Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Economics for Managers University of Management and Technology 1901 North Fort Myer Drive Arlington, VA 22209 USA Phone: (703) 516-0035 Fax: (703) 516-0985 Website: www.umtweb.edu Page 1 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Chapter 12 Macroeconomic Models and Analysis Mastrianna, F.V. Basic Economics (14th ed.) © 2007 Thomson South-Western. ISBN 9780324400700 Page 2 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Copyright Warning This presentation is the intellectual property of the textbook publisher Thomson South-Western 2007. Students are hereby advised that they may not copy or distribute this work to any third party Page 3 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Learning Objectives Upon successfully completing this module, the student should be able to: Explain briefly the aggregate supply and aggregate demand framework Explain the major ideas of classical economic doctrine and understand Say’s law Define aggregate expenditure and name its components Demonstrate an equilibrium position according to Keynesian analysis Explain the relationship between the multiplier and changes in income resulting from a change in aggregate expenditures Discuss the various options concerning the shape of the aggregate supply curve Distinguish between the monetarist and new classical theories Describe the supply-side approach to expanding national output and income Page 4 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Aggregate Demand (AD) Curve The total amount of real output that buyers in an economy will purchase at various alternate price levels Real output Output adjusted for changes in the price level Page 5 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Aggregate Demand (AD) Curve Reasons for negative slope Price level increases increases in nominal income increases in income taxes Higher price levels in the U.S. relative to price levels in the rest of the world discourage exports and stimulate imports A higher price level reduces the real purchasing power of assets or wealth that people own Higher price levels lead to higher interest rates declines in borrowing by businesses and spending by consumers Page 6 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Aggregate Supply (AS) Curve A plot of the various quantities of total real output that producers will offer for sale at various price levels The shape of the aggregate supply curve is a matter of much debate among economists The difference between what AS looks like in the short run and what it looks like in the long run, and about how long the short run and the long run are Page 7 of 43 Chapter 12, ECON125 Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Aggregate Supply (AS) and Aggregate Demand (AD) Curves P AS The intersection of AS and AD determine the equilibrium level of average prices and total output in the economy P1 AD 0 Y1 Page 8 of 43 Chapter 12, ECON125 Y Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Classical Analysis The most critical classical assumption is that the economy can be in equilibrium only at full employment If not, according to classical analysis, the situation will correct itself The market economy is self-regulating Competition helps maintain or move the economy toward equilibrium If unsold inventory exists, prices decrease All saving is invested because of interest rates are forced down Competition between workers eliminates unemployment Page 9 of 43 Chapter 12, ECON125 Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Classical Analysis Say’s Law The classical view that if supply creates its own demand, then all goods offered for sale must be purchased Alternatively, production creates supply and also creates an equivalent amount of monetary purchasing power (demand) Because all income is spent, supply and demand are always equal Page 10 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Keynesian Analysis Economy can get stuck at equilibrium with significant levels of unemployment No automatic forces operate to solve this problems Economy cannot take care of itself the government has a responsibility to pull the economy out of a recession Also known as income-expenditure analysis Page 11 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Keynesian Analysis Purchasing power does not automatically become demand for goods and services Total demand for goods and services may be less than the supply of goods produced Focused on aggregate expenditure Aggregate expenditures (AE) Total planned spending for goods and services by consumers, businesses, government, and foreign buyers Page 12 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Keynesian Analysis Total output—and therefore total employment and income—is determined by AE The income derived from the output of goods and services, in turn, determines AE Page 13 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT A Two-Sector Economy There are two sectors of AE: Consumption Investment Page 14 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Consumption The largest component of spending The amount consumers spend depends primarily on