IF YOU'LL REMEMBER, TOTAL PRODUCTION -- REALLY THERE'S A VERY SIMPLE DIAGRAM FOR THAT. WHAT WE DO IN THIS DIAGRAM FOR TOTAL PRODUCTION, WE SAY -- AND HERE WE'RE MEASURING TOTAL PRODUCTION ON THE VERTICAL AXIS -- IF GDP IS A HUNDRED DOLLARS -- I DON'T KNOW IF I USED GDP OR Y OR Q LAST TIME. BUT IF GDP IS A HUNDRED DOLLARS, WHAT'S THE VALUE OF TOTAL PRODUCTION? AND THE ANSWER IS: IT'S ALSO A HUNDRED DOLLARS. SO WE CAN PUT A DOT RIGHT THERE. AND WE COULD DO THE SAME THING IF GDP IS TWO HUNDRED DOLLARS, TOTAL PRODUCTION

3 ECO LECTURE 27 3 IS TWO HUNDRED DOLLARS, AND SO FORTH. BUT ANYWAY, THE IDEA IS THAT THIS IS A FORTY-FIVE DEGREE LINE SHOWING TOTAL PRODUCTION. IT JUST SHOWS TOTAL PRODUCTION AT VARIOUS LEVELS OF GDP, REAL GDP. SO NOW WHAT WE WANT TO DO IS BRING THESE TOGETHER. SO LET ME PUT MY TOTAL PRODUCTION CURVE IN THE SAME DIAGRAM AS THE TOTAL EXPENDITURES CURVE. NOW, IN THE KEYNESIAN MODEL -- AND YOU'LL REMEMBER THAT KEYNES WROTE THIS STUFF IN HE WAS TALKING ABOUT A DEEP DEPRESSION CASE. THERE WERE PLENTY OF UNEMPLOYED RESOURCES. A COMPANY COULD JUST GO OUT AND HIRE WORKERS WITHOUT SAYING, "OH, MAN. THERE'S A SHORTAGE OF WORKERS. WHAT ARE WE GONNA DO? WE GOTTA PAY HIGHER WAGES. WE GOTTA OFFER 'EM A PACKAGE OF FRINGE BENEFITS THAT'S ATTRACTIVE." YOU DIDN'T HAVE TO SAY THAT IN THE 1930S. YOU JUST HAD TO SAY, "YEAH, WE'VE GOT A JOB" AND PEOPLE WOULD SHOW UP. AND SO WHAT KEYNES WAS ASSUMING HERE -- YOU SEE THAT TOTAL PRODUCTION CURVE JUST GO UP, UP, UP. HE WAS ASSUMING THAT NO MATTER HOW MUCH GDP WE WANTED, WE COULD PRODUCE MORE. AND SO THIS IS ASSUMING A PASSIVE AGGREGATE SUPPLY. IT WAS ASSUMING THAT AGGREGATE SUPPLY WILL JUST GROW HOWEVER MUCH YOU WANT IT TO. HOW WOULD IT DO THAT? JUST BY HIRING UNEMPLOYED RESOURCES. SO ANYWAY, HERE'S THE KEYNESIAN MODEL WITH THE -- AND, BY THE WAY, WE'VE ALREADY TALKED ABOUT THIS A LITTLE BIT MORE AND RIGHT NOW WE DON'T NEED TO GET INTO THE DISCUSSION OF AGGREGATE SUPPLY

4 ECO LECTURE 27 4 AND AGGREGATE DEMAND. BUT WE TALKED ABOUT THE HORIZONTAL AGGREGATE SUPPLY CURVE AS THE KEYNESIAN CASE. I DON'T THINK I USED THE TERM "KEYNESIAN." I SAID THAT'S THE DEPRESSION CASE. AND THAT'S ALL WE'RE SAYING HERE IS THIS PASSIVE AGGREGATE SUPPLY, IF AGGREGATE DEMAND GROWS, WE JUST END UP GETTING LARGER LEVELS OF REAL GDP. THAT'S ALL THAT KEYNES WAS ASSUMING. BUT THIS IS REALLY THE TOOLS HE USED, TOTAL EXPENDITURES AND TOTAL PRODUCTION, RATHER THAN AGGREGATE SUPPLY AND AGGREGATE DEMAND. ANYWAY, SO THIS IS THE DIAGRAM. THIS POINT RIGHT HERE -- AND, BY THE WAY, ALL THE ACTION IN ECONOMICS OCCURS WHERE TWO LINES CROSS. SO TWO LINES CROSS RIGHT HERE. THIS IS THE EQUILIBRIUM LEVEL OF REAL GDP IN THE KEYNESIAN MODEL. OKAY. AND, OF COURSE, WE'RE JUST USING LETTERS DOWN HERE BUT THIS WAS A CERTAIN AMOUNT. THIS WOULD BE LIKE ONE HUNDRED AND FORTY-TWO BILLION DOLLARS OR SOMETHING LIKE THAT, RIGHT? SO EQUILIBRIUM IN THE KEYNESIAN MODEL IS RIGHT THERE. NOW, SUPPOSE THIS IS EQUILIBRIUM, THIS QE, BUT SUPPOSE THAT WE ARE NOT THERE. SUPPOSE THAT -- AND LET'S PUT SOME NUMBERS IN HERE. LET'S SAY EQUILIBRIUM IS FIVE HUNDRED DOLLARS OR FIVE HUNDRED BILLION DOLLARS, OR WHATEVER YOU'D LIKE TO USE IN TERMS OF UNITS. BUT LET'S SAY THE EQUILIBRIUM IS FIVE HUNDRED. AND SUPPOSE THE ACTUAL, THE CURRENT GDP, IS THREE HUNDRED DOLLARS. CURRENT

