Transcript Slide 1

Macro-Market-Micro
AGEC 430
Macroeconomics of Agriculture
Spring 2010
Let’s Look at a Simplified
Closed Macroeconomy
Consumption
Ce
Ac
Y-T
Investment
Consumption
Ce
ie
Ac
Y-T
Ie
Ai
Investment
Consumption
Aggregate Product
Ad
Ce
ie
As
Pe
Ac
Y-T
Ie
Ai
Ye Ypot
Remember that aggregate demand includes both consumption and
investment expenditures as well as government spending and net
exports.
Investment
Consumption
Aggregate Product
Ad
Ce
ie
As
Pe
Ac
Y-T
Ie
Labor Market
Ld
Ls
wre
Le
Lmax
Ai
Ye Ypot
Investment
Consumption
Aggregate Product
Ad
Ce
ie
As
Pe
Ac
Y-T
Ie
Labor Market
Ld
Phillips Curve
Ls
UR
wre
Le
Ai
Lmax
%ΔP
Ye Ypot
Investment
Consumption
Aggregate Product
Ad
Ce
ie
As
Pe
Ac
Y-T
Ie
Labor Market
Ld
Ye Ypot
Phillips Curve
Ls
These relationships
represent a
simplified “real”
macroeconomy
UR
wre
Le
Ai
Lmax
%ΔP
Policy Linkages
Money Market
Md
Ms
ie
Qm
Policy Linkages
Money Market
Md
Tax Revenue
Ms
T
ie
h
Qm
Yt-1
Policy Linkages
Money Market
Md
Tax Revenue
Budget Deficit
Ms
G
ie
Qm
T
T
h
h
Yt-1
Yt-1
Policy Linkages
Money Market
Md
Tax Revenue
Budget Deficit
Ms
G
ie
Qm
National debt
NDt = NDt-1 + Gt - Tt
T
T
h
h
Yt-1
Yt-1
Macro to Market Linkage
Aggregate Product
Ad
Wheat Market
Dw
As
Pwe
Pe
Ye Ypot
Qwe
Sw
Market to Micro Linkage
Aggregate Product
Ad
Wheat Market
Dw
As
Ye Ypot
Sw
MC
MR
Pwe
Pwe
Pe
Wheat Producer
Qwe
AC
qwe
Market to Micro Linkage
Aggregate Product
Ad
Wheat Market
Dw
As
Sw
Ye Ypot
MC
MR
Pwe
Pwe
Pe
Wheat Producer
Qwe
Is the wheat producer making a profit?
AC
qwe
Market to Micro Linkage
Wheat Producer
Average profit is the difference
between MR and AC at qwe
MC
MR
Pwe
AC
qwe
Is the wheat producer making a profit?
Total profit therefore is equal to
average profit times qwe
Market to Micro Linkage
Wheat Producer
Average profit is the difference
between MR and AC at qwe
MC
MR
Pwe
AC
qwe
Is the wheat producer making a profit?
Total profit therefore is equal to
average profit times qwe
Any Questions?
Effects of Expansionary
Monetary Policy
Money Market
Md
Ms
Action:
The Federal Reserve buys
government bonds.
ie
Qm
Money Market
Md
Ms
ie
Qm
Effect:
This action expands the
money supply, shifting the
money supply curve to the
right, and lowers the market
interest rate.
Investment
ie
1
Ie
Ai
Let’s look at the effect on the “real”
economy.
Investment
Aggregate Product
As
Ad
2
ie
1
Ie
Ai
Pe
Ye Ypot
Investment
Aggregate Product
As
Ad
2
ie
1
Consumption
Ce
Pe
Ac
Ie
Ai
Ye Ypot
We defined inflation as follows:
%ΔP = a1(%Δwr) + a2(Y / YPOT)
Is there demand pull inflation in this economy? Why?
3
Y-T
Investment
Aggregate Product
As
Ad
2
ie
Consumption
Ce
Pe
1
Ac
Ie
Ye Ypot
Ai
3
Y-T
Labor Market
Ld
Ls
4
We defined inflation as follows:
wre
%ΔP = a1(%Δwr) + a2(Y / YPOT)
Le
Lmax
Is there cost push inflation in this economy? Why?
What Does The Phillips Curve
Therefore Look Like in This
Economy?
Phillips Curve
???
UR
%ΔP
Phillips Curve
UR
Phillips Curve
UR
%ΔP
Since no inflation possible
%ΔP
Thus we can ignore the Phillips Curve for now.
Investment
Aggregate Product
As
Ad
2
ie
Consumption
Ce
Pe
1
Ac
Ie
Ye Ypot
Ai
Labor Market
Ld
Y-T
Wheat Market
Ls
Dw
Sw
5
4
PWe
wre
Le
3
Lmax
QWe
Increase in wages and
disposable personal
income increases the
demand for wheat as
long as the income
elasticity > zero.
