Transcript Document

also known as the...
Macro – Unit 3 – part 8
2 primary models that represent
our macro-economy:
(1) The AS/AD model – which
provides us with expected
outcomes in general in terms of
increases/decreases
(2) The Keynesian model /
Multiplier model which can make
numeric predictions.
How much can $50 buy in this economy?
$50
$50
$50
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$50
$50
Let’s say you choose
the pedicure.
The $50 you spend there
is taken by the pedicurist
to the Chinese restaurant.
$50
$50
$50
$50
Then the chef at the Chinese
restaurant takes that same
$50 to buy an I-Pod Shuffle.
This is the idea behind the Multiplier
Model …. $1.00 in expenditures can
increase total income for your
economy by $4.00
Supply
Resources
$
$ $
$
$
Households
Demand
Resources
$
Land, Labor, Capital,
Entrepreneurship
$
$
$ $
Firms
$
$ $
$
$
Demand
G&S
$
$
G&S
$$
$
Supply
G&S
A.
Let’s examine...Aggregate expenditures - total amount of spending on goods &
services in the economy.
Consists of...
1)
Autonomous expenditures (AEO) –
expenditures that do not vary with
income. We would have spent this
money even if we had no income.
2)
Induced expenditures –
expenditures that change as Y
changes.
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Aggregate Expenditures
Function:
Aggregate
autonomous
induced
=
+
Expenditure expenditure expenditure
s
s
s
...represented
mathematically....
AE
= AEO
+
mpeY
B. We consumers have an mpe -
marginal propensity to expend –
mpc - marginal propensity to
consume.
For each additional dollar we get we can …
or
or
1. Let’s say Anne gets $100 for her birthday
and she tends to spend around ¾ of all she
gets.
.75
Her mpe = .____
$75
Her new expenditures will be $_____
2.mpe = .2
Y = $500
What will be the change in agg expend?
$100
3. mpc = .5 Y = $1000
4. mpc = .8 Y = -$800
What will be the change in
aggregate expenditures?
What will be the change in
aggregate expenditures?
$500
-$640
C.
The marginal propensity to expend is an
aggregation of the components of
aggregate expenditures.
What are the components ....what are our
expenditures?
C
I
G
X
____
+ ____
+ ____
+ ( ____
-M
____
)
There is a marginal propensity for each of
these...mp to import...mp to invest...etc.
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C
I
G
X
____
+ ____
+ ____
+ ( ____
-M
____
)
The mp of which component is the most
important to determine the mpe?
mpc = marginal propensity to consume (b/c
consumption is the biggest part of
expenditures)
mps = marginal propensity to save
mpc + mps = 1
because when people get
additional income they either
__________
spend
it orsave
________ it.
Practice
5. mpc = .7 Y = $100
How much of the additional income will the
consumer spend? save? Spend $70 Save $30
6. mps = .25 Y = $4000
How much of the additional income will the
consumer spend?
Spend $3,000
7. mpc = .9 Y = -$1000
What will consumer do?
Consumer will cut
spending by $900
D.
Knowing the mpc allows you to calculate
what will be the GDP or equilibrium Y for an
economy
Multiplier Equation
equilibrium Y = Multiplier x Autonomous
Expenditures
Expenditures Multiplier – tells us how much
income will change in response to a change in
autonomous expenditures
Multiplier =
__1___
(1 - mpe)
If mpe = .5, what is the
multiplier? 2
Multiplier Equation
equilibrium Y = Multiplier x Autonomous
Expenditures
If the multiplier = 2, autonomous
expenditures = $7,000, what is $14,000
equilibrium Y?
Practice
8. mpc = .75, autonomous expenditures =
$10,000, what is equilibrium Y?$40,000
9. mps = .2, autonomous expenditures =
$5,000, what is equilibrium Y?
$25,000
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D.
There are multiplier equations for all
possible types of spending in an economy ….
Investment Multiplier – for
when there’s new spending on
investment such as new factory,
machinery, etc.
Government Spending Multiplier
– for when there’s new gov’t
spending such as new bridge,
school, etc.
=
=
__1___
(1 - mpc)
__1___
(1 - mpc)
Tax Multiplier – for when
there’s a change in taxes
__mpc__
= -_
Note …
mps
(1) The tax multiplier is always negative.
(2) The gov’t spending multiplier & investment
multiplier are equal.
(3) The tax multiplier has a weaker impact
than the gov’t spending multiplier.
10. So if you’re told the government would like
to increase spending but not shift
AD _____ thus
inflation
causing
____________ ….
Then would the
gov’t need to
PL
LRAS
increase taxes or
decrease taxes to
SRAS
counteract the
increase in gov’t
spending?
Increase taxes so
PL0
AD1 cosumers will have
AD
YF Y 1
Q=realGDP=Y
less disposable
income
And should the gov’t increase taxes by ….
… the same amount
… more than the increase in
gov’t spending
PL
… less than the increase?
LRAS
SRAS
PL0
AD1
AD
YF Y 1
Q=realGDP=Y
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E.
Keynesian Model does not make any
consideration of PL; prices are considered
constant.
There are often questions “what would
Keynesian model say about..?” Your answer
should not contain PL or inflation.
1. An important assumption in Keynesian theory is
that
Which choices can we
automatically?
(A) Prices are rigid downwardrule
and out
decreases
in
aggregate demand will lead to an increase in
unemployment.
(B) Prices rigidity will cause downturns in the economy
to auto-correct.
(C) When aggregate demand is inadequate, prices will
fall.
(D) When interest rates are high, many businesses
borrow money.
(E) Changes in the money supply are the major cause
of changes in real output and price level
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