5 ECO LECTURE 27 5 EQUILIBRIUM. WHAT ARE WE GONNA DO? HOW WILL WE FIX THIS? AND THE ANSWER IS: WE DON'T HAVE TO FIX ANYTHING. IF THE GDP IS ACTUALLY THREE HUNDRED DOLLARS BUT THE EQUILIBRIUM IS FIVE HUNDRED DOLLARS, HERE'S WHAT WILL HAPPEN. OKAY. TOTAL PRODUCTION WILL BE THIS AMOUNT. HOW MUCH IS THAT? WELL, THREE HUNDRED DOLLARS. OH, I'M SORRY. I'M CRAZY. THIS AMOUNT'S THREE HUNDRED DOLLARS, ON THE RED LINE. THREE HUNDRED DOLLARS. BUT TOTAL EXPENDITURES IS A GREATER AMOUNT, LET'S SAY FOUR HUNDRED DOLLARS. SO IF WE ARE AT A -- CURRENTLY AT A LOWER LEVEL OF GDP THAN THE EQUILIBRIUM IS, THEN WHAT HAPPENS IS TOTAL SPENDING OR TOTAL EXPENDITURES IS GREATER THAN TOTAL PRODUCTION. AND WHAT HAPPENS? WHAT IF SPENDING IS FOUR HUNDRED DOLLARS AND PRODUCTION IS THREE HUNDRED DOLLARS? WHAT HAPPENS? AND THE ANSWER IS: COMPANIES HAVE TO SUPPLY THOSE CUSTOMERS, THOSE BUYERS -- THEY HAVE TO SUPPLY THEM OUT OF INVENTORIES. AND SO A SITUATION BACK HERE TO THE LEFT, WHERE GDP IS BELOW EQUILIBRIUM, WHAT HAPPENS IS IS THAT THERE'S SALES FROM INVENTORIES. INVENTORIES ARE BEING DRAWN DOWN. AND WHEN INVENTORIES ARE BEING DRAWN DOWN, THAT'S WHEN THE COMPANIES -- THE MANAGERS OF THE COMPANIES, THEY SAY, "MAN, WE'RE NOT PRODUCING ENOUGH TO SUPPLY OUR CUSTOMERS. WE'RE GONNA HAVE TO STEP UP PRODUCTION, HAVE THE WORKERS STAY SOME OVERTIME, HIRE SOME MORE WORKERS," OR WHATEVER. BUT THE POINT IS, IF WE ARE AT A LOWER LEVEL OF GDP

6 ECO LECTURE 27 6 THAN THE EQUILIBRIUM IS, THEN INVENTORIES WILL BE DRAWN DOWN AND COMPANIES WILL START STEPPING UP PRODUCTION. THEY WILL HIRE MORE WORKERS. AND WHEN THEY DO THAT AND STEP UP PRODUCTION, GDP IS NO LONGER GONNA BE THREE HUNDRED DOLLARS. NOW THERE'S MORE JOBS, NOW THERE'S MORE PRODUCTION, NOW THERE'S MORE SALES. AND SO WHAT'S HAPPENING IS, IF WE START OFF AT A LEVEL OF GDP THAT IS NOT EQUILIBRIUM, THIS SITUATION CANNOT REMAIN. THIS SITUATION RIGHT HERE WHERE WE'RE NOT AT EQUILIBRIUM, THAT WILL -- IT BRINGS ABOUT AN ADJUSTMENT IN THE ECONOMY TO MOVE US UP TO THIS LEVEL, THIS EQUILIBRIUM LEVEL OF GDP. ARE YOU WITH ME ON THAT? SUPPOSE THAT WE STARTED OFF OVER HERE AT SOME POINT, EIGHT HUNDRED. THE EQUILIBRIUM LEVEL OF GDP IS FIVE HUNDRED BUT WE'RE ACTUALLY PRODUCING EIGHT HUNDRED DOLLARS WORTH OF GOODS AND SERVICES. HERE'S EIGHT HUNDRED UP HERE. BUT TOTAL EXPENDITURES IS ONLY, LET'S SAY, SIX HUNDRED AND FIFTY DOLLARS. THERE'S ONLY SIX HUNDRED AND FIFTY DOLLARS WORTH OF SPENDING TO BUY EIGHT HUNDRED DOLLARS WORTH OF MERCHANDISE. WHAT HAPPENS TO THIS EXTRA MERCHANDISE? AND THE ANSWER IS: THAT'S ADDED TO INVENTORIES. AND AFTER AWHILE OF ADDING TO INVENTORIES, THEN THE MANAGERS OF THOSE COMPANIES -- THEY SAY, "MAN, WHAT'RE WE GONNA DO WITH ALL THESE INVENTORIES? WE FILLED UP THE BACK ROOM, WE'RE FILLING UP WAREHOUSES. WE'RE GONNA HAVE TO DO SOMETHING." AND THAT'S WHEN THEY SAY TO SOME WORKERS, "HEY, WE'RE GONNA, LIKE,

7 ECO LECTURE 27 7 TAKE OFF FRIDAY NEXT WEEK AND TRY AND REDUCE PRODUCTION A LITTLE BIT, AND SELL OFF SOME OF THESE INVENTORIES." AND SO THEY START LAYING OFF WORKERS. THEY DON'T HIRE NEW WORKERS. AND SO WHAT HAPPENS IS, WHEN WORKERS ARE BEING LAID OFF AND NOT HIRED, THEY DON'T PRODUCE AS MUCH AND GDP STARTS GOING DOWN. SO IF WE ARE AT A GREATER LEVEL OF GDP THAN IS EQUILIBRIUM, THEN GDP WILL DECLINE. DECLINE TO WHAT? WELL, DECLINE TO EQUILIBRIUM. SO WHAT I'M SAYING TO YOU IS, WHERE THESE TWO CURVES CROSS, THERE'S NOT JUST EQUILIBRIUM BECAUSE I SAY SO OR KEYNES SAID SO. WHERE THOSE TWO CURVES CROSS, TOTAL PRODUCTION AND TOTAL EXPENDITURES, THAT'S EQUILIBRIUM BECAUSE IF WE START OFF AT ANY OTHER LEVEL THEN WE'VE GOT EITHER INVENTORIES BEING DRAWN DOWN OR INVENTORIES BEING BUILT UP IN AN UNDESIRABLE WAY AND MANAGERS OF COMPANIES ARE GONNA TAKE CORRECTIVE ACTION. AND IT'S THE CORRECTIVE ACTION -- THEY DON'T CARE ABOUT THE ECONOMY. THEY'RE NOT TAKING CORRECTIVE ACTION TO BRING THE ECONOMY TO EQUILIBRIUM. THEY'RE TAKING CORRECTIVE ACTION BECAUSE THEY'RE TRYING TO BRING THEIR OWN SITUATION TO THE -- YOU KNOW, IMPROVE THEIR OWN SITUATION. "WE DON'T WANT TO PRODUCE EXTRA INVENTORIES THAT WE CAN'T SELL" OR "WE DON'T WANT TO BE SELLING OUT OF INVENTORIES FOREVER. WE NEED TO GET THOSE INVENTORIES BACK UP TO THEIR NORMAL LEVEL." SO COMPANY MANAGERS, JUST TO SOLVE THEIR OWN SITUATION, WILL BRING THE ECONOMY TO AN EQUILIBRIUM.