Investment
Aggregate Product
As
Ad
2
ie
Consumption
Ce
Pe
1
Ac
Ie
Ye Ypot
Ai
Labor Market
Ld
Y-T
Wheat Market
Ls
Dw
3
Wheat Producer
Sw
5
6
MC
4
Le
Lmax
MR
PWe
PWe
wre
QWe
AC
qwe
Impact on Farm Financial Statements
Farm Income Statement:
Farm revenue
Farm expenses
Farm taxable income
Income taxes
Net farm income
Up
Up slightly
Up
No change
Up
6
MC
MR
PWe
AC
qwe
Impact on Farm Financial Statements
Farm Income Statement:
Farm revenue
Farm expenses
Farm taxable income
Income taxes
Net farm income
Up
Up slightly
Up
No change
Up
Remember taxes assumed
to be based on Yt-1 and not
current income.
Impact on Farm Financial Statements
Farm Income Statement:
Farm revenue
Farm expenses
Farm taxable income
Income taxes
Net farm income
Up
Up slightly
Up
No change
Up
Farm Balance Sheet: 1/
Current assets
Up
Land values 2/
Up
Fixed assets
No change
Total assets
Up
Current liabilities
Fixed liabilities
Net worth
Total debt and equity
1/ Assumes a current market value balance sheet.
2/ Capitalized land values rise due to higher farm income.
Up (accrued taxes)
No change
Up
Up
Impact on Farm Financial Statements
Farm Income Statement:
Farm revenue
Farm expenses
Farm taxable income
Income taxes
Net farm income
Up
Up slightly
Up
No change
Up
Farm Balance Sheet: 1/
Current assets
Up
Land values 2/
Up
Fixed assets
No change
Total assets
Up
Current liabilities
Fixed liabilities
Net worth
Total debt and equity
Up (accrued taxes)
No change
Up
Up
1/ Assumes a current market value balance sheet.
2/ Capitalized land values fall due to lower farm income.
Conclusion: Expansionary monetary policy good for farmers.
Any Questions?
Effects of Contractionary
Fiscal Policy
Tax Revenue
Action:
The government raises
the income tax rate.
T
h
Yt-1
Tax Revenue
Budget Deficit
Effect:
Raises tax revenue and
lowers the budget deficit
in the short run since
tax revenue based on
last year’s income.
G
T
T
h
h
Yt-1
Yt-1
Consumption
Ce
Ac
1
Y-T
Let’s look at the effect on the “real”
Economy again.
Investment
Consumption
Ce
ie
2
Ac
1
Y-T
Ie
Ai
Investment
Consumption
Aggregate Product
As
Ad
Ce
3
ie
2
Ac
1
Y-T
Ie
Ai
Pe
Ye Ypot
Investment
Consumption
Aggregate Product
As
Ad
Ce
3
ie
2
Ac
1
Y-T
Ie
Labor Market
Ld
Ls
4
wre
Le
Lmax
Ai
Pe
Ye Ypot
Investment
Consumption
Aggregate Product
As
Ad
Ce
3
ie
2
Ac
1
Y-T
Ie
Labor Market
Ld
Ai
Ye Ypot
Wheat Market
Ls
Dw
Sw
5
4
PWe
wre
Le
Pe
Lmax
QWe
Decrease in wages and
disposable personal
income decreases the
demand for wheat as
long as the income
elasticity > zero.
Investment
Consumption
Aggregate Product
As
Ad
Ce
3
ie
2
Ac
1
Y-T
Ie
Labor Market
Ld
Pe
Ye Ypot
Ai
Wheat Market
Ls
Dw
Sw
5
4
Wheat Producer
PWe
6
MC
PWe
wre
Le
Lmax
MR
AC
QWe
qwe
Impact on Farm Financial Statements
Farm Income Statement:
Farm revenue
Farm expenses
Farm taxable income
Income taxes
Net farm income
Down
Down slightly
Down
Down
Down
PWe
6
MC
MR
AC
qwe
Impact on Farm Financial Statements
Farm Income Statement:
Farm revenue
Farm expenses
Farm taxable income
Income taxes
Net farm income
Down
Down slightly
Down
Down
Down
Last year’s income taxed at a
higher rate.
Impact on Farm Financial Statements
Farm Income Statement:
Farm revenue
Farm expenses
Farm taxable income
Income taxes
Net farm income
Down
Down slightly
Down
Down
Down
Farm Balance Sheet: 1/
Current assets
Down
Land values 2/
Down
Other assets
No change
Total assets
Down
Current liabilities
Down (accrued taxes)
Fixed liabilities
No change
Net worth
Down
Total debt and equity Down
1/ Assumes a current market value balance sheet.
2/ Capitalized land values fall due to lower farm income.
Impact on Farm Financial Statements
Farm Income Statement:
Farm revenue
Farm expenses
Farm taxable income
Income taxes
Net farm income
Down
Down slightly
Down
Down
Down
Farm Balance Sheet: 1/
Current assets
Down
Land values 2/
Down
Other assets
No change
Total assets
Down
Current liabilities
Down (accrued taxes)
Fixed liabilities
No change
Net worth
Down
Total debt and equity Down
1/ Assumes a current market value balance sheet.
2/ Capitalized land values fall due to lower farm income.
Conclusion: Contractionary fiscal policy not good for farmers.
Any Questions?
Know These Relationships