Transcript Lecture 13
Constructing Multipliers Lecture 13 Dr. Jennifer P. Wissink ©2016 Jennifer P. Wissink, all rights reserved. March 14, 2016 Prelim 1 Epilogue Scores will be posted to CMS later today! See Blackboard for important messages once there. About any low scores: Stay calm and do NOT panic. Remember our grading rubric... you can bank on those MEL and i>clicker points, so try to relax. Go re-read the syllabus. TAs will hand back exams in sections and during their office hours based on what you checked on the front of your exam paper. If you did not check anything, see the head TA at office hours or here in lecture. Re-grades: Wissink and only Wissink deals with ANY re-grade issues. Even if the re-grade is simply adding points wrong, it goes via Wissink (so we can make sure the master spread sheet gets updated). Fill out the form (see Bb) and turn your exam and form into me during class ASAP. – REGRADE DEADLINE: Monday March 21 IN CLASS! Wissink’s OH today – moved to 2-4pm for today only. Frugal Economy Equilibrium Y* Review Aggregate output/income ≡ Y Aggregate desired expenditure = AEd(Y) = C(Y) + Id Equilibrium Y* where: Y = AEd(Y), or Y* = C (Y*) + Id SUPPOSE: Y > [C(Y) + Id] – – – – Actual aggregate output/income > aggregate desired expenditure So inventory investment is greater than planned So actual investment is greater than planned investment So something will change! SUPPOSE [C(Y) + Id] > Y – – – – Aggregate desired expenditure > actual aggregate output/income So inventory investment is smaller than planned So actual investment is less than planned investment So something will change! Frugal Economy Equilibrium Y* Graphed Macro Model Comparative Statics Suppose something that we are holding FIXED in the background changes, like… – subsistence level of consumption. – exogenous amount of desired investment. Would throw us out of equilibrium. We’d get a new Y*. How would the new Y* compare to the old Y*? A great comparative statics question! A macro multiplier question. Comparative Statics and “Multipliers” A multiplier(K) is the change in the equilibrium level of output (Y*), given a change in some exogenous/autonomous variable. It’s always: K AV Y * AutonomousVariable For our simple frugal economy we could have two autonomous changes and thereby the following: – An investment multiplier – A (subsistence) consumption multiplier Example: The Investment Multiplier Do the math... suppose C = 100+.75Y and Id=25 Example: The Investment Multiplier Do the series... suppose C=100+.75Y and Id=25 Example: The Investment Multiplier Do the graph... suppose C = 100+.75Y and Id=25 $AEd 45° $Y The Frugal Economy: General Multiplier Analysis Use of Multipliers: A Typical Question Suppose you know the following: – – – – Y*0 is currently $5,000 You’d like Y* to be $6,000 KI = 4 So, how much would desired investment have to increase from current levels to generate the Y* you want? The Size of the Multiplier in the Real World The size of the “Keynesian” AEd multiplier in the U.S. economy is often said to be about 2.0 (based on CFO Chapter 8, 11th edition). For example, a sustained increase in autonomous spending of $10 billion into the U.S. economy can be expected to raise real GDP over time by $20 billion. The Paradox of Thrift So… you think saving is good for the economy. But... when households become concerned about the future and decide to save more, the corresponding decrease in consumption leads to a drop in spending and a DROP in Y*. The paradox: Households end up consuming less, but they have not saved any more. The Paradox of Thrift $S, $Id 0 $Y From The New York Times February 15, 2009, Economic View Go Ahead and Save. Let the Government Spend. By ROBERT H. FRANK, http://www.nytimes.com/2009/02/15/business/economy/15view.html?_r=1&sq=robert%20frank&st =cse&scp=5&pagewanted=print A PSYCHOTHERAPIST friend says that several of her patients are fretting about whether they have an obligation to help the nation spend its way out of the current downturn. Some of them are having a hard time making ends meet, she said, yet are reluctant to cut back for fear they would cause the economy to slide further. The role of consumers has had considerable attention in the press because the economy desperately needs additional spending right now. But it is not — and should not be — the responsibility of middle-income families to provide that spending. If financially comfortable families want to support their favorite restaurants during hard times by eating out more often, who could object? But if others are inclined to pay down their bills or save a little more, concerns about the economy shouldn’t stop them. Government is in a far better position to provide immediate economic stimulus. It is in fact the only player that can significantly alter the economy’s short-run trajectory. In a recession, as in ordinary times, a family’s first economic priority should be to spend its income prudently. The “paradox of thrift,” a celebrated chestnut first described by John Maynard Keynes in the 1930s, has been the source of much confusion about how saving affects the health of the economy. Intuition suggests, correctly, that if any one family saves an extra $100 this year, its bank balance at year’s end will be higher by that amount. According to the paradox of thrift, however, if everyone tries to save more at once, total savings will actually fall. How could that happen? The explanation begins with the observation that, to save more, a family must spend less. Because consumption spending is part of national income, which in turn is the total amount spent by everyone in the economy, more saving causes national income to fall. Income will actually fall by more than the initial decline in consumption, because when one family spends less, other families earn less and respond by cutting their own consumption. When the dust settles, the story concludes, each family ends up saving less than before. From The New York Times January 11, 2009, Economic View Is Government Spending Too Easy an Answer? By N. GREGORY MANKIW http://www.nytimes.com/2009/01/11/business/economy/11view.html?pagewanted=print WHEN the Obama administration finally unveils its proposal to get the economy on the road to recovery, the centerpiece is likely to be a huge increase in government spending. But there are ample reasons to doubt whether this is what the economy needs. Arguably, the seeds of the spending proposal can be found in the classic textbook by Paul A. Samuelson, “Economics.” First published in 1948, the book and others like it dominated college courses in introductory economics for the next half-century. It is a fair bet that much of the Obama team started learning how the economy works through Mr. Samuelson’s eyes. Most notably, Lawrence H. Summers, the new head of the National Economic Council, is Mr. Samuelson’s nephew. Written in the shadow of the Great Depression and World War II, Mr. Samuelson’s text brought the insights of John Maynard Keynes to the masses. A main focus was how to avoid, or at least mitigate, the recurring slumps in economic activity. “When, and if, the next great depression comes along,” Mr. Samuelson wrote on the first page of the first edition, “any one of us may be completely unemployed — without income or prospects.” He added, “It is not too much to say that the widespread creation of dictatorships and the resulting World War II stemmed in no small measure from the world’s failure to meet this basic economic problem adequately.” Economic downturns, Mr. Keynes and Mr. Samuelson taught us, occur when the aggregate demand for goods and services is insufficient. The solution, they said, was for the government to provide demand when the private sector would not. Recent calls for increased infrastructure spending fit well with this textbook theory.