8 ECO LECTURE 27 8 AND SO THAT POINT THERE, TOTAL PRODUCTION EQUALS TOTAL EXPENDITURES, THAT'S EQUILIBRIUM. WE ALWAYS MOVE TOWARD EQUILIBRIUM. AND, BY THE WAY, ON A DAILY BASIS -- AND I DON'T MEAN TO CONFUSE YOU WITH THIS, BUT ON A DAILY BASIS THIS TOTAL EXPENDITURES CURVE COULD BE SHIFTING AROUND. BOY, I JUST CAN'T GET THAT OFF. THE CURVE COULD BE SHIFTING AROUND AND EQUILIBRIUM COULD BE MOVING. AND SO I DON'T MEAN TO SAY THAT THERE'S AN EQUILIBRIUM JUST REMAINS THERE FOREVER. IF THE EQUILIBRIUM MOVES, THEN IT'S A MOVING TARGET. BUT ALWAYS THE TENDENCY IS TO FIND THAT EQUILIBRIUM BECAUSE WE ALWAYS HAVE THOSE INVENTORIES EITHER BEING BUILT UP OR BEING DRAWN DOWN BELOW UNDESIRABLE LEVELS. OKAY. WELL, LET ME ERASE JUST LITTLE BIT AND WE'LL TAKE ON ANOTHER LITTLE PROBLEM HERE. WE'LL DRAW THE SAME DIAGRAM. HERE'S THE FORTY-FIVE DEGREE LINE, TOTAL PRODUCTION. WE'LL DRAW A TOTAL EXPENDITURES CURVE. WE SEE WHERE THE EQUILIBRIUM IS. THIS IS -- WHAT DID WE SAY -- QRGDP OR Y. SO WE'VE GOT AN EQUILIBRIUM. LET'S LABEL THAT QE. HERE'S NATURAL REAL GDP OR THAT'S REAL GDP AT FULL EMPLOYMENT. WHAT DO WE CALL THIS SITUATION? WELL, WE'VE SEEN THIS SITUATION BEFORE BACK IN AGGREGATE SUPPLY, AGGREGATE DEMAND MATERIAL. BUT WHAT WE CALL THAT HERE IS A RECESSIONARY GAP. WHY A RECESSIONARY GAP? AND THE ANSWER IS: WE'VE GOT AN EQUILIBRIUM FOR THE ECONOMY AND THAT EQUILIBRIUM FOR THE ECONOMY IS AT A LOWER LEVEL OF GDP THAN FULL EMPLOYMENT WOULD BRING ABOUT. IF

9 ECO LECTURE 27 9 ALL THE WORKERS -- REALLY, WITH FULL EMPLOYMENT WE DON'T HAVE EVERYBODY WITH JOBS, OF COURSE. WE HAVE THE NATURAL RATE OF UNEMPLOYMENT THAT -- WHAT'D I SAY -- FROM FOUR AND A HALF TO FIVE AND A HALF PERCENT, ABOUT FIVE PERCENT UNEMPLOYMENT RATE. AND THAT THAT WOULD JUST BE FRICTIONAL UNEMPLOYMENT AND STRUCTURAL UNEMPLOYMENT, NO CYCLICAL UNEMPLOYMENT. SO ANYWAY, IF WE HAD FULL EMPLOYMENT IN THE SENSE I JUST DESCRIBED IT, THEN WE WOULD BE PRODUCING THIS LEVEL OF GDP, QN. BUT WE'RE PRODUCING A SMALLER AMOUNT AND WE CALL THAT A RECESSIONARY GAP. THINK BACK ON WHAT WE'VE TALKED ABOUT BEFORE. IF THERE'S A RECESSIONARY GAP AND WAGES ARE FLEXIBLE, WHAT WOULD HAPPEN IS THE SURPLUS OF WORKERS NOW WOULD COME IN AND SAY, "I'M WILLING TO WORK FOR LESS," WAGES WOULD GO DOWN, AGGREGATE SUPPLY CURVE SHIFTS. WE'VE ALREADY BEEN THROUGH THAT MATERIAL. BUT HERE KEYNES SAYS WAGES DON'T GO DOWN. AND IF WAGES DON'T GO DOWN, WE'RE JUST THERE. THIS IS WHAT KEYNES CALLED UNEMPLOYMENT EQUILIBRIUM. SO IN KEYNES' WAY OF SEEING THINGS, WHERE WAGES WON'T ADJUST AND INTEREST RATES WON'T ADJUST AND PRICES DON'T ADJUST AND SO FORTH, HE SAYS WE JUST FIND OURSELF AT THIS SPOT. HERE'S THE EQUILIBRIUM LEVEL OF GDP AND THAT'S THE END OF THE STORY. AND DO WE HAVE A RECESSION? YES, WE DO. DO WE HAVE CYCLICAL UNEMPLOYMENT? YES, WE DO. WILL THAT CURE ITSELF? NO, IT WON'T. NOW, WHAT I ALREADY SHOWED YOU AND WHAT WE JUST TALKED

10 ECO LECTURE ABOUT BEFORE IS, IF REAL GDP STARTED OFF AT SOME OTHER LEVEL -- LET'S SAY IT WAS A Q1 -- WE JUST SAW A MOMENT AGO HOW INVENTORIES WOULD BE DRAWN DOWN AND THAT WOULD INCREASE THE LEVEL OF PRODUCTION. BUT IT WOULD ONLY INCREASE IT UP TO THE EQUILIBRIUM POINT. IF SOMEHOW OR ANOTHER YOU COULD JUST PUT THE ECONOMY THERE, QN, AND JUST SAY, "OKAY, EVERYBODY'S GOT A JOB AND GDP IS OUT HERE AT QN," THEN THERE WOULD BE PRODUCTION OVER AND ABOVE PURCHASES, SPENDING. AND SO WE WOULD HAVE -- INVENTORY'S BEEN BUILT UP AND THEN WHAT WOULD HAPPEN IS COMPANIES WOULD LAY OFF THEIR WORKERS AND WE'D MOVE BACK TO QE. SO NOTHING THAT WE'VE SAID SO FAR TELLS US THAT WE'RE GONNA ELIMINATE THIS RECESSIONARY GAP. KEYNES SAID WE'RE NOT AND IN THE MODEL, WE'RE JUST NOT GOING TO. WE'RE GOING TO HAVE TO LIVE WITH THE RECESSION POTENTIALLY FOREVER. NOW, KEYNES HAD SUGGESTIONS ON WHAT TO DO TO ELIMINATE THIS. BUT WITHOUT TAKING HIS SUGGESTIONS, WE'RE STUCK RIGHT HERE AT THE EQUILIBRIUM POINT. FULL EMPLOYMENT IS AT A DIFFERENT LEVEL OF GDP AND THERE'S NO WAY TO GET THERE. LET'S DRAW A GRAPH, ANOTHER GRAPH. I WANT TO RELATE WHAT WE'VE BEEN TALKING ABOUT TO WHAT WE HAVE SEEN EARLIER WITH AGGREGATE SUPPLY AND AGGREGATE DEMAND. I'M SAYING THIS IS THE KEYNESIAN AGGREGATE SUPPLY CURVE. WE'LL GET AN AGGREGATE DEMAND CURVE, AD. LET'S GIVE THIS NOT JUST A LETTER QE. LET ME PUT A

