Transcript Unemployment & Circle

Unemployment and Circular
Flow
Given data:
Good Weights
u90 u95 u00
A
10 5
20
B
5 10
5
C
20 10
10
Prices
p90 p95
2 3
4 4
3 4
p00
4
4
3
What is wPI(90,95,00,95)?
Note the first two numbers 90,95 are the weight years
And the order does not matter. The last two numbers
are the price years--order matters: 00 is top and 95 is
base and is bottom number
Solution
Good
Weights
Prices
u90 u95 u00 p90 p95 p00
A
10 5
20
2 3 4
B
5 10
5
4 4 4
C
20 10
10
3 2 3
Write
I II
B T
What is wPI(90,95,00,95)?
VB(I,00)=40+20+60=120 VB(II,00)=20+40+30=90
VB(I,95)=30+20+40=90 VB(II,95)=15+40+20=75
sPI(I,00,95)=(120/90)x100=133.33
sPI(II,00,95)=(90/75)x100=120
wPI(90,95,00,95)=(133.33x120)1/2
=126.5
Unemployment
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Most important Presidential reelection var
Measurement varies among countries
US
Employed
Unemployed
Not in workforce
Adjectives: Frictional and Structural
Consumption Function
• Keynes: not controversial
• C is linear function of income
• C = a + bGDP
– Where GDP = NI in simplest model
• Econometric estimation
– In class a and b will be given to you
– b is the marginal propensity to consume MPC
Simplest Model
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Y = C + I identity
C = a + bY consumption function
Y GDP, C consumption, I investment
a and b given constants
2 eqn in 3 unk Y,C, and I. We solve for Y
and C given I
Model Solution
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Y=C+I
C = a + bY
Substitute into top
Y = a + bY + I
Y - bY = a + I or (1-b)Y = a + I
Y = k(a + I) where k = 1/(1-b) multiplier
Sample Problem
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Given Y = C + I and C = 200 + 0.8Y
If I = 600 what is Y?
k = 1/(1 - 0.8) = 5
Y = 5(200 + 600) = 4000
If I increases from 600 to 800 or  = 200
What is Y? Y = k  (See notes)
Therefore Y = 1000
Practice
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Given Y = C + I and C = 400 + 0.75Y
If I =800 what is Y?
If I decreases from 800 to 600
What is Y?