their disposable income Consumption function Any equation, table, or graph that shows the relationship between the income that consumers receive (disposable income) and the amount they plan to spend on currently produced final output Page 15 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Marginal Propensity to Consume (MPC) The ratio of the change in consumption spending to the change in disposable or after-tax income The slope of the consumption function 0 < MPC < 1 Page 16 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Saving Keynes challenged the classical economic belief that planned saving depended entirely on the interest rate Keynes believed that consumers’ saving habits were based primarily on their income Saving function The relationship between the amount of disposable income consumers receive and the amount they save Page 17 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Marginal Propensity to Save (MPS) The ratio of the change in planned saving to the change in disposable income The slope of the saving function MPC + MPS = 1 Page 18 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Investment Classical economists believed that the most important determinant of planned investment spending was the interest rate Keynes argued that profit expectations are the most important single determinant of planned investment spending by business The Keynesian model treats planned investment as having a given value that is determined by factors outside of the model Page 19 of 43 Chapter 12, ECON125 Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Expenditure Consumption and Savings Functions C = consumption function Saving C2 C1 Planned consumption = total income and total output 45o Saving 0 Y1 Y2 Real Income S = saving function S2 0 Saving Y1 Y2 Page 20 of 43 Chapter 12, ECON125 Real Income Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Equilibrium Output when Planned I Equals Planned S Expenditure Equilibrium AE equals total output Constant level of planned investment 0 45o Y1 Y2 Y3 Y4 Saving and Investment C+I C Real Income S I 0 I Y1 Y2 Y3 Y4 Page 21 of 43 Chapter 12, ECON125 Real Income Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Equilibrium Output when Planned I Equals Planned S Expenditure C+I C 0 45o Saving and Investment Y1 Y3 Real Income S I 0 I Y1 Y3 Real Income Page 22 of 43 Chapter 12, ECON125 At any output level below Y3, for example Y1, planned investment > planned saving production and output would increase as firms expanded supply to meet the excess demand Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Equilibrium Output when Planned I Equals Planned S Expenditure C+I C 0 45o Saving and Investment Y3 Y4 Real Income S I 0 I Y3 Y4 Real Income Page 23 of 43 Chapter 12, ECON125 At any output level above Y3, for example Y4, planned investment < planned saving production and output would decrease Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Government Spending and Taxes Government spending (G) Causes increases in aggregate expenditures injection Assumed to be determined by factors other than income Taxes (T) Causes decreases in aggregate expenditures leakage An increase (decrease) in T causes the saving function to shift up (down) by the amount of the tax increase Page 24 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Taxes Incorporated into the aggregate expenditure model through the consumption function An increase in taxes reduces disposable income consumption function shifts downward A fall in taxes increases disposable income consumption function shifts upwards Page 25 of 43 Chapter 12, ECON125 Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Net Exports Exports (X) Purchases by foreigners Add to aggregate expenditures injection Imports (IM), spending of consumers, businesses, and government on foreign output Reduces aggregate expenditures leakage Both are assumed to be determined by factors outside the model Net exports (X – IM) can be regarded as a given constant Page 26 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Complete AE relationship AE ≡ C + I + G + (X – IM) Equilibrium AE equals total output Planned leakages = planned injections Below equilibrium, injections > leakages income and output rise Above equilibrium, injections < leakages income and output fall Page 27 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Equilibrium with Unemployment Keynes argued that there may be no automatic adjustment toward the full-employment level of output Various measures must be used to stimulate the economy Increased consumption Increased net exports Increased investment Increased government spending Discretionary government spending Page 28 of 43 Chapter 12, ECON125 Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Discretionary Government Spending Used to Increase Income and Output Expenditure C + I + G2 + (X – IM) C + I + G1 + (X – IM) C If discretionary government 45o Y1 Y* Page 29 of 43 Chapter 12, ECON125 spending were used to fill the vertical gap Y* between total output and AE at full employment injections equal leakages equilibrium occurs at a higher level of output, income, and full Real Income