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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 • • • • • • • 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 • • • • • • 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 • • • • • • 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 • • • • • • • 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 • • • • 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?