11 ECO LECTURE NUMBER ON IT. THIS EQUILIBRIUM POINT -- WE'LL SAY THAT'S Q1, REAL GDP, AND RIGHT OVER HERE, THIS WOULD BE Q1. AND SO WE CAN -- AND OVER HERE SOMEPLACE IS QN. THAT'S NATURAL REAL GDP. I SHOULD PUT IT FURTHER OVER TO THE RIGHT. OKAY. NOW, LET ME SEE IF I CAN SHOW -- OH, LET'S SHIFT THIS CURVE. LET'S SHIFT THE TOTAL EXPENDITURE -- AND, BY THE WAY, THE FORTY-FIVE DEGREE LINE NEVER SHIFTS SO IT'S JUST THERE. IT REMAINS IN ONE SPOT. LET ME SHIFT THIS TOTAL EXPENDITURES CURVE UPWARD. IF YOU'LL REMEMBER, WE STARTED OFF WITH AUTONOMOUS SPENDING AND IT LOOKS LIKE AUTONOMOUS SPENDING HAS GONE UP, C0 PLUS I0 PLUS G0 PLUS XN. THAT'S LARGER NOW THAN IT WAS JUST A MOMENT AGO. OKAY. SO EITHER HOUSEHOLDS OR BUSINESSES OR THE GOVERNMENT OR FOREIGNERS, SOMEBODY'S SPENDING MORE IN THE UNITED STATES ECONOMY. THE EQUILIBRIUM -- WE GO NOW TO Q2. OKAY. THEN WE WOULD COME BACK OVER HERE AND WE SEE Q2. ALL WE'RE TALKING ABOUT IS AD2. I'M SAYING THIS INCREASE IN TOTAL EXPENDITURES WHICH INCREASES OUR EQUILIBRIUM GDP IN THIS DIAGRAM, THAT CORRESPONDS TO A SHIFT, A RIGHTWARD SHIFT, IN THE AGGREGATE DEMAND CURVE FROM AD -- I DIDN'T PUT A ONE THERE -- BUT AD1 TO AD2. NOW, IF YOU WILL THINK BACK WHEN WE FIRST DREW THE AGGREGATE DEMAND CURVE, I SAID, "OH, WHAT CAN SHIFT THE AGGREGATE DEMAND CURVE?" AND I SAID, "WELL, INCREASED CONSUMPTION SPENDING. INCREASED SPENDING BY BUSINESSES. INCREASED SPENDING BY

12 ECO LECTURE GOVERNMENT. INCREASES IN EXPORTS. DECREASES IN IMPORTS. CHANGES IN THE MONEY SUPPLY." BUT I WENT THROUGH A LIST OF THINGS THAT CAN SHIFT THAT CURVE. REALLY, ALL WE'RE DOING IN THIS CHAPTER -- AND I'M PUTTING THE DISCUSSION AROUND KEYNES AND THE 1930S AND ALL THAT KIND OF STUFF. BUT BASICALLY WHAT WE HAVE IS THIS: KEYNES IS SHOWING US HOW THAT IF CONSUMPTION SPENDING, AUTONOMOUS CONSUMPTION SPENDING, WOULD GO UP, THIS CURVE WOULD SHIFT UPWARD AND KEYNES' NEW EQUILIBRIUM AT Q2 JUST CORRESPONDS TO A RIGHTWARD SHIFT ON THE AGGREGATE DEMAND CURVE. AND IF THIS -- AND I'LL PUT SOME DOLLAR AMOUNTS IN HERE. IF THIS IS FOUR HUNDRED DOLLARS AND THIS IS FIVE HUNDRED DOLLARS, ALL THAT TELLS US IS THAT THE AGGREGATE DEMAND CURVE SHIFTS TO THE RIGHT BY ONE HUNDRED DOLLARS. THIS AMOUNT RIGHT HERE IS A HUNDRED DOLLARS SO THAT IS THE AMOUNT BY WHICH AGGREGATE DEMAND SHIFTS TO THE RIGHT IN THE EVENT CONSUMPTION OR INVESTMENT OR GOVERNMENT SPENDING OR NET EXPORTS GOES UP. LET ME SAY THIS IN A SLIGHTLY DIFFERENT WAY. WHEN KEYNES PUT THIS THING TOGETHER, HE SAID, "LOOK. THAT'S IT. THAT'S THE WHOLE WORLD. YOU DON'T NEED ANYTHING ELSE." KEYNES JUST SAID, "THAT'S THE STORY." MODERN DAY ECONOMISTS DON'T BELIEVE THAT. WHAT THEY SAY IS, "LOOK, KEYNES' STORY IS REALLY A STORY OF AGGREGATE DEMAND. KEYNES HAS SHOWN US EQUILIBRIUM BEGINNING, THE NEW EQUILIBRIUM, IF THERE'S AN INCREASE IN SPENDING AND IF THERE'S A PASSIVE SUPPLY.

