Download The Keynesian Cross and the Production Possibilities Frontier

Let’s
The intersection
let investment
of the
spending
consumption
be zero
initially
equationand
andthen
the increase
45-degree
it line
in increments
represents
200,
an income-expenditure
keeping track of theequilibrium
relationshiponly
between
if investment
consumption
spendingand
is zero.
investment.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
When I = 0; C = 600.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
When I = 200; C = 1000.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
When I = 400; C = 1400.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
When I = 600; C = 1800.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
When I = 800; C = 2200.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
When I = 1000; C = 2600.
Let’s let investment spending be zero
initially and then increase it in increments
200, keeping track of the relationship
between consumption and investment.
C = 200 + 2/3Y and Y = C + I
C = 200 + 2/3 (C + I) = 200 + 2/3C + 2/3I
1/3C = 200 + 2/3I
C = 600 + 2I
27. We can see that, for a wholly private
economy, the equilibrium condition of
income-expenditure analysis
(Y = C + I), together with the consumption
equation (C = a + bY), implies that
consumption and investment
a. move in opposite directions.
b. move in the same direction.
c. move towards full employment.
d. move away from equilibrium.
28. If "a" in the equation C = a + bY is 30
and the marginal propensity to consume is
0.6, then, for a wholly private economy,
the equilibrium level of consumption is
related to the level of investment by the
equation
a. C = 75 + 1.5 I.
b. C = 75 - 1.5 I.
c. C = 50 + 0.4 I.
d. C = 50 - 0.4 I.
So, C and I are positively related. There’s
no trading off one against the other.
Is this last point (I=1000;C=2600) below,
at, or above full employment?
Imposing a PPF, which Keynes would
not be inclined to do, shows that the
economy is “overheated.” So, let’s
reduce investment until we have full
employment without inflation.
The Keynesians would
show full-employment as a
labor market that clears at
the “going” wage rate.
The Keynesians would
show full-employment as a
labor market that clears at
the “going” wage rate.
We can also show the supply and demand for
loanable funds and market-clearing rate on interest.
Keynesian theory
focuses on income
and expenditures.
Keynesian theory
focuses on income
and expenditures.
Let investment fall
because of a waning
of animal spirits.
Let investment fall
because of a waning
of animal spirits.
What happens?
Let investment fall
because of a waning
of animal spirits.
What happens?
The economy crashes.
Watch the waning
and the crash
again—this time
with an eye on the
PPF diagram.
Watch the waning
and the crash
again—this time
with an eye on the
PPF diagram.
Watch the waning
and the crash
again—this time
with an eye on the
PPF diagram.
Now let’s do it again,
keeping track this
time with the help of
the loanable-funds
market.
With the loanable-funds market in play, a decrease
in investment shows up it two ways.
Now watch the crash, which entails a decrease in
income and hence a decrease in saving.
Now watch the crash, which entails a decrease in
income and hence a decrease in saving.
Keynes’s paradox of thrift can be illustrated by
allowing saving to increase.
Note that the “a” in C=a+bY has decreased, which
means that the demand constraint will shift down.
Income falls and, with it, saving—undoing the
initial increase in saving. Hence the paradox.
Keynes’s Paradox of Thrift
Trying to save more doesn’t result in
more saving.
It results, instead, in less income out of
which to save.
To resolve the paradox, let’s outfit the model with a
Hayekian triangle and corresponding labor markets.
To resolve the paradox, let’s outfit the model with a
Hayekian triangle and corresponding labor markets.
To resolve the paradox, let’s outfit the model with a
Hayekian triangle and corresponding labor markets.
Let’s show the paradox again—this time keeping
track of it with the capital-based graphics.
Let’s show the paradox again—this time keeping
track of it with the capital-based graphics.
Notice that the triangle changes in size but not in
shape. There’s no interest-rate effect here.
Finally, let’s do it again, allowing for an interest-rate
effect and resolving the paradox.
Finally, let’s do it again, allowing for an interest-rate
effect and resolving the paradox.
Finally, let’s do it again, allowing for an interest-rate
effect and resolving the paradox.