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1. 2. 3. 4. 5. 6. 7. 8.
Simple Keynesian model Aggregate expenditures Equilibrium Consumption function Autonomous spending Autonomous spending multiplier Government fiscal policy Automatic stabilizers
Intermediate Macroeconomics
2. Aggregate Expenditures
AE = C + I + G + NX
C = Consumption I = Private Domestic Investment G = Government Spending NX = Net Exports (Exports - Imports)
Intermediate Macroeconomics
Intermediate Macroeconomics
3. Equilibrium
4. Consumption Function
Y = AE
Undesired Inventory Build: Undesired Inventory Draw: where, Y > AE Y < AE
C = C0 + c ( Y
Co = Autonomous consumption c = Marginal propensity to consume out of income (MPC) Y = Income
Intermediate Macroeconomics
Intermediate Macroeconomics
4. Consumption Function
C = C0 + c ( Y
5000 Desired Consumption 4000 3000 2000 1000 0 0 1000 2000 3000 4000 5000 Income
Dissaving
5. Autonomous Spending
Spending that is independent of any other variable (e.g., income, prices, interest rate) C0 = Autonomous Consumption I0 = Autonomous Investment G0 = Autonomous Government Spending Autonomous (adj.) - self-governing
Intermediate Macroeconomics
2500 2500
Saving
C0 = 500
c = MPC = slope of consumption function = (2500 - 500) / (2500 - 0) Intermediate Macroeconomics = 0.8
6. Autonomous Spending Multiplier Step 1. Aggregate expenditures restated Given: AE = C + I + G + NX C = C0 + c ( Y I = I0 G = G0 NX = 0 Step 1. Substitute into equation for aggregate expenditures: AE = C0 + c ( Y + I0 + G0
Intermediate Macroeconomics
Step 1. Restate aggregate expenditures Step 2. State the equilibrium condition Step 3. Substitute aggregate expenditures from Step 1 into equilibrium condition in Step 2 Step 4. Solve for Y (national income)
Intermediate Macroeconomics
AE = (C0 + I0 + G0) + c ( Y
5000 4000 3000 2000 1000 0 0 1000 2000 3000 4000 5000 6000 7000
Income
Step 2. State the Equilibrium Condition: Y = AE Step 3. Substitute AE from Step 1 into Step 2: Y = C0 + c ( Y + I0 + G0 or Y = (C0 + I0 + G0) + c ( Y
Intermediate Macroeconomics
5000
C0 + I0 + G0 + NX = 1000 MPC = slope of consumption line = slope aggregate expenditure line = (5000 - 1000) / (5000 - 0) = 0.8
Intermediate Macroeconomics
6. Autonomous Spending Multiplier Change in Y = Multiplier ( Change in C0, I0,or G0 Equilibrium model solution:
Y=
Intermediate Macroeconomics
Intermediate Macroeconomics
7. Government Fiscal Policy Given Equations: AE = C + I + G + NX C = C0 + c ( YD I = I0, G = G0, NX = 0 YD = Y - t ( Y - T0 + TR YD = disposable income t ( Y = income tax revenues T0 = lump sum tax TR = govt transfer payments
Intermediate Macroeconomics
AE = C + I + G + NX = C0 + c ( YD + I0 + G0 = C0 + c ( (Y - t ( Y - T0 + TR) + I0 + G0 = C0 + I0 + G0 + c ( Y - c ( t ( Y - c ( T0 + c ( TR
Intermediate Macroeconomics
Step 2. State the Equilibrium Condition: Y = AE Step 3. Substitute AE from Step 1 into Step 2: Y = C0 + I0 + G0 + c ( Y - c ( t ( Y - c ( T0 + c ( TR
Intermediate Macroeconomics
Intermediate Macroeconomics
No Income Tax
(t = 0.0)
Income Tax
(t = 0.3)
Intermediate Macroeconomics
Intermediate Macroeconomics
7. Government Fiscal Policy Balanced budget multiplier Spending multiplier (assume no income tax)
1 1c
8. Automatic Stabilizers
Economy Moves Into Recession Inflation Desired Policy Government Spending Taxes Actual Outcomes G - Defense Spending TR - Social Security Benefits TR Unemployment Comp. TA Lump Sum Tax t(Y - Income Tax Receipts n/c n/c Increase n/c Decrease n/c n/c Decrease n/c Increase Increase Decrease Decrease Increase
Intermediate Macroeconomics