13 ECO LECTURE THEN KEYNES HAS SHOWN US HOW THE ECONOMY REACTS. WELL, WE DON'T THINK A SUPPLY IS PASSIVE IN OUR ECONOMY AND SO WE WOULD WANT TO DRAW A DIFFERENT AGGREGATE SUPPLY CURVE. BUT IF SUPPLY WAS PASSIVE AND JUST RESPOND TO WHATEVER THE DEMAND IS, THEN KEYNES IS REALLY JUST SHOWING US HIS CHANGE IN EQUILIBRIUM IS JUST THE SHIFT, THE RIGHTWARD SHIFT, IN THE AGGREGATE DEMAND CURVE. WE'VE TAKEN KEYNES FROM SORT OF A TOTAL THIS IS ALL YOU NEED TO KNOW. WE HAVE REINTERPRETED THAT WHERE KEYNES IS NOW SHOWING US THE AMOUNT BY WHICH THE AGGREGATE DEMAND CURVE SHIFTS. AGAIN, DON'T GET TOO CAUGHT UP IN THIS BECAUSE WE'LL COME BACK TO IT LATER ON. BUT THERE IS A RELATIONSHIP BETWEEN THESE TWO. IF THIS CURVE SHIFTS UP -- AND WE JUST SAW THIS, BUT IF THE TOTAL EXPENDITURES CURVE SHIFTS UPWARD, THAT CORRESPONDS TO A RIGHTWARD SHIFT OR AN INCREASE IN AGGREGATE DEMAND. SO IN A SENSE THERE'S NOT MUCH -- WELL, I SHOULDN'T SAY THERE'S NOT MUCH NEW. KEYNES DID HIS STUFF BEFORE AGGREGATE DEMAND AND AGGREGATE SUPPLY WAS DONE, SO I GUESS IN A SENSE THIS IS NOT MUCH THAT'S NEW. BUT IN ANOTHER SENSE IT IS BECAUSE WE HAVE AN AGGREGATE SUPPLY CURVE NOWADAYS THAT DOESN'T LOOK LIKE THAT HORIZONTAL ONE KEYNES WAS TALKING ABOUT. I DON'T REALLY WANT TO EXTEND THAT OUT PAST NATURAL REAL GDP. ANY QUESTIONS ABOUT THIS? OKAY. WELL, NEXT TOPIC -- WELL, SAME TOPIC. NEXT WHATEVER -- SUBTOPIC. LET'S PICK A DOLLAR HERE, FIVE HUNDRED. WE'LL START OFF

14 ECO LECTURE WITH THAT EQUILIBRIUM LEVEL OF GDP. I'LL DRAW THAT A LITTLE MORE CAREFULLY. IT DIDN'T LOOK VERY STRAIGHT TO ME. MAYBE THAT'S BETTER. KIND OF GOT A LITTLE BUMP IN IT RIGHT THERE, DOESN'T IT? NORMALLY, I'M NOT SO CAREFUL WITH THOSE; BUT WHAT I'M GETTING READY TO SHOW YOU, I WANT A LITTLE BIT OF PRECISION IN THIS. LET'S DO THIS. LET'S SHIFT THAT TOTAL EXPENDITURES CURVE UPWARD BUT WE'LL SHIFT IT UPWARD BY JUST A SMALL AMOUNT -- AND LET'S KIND OF PAY ATTENTION WHEN WE SHIFT THAT UP. WE'LL JUST SHIFT IT UP BY THIS AMOUNT AND THEN DRAW A PARALLEL LINE SO AUTONOMOUS SPENDING HAS GONE UP, TE2, BY THIS AMOUNT. LET'S DRAW THE NEW EQUILIBRIUM. HERE'S WHAT I WANTED TO SHOW YOU. THIS AMOUNT RIGHT HERE, THESE FINGERS APART, WOULD GIVE US TO ABOUT THIS AMOUNT OF NEW GDP. BUT, GOSH, HERE'S WHAT WE NOTICE, IS THAT EVEN THOUGH TOTAL EXPENDITURES CURVE SHIFTED UP BY -- AND I'LL JUST PUT AN AMOUNT OF MONEY HERE. LET'S SAY THIS CURVE SHIFTED UP BY FIFTY DOLLARS, IF THAT'S FIFTY DOLLARS. I'M SAYING REAL GDP MAYBE WENT UP TO SIX HUNDRED. AGAIN, THIS IS JUST A MEASUREMENT ISSUE. IF WE MEASURE THIS SHIFT, YOU MIGHT THINK TOTAL EXPENDITURES IS UP BY FIFTY DOLLARS SO GDP OUGHT TO RISE BY FIFTY DOLLARS. BUT I'M SAYING IT DOESN'T WORK THAT WAY. IF GDP IS UP BY FIFTY -- I'M SORRY. IF TOTAL EXPENDITURES SHIFT UP BY FIFTY DOLLARS, GDP IN THIS PARTICULAR CASE WENT UP BY A HUNDRED DOLLARS. SHIFT IN TOTAL EXPENDITURES LESS THAN CHANGE IN GDP, EQUILIBRIUM GDP. AND THAT'S WHAT OUR DIAGRAM

15 ECO LECTURE IS SHOWING. THIS IS CALLED THE MULTIPLIER EFFECT OF SPENDING. YOU'LL HEAR ABOUT THESE MULTIPLIERS PROBABLY FOR THE REST OF YOUR LIFE. I DON'T KNOW IF YOU'VE HEARD ABOUT IT BEFORE BUT IF YOU HAVE OR HAVEN'T, YOU'RE GONNA HEAR ABOUT IT IN THE FUTURE. I TALK WITH PEOPLE EVERY ONCE IN AWHILE ON THE PHONE. THEY'LL CALL ME UP AND BEFORE YOU KNOW IT, THE CONVERSATION'S TURNED AROUND TO MULTIPLIERS. THERE'S A MULTIPLIER EFFECT. AND SOMETIMES THIS IS CALLED THE KEYNESIAN MULTIPLIER, ALTHOUGH HE DIDN'T DEVELOP THE IDEA. HE DIDN'T DEVELOP THE IDEA, BUT THE PEOPLE WHO DID REALLY DIDN'T DO A WHOLE LOT WITH THAT IDEA. AND KEYNES CAME ALONG AND SAID, "HEY, I NEED THAT MULTIPLIER FOR MY THEORY," AND SO HE WORKED THAT INTO THE DISCUSSION. OKAY. SO HOW'S THIS MULTIPLIER THING WORK? TOTAL SPENDING WENT UP BY FIFTY BUCKS. AND I DON'T CARE HOW YOU DRAW IT AS LONG -- IF YOU'VE GOT A FORTY-FIVE DEGREE LINE THERE EVERY SINGLE TIME, IF YOU SHIFT THIS CURVE UP BY LIKE ONE INCH, YOU'LL FIND THE EQUILIBRIUM IS TO THE RIGHT BY TWO INCHES OR SOME OTHER AMOUNT. WHERE'S THAT MULTIPLIER COME FROM? LET ME MAKE IT CLEAR ABOUT ONE THING RIGHT HERE. WHAT'S INCREASING IS AUTONOMOUS SPENDING. SO THIS IS AN INCREASE IN AUTONOMOUS SPENDING, MPC NOT CHANGED. THAT IS TO SAY THE SLOPE OF THE CURVE DIDN'T CHANGE. I TRIED TO MAKE THOSE TWO CURVES PARALLEL. THE SLOPE OF THE CURVE DOESN'T CHANGE. WE'RE