employment Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Equilibrium with Inflation If AE continues to increase once full employment has been attained, prices will be pushed upward as buyers bid against each other for the use of scarce resources To combat inflationary tendencies Government spending can be decreased Taxes can be increased Interest rates can be pushed upward Page 30 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT The Multiplier Effect The relationship between a change in aggregate expenditure and the resulting larger change in national output or income k = [1/(1 – MPC)] = (1/MPS) The multiplier is related directly to the MPC and inversely to the MPS Page 31 of 43 Chapter 12, ECON125 Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Multiplier Effect Example Net Increase In Investment $20 A B C D E F G Increased Income $20.00 16.00 12.80 10.20 8.20 6.60 5.20 etc. $100.00 Increased Spending (Spend 80%) $16.00 12.80 10.20 8.20 6.60 5.20 4.20 etc. $80.00 Page 32 of 43 Chapter 12, ECON125 Savings (Save 20%) $4.00 3.20 2.60 2.00 1.60 1.40 1.00 etc. $20.00 Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Deriving an Aggregate Demand Curve from Aggregate Expenditure Curves Expenditure AE3 AE2 AE1 The AE function is drawn for a given price level a unique equilibrium output AE1 is associated with P1, AE2 with P2, and AE3 with P3 where P1 > P2 > P3 45o 0 P Y1 Y2 Y3 Y The AD curve is derived by plotting the various P and Y combinations derived from the set of AE curves P1 P2 P3 AD 0 Y1 Y2 Y3 Y Page 33 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Aggregate Expenditure and Aggregate Demand Both the AE curve and the AD curve represent demand for total output AE shows the relationship between demand and income AD shows the relationship between demand and price level Page 34 of 43 Chapter 12, ECON125 Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Classical and Keynesian Views of Aggregate Supply P AS P P0 AS AD2 AD2 AD1 AD1 0 Y* Y Equilibrium always occurs at the level of output associated with full employment AS is vertical at full employment AD determines the price level 0 Y In the short term, equilibrium could be reached at an output level involving less than full employment Keynes suggested a horizontal AS curve because of the unemployed resources Page 35 of 43 Chapter 12, ECON125 Visit UMT online at www.umtweb.edu Version 090825 © 2007 Thomson South-Western © 2009 UMT Aggregate Demand and Composite Aggregate Supply P AS AD5 AD4 AD3 AD2 AD1 0 Y1 Y2 Y* Page 36 of 43 Chapter 12, ECON125 Y Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT The Monetarist School Both wages and prices are highly flexible and adjust quickly to supply and demand conditions The economy automatically tends toward fullemployment equilibrium Government intervention is not needed and worsens the effects of the business cycle Focus on the role of money as being the most important variable in determining aggregate demand Page 37 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT The Monetarist School Changes in monetary policy can have a powerful impact on the economy in the short run The long-run effects are inflationary because increases in the money supply do not increase employment or output, only the price level Ineffectiveness of monetary policy stem from time lags Page 38 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Time Lags Recognizing that a problem exists in aggregate demand and formulating a policy approach to correct it The extensive amount of time required for the policy to work its way through the economy Result: Because of these two time lags, the economy may actually be in a completely different situation than it was when the problem was first recognized Page 39 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Monetarist Policy Monetary and fiscal authorities should follow a fixed set of rules The government should balance its budget over the business cycle The Federal Reserve should maintain a constant rate of growth in the money supply, regardless of interest rates, the level of economic activity, or any other economic variables Page 40 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT The New Classical School The economy is essentially stable and price and wage flexibility are self-correcting properties Active monetary policy has no place in the economy because of rational expectations Rational expectations People learn from their past experiences and with access to vast amounts of economic information available, are able to correctly foresee the future They will correctly anticipate changes in monetary and fiscal policy Page 41 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Supply-Side Economics The use of tax cuts for the purpose of encouraging greater saving, investment, and work effort on the part of individuals in order to stimulate economic growth Shifts funds from the public into the private sector Expansion in national output and income Page 42 of 43 Chapter 12, ECON125 Version 090825 Visit UMT online at www.umtweb.edu © 2007 Thomson South-Western © 2009 UMT Supply-Side vs. Demand-Side Tax Cut Page 43 of 43 Chapter 12, ECON125