16 ECO LECTURE JUST INCREASING AUTONOMOUS SPENDING. LET'S TALK ABOUT HOW THIS WORKS. AND I'LL USE SOME SIMPLE EXAMPLES. LET'S MAKE THE MPC -- MPC EQUALS, OH, I DON'T -- LET'S SAY FIFTY PERCENT FOR THE MOMENT, JUST 'CAUSE THAT'S AN EASY NUMBER TO WORK WITH. HERE'S WHAT I'M SAYING WILL HAPPEN, AND FOLLOW ME HERE WITH THE NUMBERS. SUPPOSE THAT SOMEBODY -- WELL, LET'S SAY A FOREIGNER COMES TO THE UNITED STATES AND THEY SPEND -- AND WE START OFF AT EQUILIBRIUM, FIVE HUNDRED DOLLARS -- AND A FOREIGNER COMES TO THE UNITED STATES AND SPENDS FIFTY BUCKS. HERE IS FIFTY DOLLARS. GOES INTO -- OH, I DON'T KNOW -- THE GROCERY STORE AND BUYS FIFTY DOLLARS WORTH OF GROCERIES. HERE'S WHAT HAPPENED IMMEDIATELY, IS THAT THAT FIFTY DOLLARS COMES INTO THE CASH REGISTER OF THE GROCERY STORE OWNER. AND THE GROCERY STORE OWNER SAYS, "HEY, GREAT. MY REVENUES HAVE GONE UP BY FIFTY DOLLARS." THAT'S HIS GROSS INCOME. AND HE'S GOT TO PAY SOME OF THAT OUT TO WORKERS AND SOME OF IT OUT TO THE PEOPLE WHO SUPPLY VEGETABLES AND SOME OF IT OUT TO THE RANCHERS OR THE BUTCHERS OR WHATEVER THAT SUPPLY THE MEAT. BUT IF HE DOES PAY THAT OUT, THEN IT BECOMES THE INCOME OF THE RANCHER OR THE INCOME OF THE BUTCHER OR THE INCOME OF THE FARMER WHO GROWS VEGETABLES. SO WHEN THE FOREIGNER COMES TO THE UNITED STATES AND SPENDS THAT FIFTY DOLLARS, THE GROCER AND THE BUTCHER AND THE

17 ECO LECTURE RANCHER AND THE FARMER, ALL OF 'EM TOGETHER, THEIR INCOME GOES UP BY FIFTY DOLLARS. AND NOW OUR MULTIPLIER IS ONE. THE FOREIGNER SPENDS FIFTY DOLLARS IN THE UNITED STATES AND INCOME GOES UP BY FIFTY DOLLARS. BUT THE GROCERY STORE OWNER AND THE RANCHER AND THE WHOEVER ELSE I SAID -- BUTCHER AND THE FARMER, THEY ALL SAY COLLECTIVELY, "HEY, OUR INCOMES HAVE GONE UP BY FIFTY DOLLARS." AND THEN THEY SAY, "WELL, WITH THIS EXTRA FIFTY DOLLARS, I CAN AFFORD TO SPEND SOME MORE MONEY NOW." SO THEIR INCOMES HAVE RISEN AND THEY'RE GONNA SPEND, OUT OF THAT FIFTY DOLLARS, TWENTY- FIVE DOLLARS JUST TO GO OUT AND SAY, "WELL, SINCE I'M BETTER OFF THAN I USED TO BE, INCOME-WISE, I'M GONNA SPEND A LITTLE BIT MORE." WE HAD A CONSUMPTION FUNCTION, IF YOU REMEMBER, THAT LOOKED LIKE THIS. HERE'S Q AND C. AND A CONSUMPTION FUNCTION HAD A SLOPE TO IT. WE'RE SAYING HERE THE SLOPE IS FIFTY PERCENT OR POINT FIVE. ANYWAY, ALL WE'RE SAYING HERE IS THAT THE FARMER AND THE BUTCHER AND THE VEGETABLE FARMER AND EVERYBODY ELSE, THEIR INCOMES HAVE GONE UP BY FIFTY DOLLARS AS A RESULT OF THAT FIRST ROUND OF SPENDING AND I'M SAYING NOW THEY'RE GONNA SPEND SOME OF THAT FIFTY DOLLARS. HOW MUCH? FIFTY PERCENT OF IT. AND THAT'S -- MY ASSUMPTION HERE WAS THE MPC IS FIFTY PERCENT. SO OUT OF THAT FIFTY -- AND WHAT'LL THEY DO WITH THE OTHER FIFTY DOLLARS? SAVE IT. YOU REMEMBER ABOUT THE MPC PLUS THE MPS EQUALS ONE. A HUNDRED PERCENT OF THAT INCOME AND YOU SPEND FIFTY PERCENT. THAT MUST

18 ECO LECTURE MEAN YOU'RE SAVING THE OTHER FIFTY PERCENT. SO THE FARMER AND THE RANCHER AND THE BUTCHER AND THE GROCER, THEY'VE GOT AN EXTRA FIFTY DOLLARS WORTH OF INCOME TIMES THEIR FIFTY PERCENT MPC, THEY SPEND TWENTY-FIVE DOLLARS. WHERE DO THEY SPEND IT? OH, MAYBE ONE OF 'EM GOES AND GETS A HAIRCUT. ONE OF 'EM GOES TO A RESTAURANT HERE IN TOWN. ONE OF 'EM BUYS A BICYCLE FOR HIS KID -- OR USES PART OF THAT TO BUY THE BICYCLE. AND SO NOW THE TWENTY-FIVE DOLLARS WORTH OF SPENDING BECOMES INCOME OF SOMEBODY ELSE. I'D BETTER BE WRITING THESE DOWN. FIFTY DOLLARS WAS FROM THE INITIAL FOREIGNER SPENDING THE MONEY IN THE UNITED STATES WHICH BECAME INCOME. THEN THE PEOPLE WHO GOT THAT INCOME, THEY SPENT TWENTY-FIVE DOLLARS. AND SO THEY SPEND THEIR TWENTY-FIVE DOLLARS GETTING, AS I SAY, THE HAIRCUT AND THE EATING DINNER AND BUYING A BICYCLE. AND NOW THE PEOPLE WHO MANUFACTURE BICYCLES AND THE PEOPLE WHO CUT HAIR -- THOSE WOULD BE BARBERS -- AND THE PEOPLE WHO -- WHAT WAS MY OTHER EXAMPLE? -- THE OWNER OF THE RESTAURANT AND THE WAITERS AND THE WAITRESSES AND THE COOKS, THEY SAY, "WOW, LOOK. TWENTY-FIVE DOLLARS CAME IN. THERE'S OUR INCOME WENT UP BY TWENTY-FIVE BUCKS. AND SINCE OUR MPC IS FIFTY PERCENT, LET'S SPEND TWELVE DOLLARS AND A HALF." AND SO THEIR INCOME GOES UP -- SO THEY SPEND THE TWELVE AND A HALF AND THAT BECOMES INCOME FOR SOMEBODY ELSE. AND THAT SOMEBODY ELSE SAYS, "WOW, INCOME WENT UP BY TWELVE DOLLARS AND A HALF. LET'S SPEND

19 ECO LECTURE FIFTY PERCENT OF IT, SIX DOLLARS AND A QUARTER." WHAT'S THE NEXT ONE GONNA BE? THREE DOLLARS, TWELVE AND A HALF CENTS. AND THE NEXT ONE IS GONNA BE A DOLLAR FIFTY-SIX AND THREE-QUARTERS OR -- I DON'T EVEN KNOW. BUT THE POINT IS, IS THAT EVEN THOUGH THESE NUMBERS ARE GETTING SMALLER, EACH ONE'S FIFTY PERCENT OF THE ONE BEFORE. BUT THE POINT IS, IS THAT THAT ORIGINAL INJECTION OF SPENDING INTO THE ECONOMY OF FIFTY DOLLARS, THAT CREATED FIFTY PLUS TWENTY-FIVE PLUS TWELVE FIFTY PLUS SIX TWENTY-FIVE, AND THAT CREATED ADDITIONAL INCOME. AND WHAT DO ALL THESE ADD UP TO? IF WE JUST CARRIED THIS OUT TO THE LAST PENNY, WHAT WOULD IT ADD UP TO? AND THE ANSWER IS: A HUNDRED DOLLARS, JUST LIKE I TOLD YOU. THERE'S A MULTIPLIER EFFECT. LET ME GIVE THIS EXAMPLE OR CHANGE THE EXAMPLE SLIGHTLY AND TAKE YOU AS AN EXAMPLE. MAYBE YOU LIVE IN ST. LOUIS OR KANSAS CITY. YOU MOVE TO SPRINGFIELD. MAYBE YOU PAY -- OH, I DON'T KNOW -- YOUR LIVING COSTS, EVERYTHING LIKE THAT. MAYBE YOU'RE GONNA SPEND SEVEN THOUSAND DOLLARS A YEAR IN SPRINGFIELD. SO IN EFFECT YOU MOVE FROM ST. LOUIS OR KANSAS CITY TO SPRINGFIELD; YOU BRING SEVEN THOUSAND DOLLARS WITH YOU; YOU SCATTER IT AROUND TOWN. I THINK MAINLY IN THE NIGHTCLUBS AND BARS. BUT ANYWAY, YOU SPEND THE SEVEN THOUSAND DOLLARS AROUND TOWN. AND THE PEOPLE WHO RUN THE NIGHTCLUBS AND BARS AND THE

20 ECO LECTURE LANDLORDS AND EVERYBODY ELSE, THEY SAY, "WOW, SEVEN THOUSAND DOLLARS WORTH OF INCOME." AND THEN SOME OF 'EM GO OUT AND GET A HAIRCUT, SOME OF 'EM EAT DINNER AT THE RESTAURANT, AND SOME OF 'EM DO WHATEVER, BUT THEY SPEND THAT SEVEN THOUSAND DOLLARS WORTH OF INCOME, OR PART OF IT, AND THAT BECOMES INCOME FOR SOMEBODY ELSE. AND THEN THAT SOMEBODY ELSE SAYS, "WOW, I GOT SOME MORE INCOME," AND THEN THEY SPEND THAT AND IT BECOMES INCOME FOR SOMEONE ELSE. AND BEFORE YOU KNOW IT, EVEN THOUGH YOU BROUGHT SEVEN THOUSAND DOLLARS TO SPRINGFIELD, IT TURNS INTO MAYBE FIFTEEN THOUSAND DOLLARS WORTH OF INCOME IN SPRINGFIELD. SO SPRINGFIELD SAYS, "THANK YOU, STUDENTS." AS A MATTER OF FACT, I KNOW A LITTLE BIT ABOUT THIS. I'VE DONE SOMETHING CALLED ECONOMIC IMPACT STUDIES FOR SMS AND IT'S EXACTLY ABOUT THE THING I JUST DESCRIBED TO YOU. LET ME JUST MENTION TO YOU -- AND THIS HAS BEEN A COUPLE OF YEARS AGO. BUT STUDENTS WERE BRINGING -- LET ME MOVE THESE NUMBERS OUT OF THE WAY OR THESE MARKS. STUDENTS BROUGHT INTO SPRINGFIELD -- AND THIS HAS BEEN TWO OR THREE YEARS AGO, BUT -- A HUNDRED AND THIRTY-SIX POINT -- A HUNDRED AND THIRTY-NINE POINT FIVE MILLION DOLLARS. THAT IS TO SAY, AS A RESULT OF SMS'S STUDENTS BEING HERE, GOING TO SCHOOL, THAT IS RESPONSIBLE FOR AN EXTRA HUNDRED AND THIRTY-NINE POINT FIVE MILLION DOLLARS WORTH OF SPENDING IN THE SPRINGFIELD ECONOMY. THAT AUTONOMOUS SPENDING SHIFTS UP BY THAT MUCH. WE'VE GOT A

21 ECO LECTURE MULTIPLIER FOR STUDENTS OF TWO POINT TWO SIX FOUR, AND SO THE TOTAL IMPACT -- THAT IS TO SAY THIS TOTAL INCREASE IN SPRINGFIELD -- IT'S NOT GDP. WHAT WOULD IT BE? GCP, GROSS CITY PRODUCT? THREE HUNDRED AND FIFTEEN POINT NINE MILLION AS A RESULT OF YOU AND OTHER STUDENTS. REALLY, IT'S A RESULT OF SMS BEING HERE, ATTRACTING THE STUDENTS IN, KEEPING SOME STUDENTS FROM LEAVING TOWN WHO WOULD ORDINARILY HAVE GRADUATED FROM HIGH SCHOOL AND GONE TO COLLEGE ELSEWHERE. SMS IS HERE; THEY STAY HERE IN TOWN. BUT STUDENTS BEING HERE, GOING TO SCHOOL, IS RESPONSIBLE FOR SPRINGFIELD'S CONTRIBUTION TO REAL GDP GOING UP BY A LITTLE OVER THREE HUNDRED AND FIFTEEN -- ALMOST THREE HUNDRED AND SIXTEEN MILLION DOLLARS. SO THESE THINGS -- WHAT WE'RE TALKING ABOUT NOW, IT HAS SOME PRACTICAL APPLICATION. NOW, THIS IS A GOOD MODEL. THIS IS -- IN MY OPINION, THIS IS A GOOD MODEL FOR LOOKING AT SPRINGFIELD BECAUSE SPRINGFIELD REALLY KIND OF DOES HAVE AN AGGREGATE SUPPLY CURVE THAT LOOKS LIKE THIS. WE'RE NOT IN A DEPRESSION. BUT THE POINT IS THAT IF THERE'S MORE AND MORE STUDENTS MOVE INTO SPRINGFIELD AND START SPENDING MONEY, PEOPLE WILL MOVE TO SPRINGFIELD FROM SURROUNDING COMMUNITIES TO GET JOBS. WE'LL JUST HAVE LOTS AND LOTS OF JOBS. AND WE DON'T HAVE A LIMIT ON THE NUMBER OF WORKERS THAT CAN, YOU KNOW, GET JOBS HERE IN SPRINGFIELD. WHY? WELL, BECAUSE, AS I SAY, THEY CAN JUST MOVE INTO TOWN AND GO TO WORK.

22 ECO LECTURE THERE'S A LIMIT ON FOR THE UNITED STATES ECONOMY WHERE THAT WE CAN'T JUST KEEP ON ADDING MORE AND MORE AND MORE JOBS, BUT IN A LOCAL ECONOMY YOU CAN. SO WHAT I'M SAYING IS, THERE IS SORT OF A HORIZONTAL AGGREGATE SUPPLY CURVE FOR SPRINGFIELD AND I'M SAYING STUDENTS ARE RESPONSIBLE FOR SHIFTING THAT CURVE OUT TO THE RIGHT. SO ARE FACULTY, SO ARE THE UNIVERSITY'S EXPENDITURES ON BUILDINGS SUCH AS WHEN IT BUILT THIS ONE, AND SO FORTH. THE TOTAL IMPACT OF ALL SMS -- STUDENTS, FACULTY, MONEY THAT WOULD NOT BE SPENT IN SPRINGFIELD IF NOT FOR SMS BEING HERE, THE TOTAL -- I WON'T GO INTO ALL THE DETAILS HERE. BUT THE TOTAL IMPACT IS DOWN HERE ON GDP FIVE HUNDRED AND SEVENTEEN MILLION DOLLARS. SO STUDENTS ARE RESPONSIBLE FOR MORE THAN -- WELL OVER HALF OF IT, ABOUT SIXTY PERCENT, SIXTY-FIVE PERCENT. OKAY. SO AGAIN, WHAT I'VE REALLY BEEN TALKING ABOUT HERE, ALTHOUGH I'M ILLUSTRATING IT WITH THIS SMS CASE -- WHAT I'M REALLY ILLUSTRATING IS THE FACT THAT AN INCREASE IN AUTONOMOUS SPENDING OF WHATEVER THE AMOUNT IS, ONE DOLLAR, IT WILL -- AFTER IT'S SPENT AND RESPENT AND RESPENT AGAIN, AND BY THE RECIPIENTS, IT WILL ACTUALLY CAUSE TOTAL INCOMES IN THE ECONOMY AND GDP IN THE ECONOMY TO RISE BY A MULTIPLE OF THAT DOLLAR. HOW MUCH? HOW MUCH IS THE MULTIPLE? NOT IN THIS SMS CASE, BUT JUST IN GENERAL WE'VE GOT A FORMULA FOR THAT MULTIPLIER AND THE MULTIPLIER IS ONE OVER ONE MINUS THE MPC.

23 ECO LECTURE SO IF I TELL YOU THE MULTIPLIER -- I'M SORRY. IF I TELL YOU THE MPC, YOU OUGHT TO KNOW HOW MUCH THE MULTIPLIER IS. IF I TELL YOU MPC EQUALS TWO -- TWO -- POINT FIVE, YOU REMEMBER WHAT THE MPC IS, CHANGE IN CONSUMPTION SPENDING DIVIDED BY CHANGE IN INCOME, IT'S THE FRACTION OF EACH DOLLAR'S WORTH OF INCOME THAT GETS SPENT, INCREMENTAL DOLLAR. IF THE MCP IS POINT FIVE, THEN THE MULTIPLIER IS EQUAL TO TWO. ONE OVER ONE MINUS POINT FIVE EQUALS ONE OVER POINT FIVE EQUALS TWO. LET'S SAY THE MPC IS POINT SEVEN FIVE. EACH INCREMENTAL DOLLAR'S WORTH OF INCOME, WE SPEND THREE-QUARTERS OF IT. THEN THIS MULTIPLIER IS ONE OVER ONE MINUS POINT SEVEN FIVE EQUALS ONE OVER POINT TWO FIVE EQUALS FOUR. LET'S DO ONE OR TWO MORE. YOU'LL NEED TO DO THESE ON THE EXAM, SO DON'T BECOME TOO COMPLACENT ABOUT THESE. LET'S SAY THE MPC IS POINT NINE. THEN THE MULTIPLIER IS EQUAL TO ONE OVER ONE MINUS POINT NINE EQUALS ONE OVER POINT ONE EQUALS TEN. THIS MULTIPLIER EFFECT APPLIES TO ANYTHING THAT SHIFTS THIS CURVE UP RIGHT HERE. IT APPLIES TO SHIFTS IN AUTONOMOUS SPENDING. AND WHEN YOU GET THAT CHANGE IN AUTONOMOUS SPENDING, THEN WE MULTIPLY BY THE MULTIPLIER AND THAT TELLS US THE CHANGE IN EQUILIBRIUM GDP. WHY DON'T I JUST NOT DO ANY MORE TODAY OTHER THAN SUGGEST TO YOU THAT OVER THE NEXT FEW DAYS YOU MAKE UP A FEW OF THESE PROBLEMS FOR YOURSELF AND GET SOME EXPERIENCE DOING THE

24 ECO LECTURE CALCULATIONS, AND THAT WAY TESTS WILL BE A LITTLE BIT EASIER. SO LONG. I'LL SEE YOU NEXT TIME.