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
Steady-state economy wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Business cycle wikipedia , lookup
Interest rate wikipedia , lookup
Fei–Ranis model of economic growth wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Keynesian economics wikipedia , lookup
The Classical Long-Run Model © 2003 South-Western/Thomson Learning Macroeconomic Models: Classical Versus Keynesian Classical Model A macroeconomic model that explains the long-run behavior of the economy, assuming that all markets clear Macroeconomic Models: Classical Versus Keynesian Keynesian Model Keynes and his followers argued that, while the classical model might explain the economy’s operation in the long run, the long run could be a very long time in arriving. In the meantime, production could be stuck below its potential. Macroeconomic Models: Classical Versus Keynesian Keynes’s ideas and their further development help us understand economic fluctuations - movements in output around its long-run trend - the classical model has proven more useful in explaining the long-run trend itself. Assumptions of the Classical Model A critical assumption in the classical model is that markets clear: The price in every market will adjust until quantity supplied and quantity demanded are equal. Important Questions About the Economy in the Long Run •How is total employment determined? •How much output will we produce? •What role does total spending play in the economy? •What happens when things change? Important Questions About the Economy in the Long Run The classical model: focus on real variables •real GDP •real wage •real saving, and so on How Much Output Will We Produce? •The Labor Market •Determining the Economy’s Output How Much Output Will We Produce? In order to earn income so we can buy goods and services, we must supply labor and other resources to firms. The Labor Market Labor Supply Curve Indicates how many people will want to work at various wage rates The Labor Market The labor supply curve slopes upward because - as the wage rate increases more and more individuals are better off working than not working. Thus, a rise in the wage rate increases the number of people in the economy who want to work - to supply their labor. The Labor Market Real Hourly Wage LS $20 A E 15 10 Excess Supply of Labor B H J Excess Demand for Labor 100 million = Full Employment LD Number of Workers The Labor Market Labor Demand Curve Indicates how many workers firms will want to hire at various wage rates. The Labor Market As wage rate increases, each firm in the economy will find that - to maximize profit - fewer workers than before should be employed. The Labor Market When all firms behave this way together, a rise in the wage rate will decrease the quantity of labor demanded in the economy. Thus, the economy’s labor demand curve slopes downward. The Labor Market In the classical view, the economy achieves full employment on its own. Determining the Economy’s Output The Production Function The relationship between the quantity of labor employed and the total quantity of output produced Determining the Economy’s Output Aggregate Production Function The relationship showing how much total output can be produced with different quantities of labor, with land, capital, and technology held constant Determining the Economy’s Output The production function shows that–with given amounts of capital and land and the current state of technology– those 100 million workers can produce $7 trillion of real GDP. Real Hourly Wage LS Output (Dollars) Aggregate Production Function $7 Trillion = Full Employment Output $15 LD In the labor market, the demand and supply curves intersect to determine employment of 100 million workers. 100 million Number of Workers 100 million Number of Workers Determining the Economy’s Output In the classical long-run view, the economy reaches its potential output automatically. The Role of Spending •Total Spending in a Very Simple Economy •Total Spending in a More Realistic Economy •Leakages and Injections •The Loanable Funds Market The Role of Spending •The Supply of Funds Curve •The Demand for Funds Curve •Equilibrium in the Loanable Funds Market •The Loanable Funds Market and Say’s Law Total Spending in a Very Simple Economy Circular Flow A diagram that shows how goods, resources, and dollar payments flow between households and firms Circular Flow Goods and Services Purchased Households Resources Sold $Consumption Spending $Income Goods Markets Goods and Services Sold Factor Markets $Firm Revenues $Factor Payments Firms Resources Purchased Total Spending in a Very Simple Economy In a simple economy with just households and firms, in which households spend all of their income, total spending must be equal to total output. Total Spending in a Very Simple Economy Say’s Law The idea that total spending will be sufficient to purchase the total output produced. Total Spending in a More Realistic Economy In the real world: •Households don’t spend all their income •Households are not the only spenders in the economy •There is a market for loanable funds Total Spending in a More Realistic Economy Net Taxes Government tax revenues minus transfer payments T = Total taxes – Transfer payments Total Spending in a More Realistic Economy (Household) Saving The portion of after-tax income that households do not spend on consumption goods S=Y–T–C Leakages and Injections Leakages Income earned, but not spent, by households during a given year Injections Spending from sources other than households Planned Investment Spending Business purchases of plant and equipment Leakages and Injections Total spending will equal total output if and only if - total leakages in the economy are equal to total injections. That is, only if the sum of saving and net taxes is equal to the sum of investment spending and government purchases. Leakages and Injections G ($2 Trillion) IP ($1 Trillion) $7 Trillion = $7 Trillion C ($4 Trillion) Total Output Total Income C ($4 Trillion) Total Spending The Loanable Funds Market Loanable Funds Market Arrangements through which households make their saving available to borrowers Loanable Funds Market Budget Deficit The excess of government purchases over net taxes. Budget Surplus The excess of net taxes over government purchases. Loanable Funds Market When G > T, the government runs a budget deficit equal to G – T When G < T, the government runs a budget surplus equal to T – G The Loanable Funds Market National Debt The total amount of government debt outstanding The Loanable Funds Market Loanable funds market: •The supply of funds is the sum of household saving and the government’s budget surplus, if any. • The demand for funds is the sum of the business sector’s planned investment spending and the government sector’s budget deficit, if any. The Supply of Funds Curve Supply of Funds Curve Indicates the level of household saving at various interest rates. The quantity of funds supplied to the financial market depends positively on the interest rate, so the saving, or supply of funds, curve slopes upward. The Supply of Funds Curve Interest Rate As the interest rate rises, saving or the quantity of loanable funds supplied increases. B 5% 3% Saving = Supply of Funds A 1.5 1.75 Trillions of Dollars The Demand for Funds Curve Investment Demand Curve Indicates the level of investment spending firms plan at various interest rates The Demand for Funds Curve As the interest rate falls, business firms demand more loanable funds for investment projects. Interest Rate 5% A B 3% Investment Demand 1.0 1.5 Trillions of Dollars The Demand for Funds Curve Investment Demand Curve When the interest rate falls, investment spending and the business borrowing needed to finance it rise, so the investment demand curve slopes downward. The Demand for Funds Curve Interest Rate 5% 3% Summing the government’s demand for loanable funds... and business firms’ demand for loanable funds at each interest rate... (a) (b) 5% A B 1.0 Trillions of Dollars Total Demand for Funds 5% A 3% 0.75 (c) Business Demand for Funds Government Demand for Funds B gives us the economy’s total demand for loanable funds at each interest rate. 1.5 Trillions of Dollars B A 3% 1.75 2.25 Trillions of Dollars The Demand for Funds Curve Government Demand for Funds Curve Indicates the amount of government borrowing at various interest rates Total Demand for Funds Curve Indicates the total amount of borrowing at various interest rates The Demand for Funds Curve As the interest rate decreases: • the quantity of funds demanded by business firms increases •the quantity demanded by the government remains unchanged Thus, the total quantity of funds demanded rises. Equilibrium in the Loanable Funds Market In the classical view, the loanable funds market -like all other markets - is assumed to clear: The interest rate will rise or fall until the quantities of funds supplied and demanded are equal. Equilibrium in the Loanable Funds Market Interest Rate 5% Total Supply of Funds (Saving) E Total Demand for Funds (Investment + Deficit) 1.75 Trillions of Dollars The Loanable Funds Market and Say’s Law As long as the loanable funds market clears, Say’s law holds even in a more realistic economy with saving, taxes, investment, and a government deficit. The Loanable Funds Market and Say’s Law The interest rate will adjust until S Quantityof funds supplied 1P G T Quantity of funds demanded and when the loanable funds market clears P ST 1 G Leakages Injections The Classical Model: Conclusions The economy will achieve and sustain potential output on its own. We need never worry about there being too little or too much spending; Say’s law assures us that total spending is always just right to purchase the economy’s total output. Fiscal Policy in the Classical Model Fiscal Policy A change in government purchases or net taxes designed to change total spending and total output In the classical view, fiscal policy is ineffective and unnecessary. Fiscal Policy with a Budget Deficit Crowding Out A decline in one sector’s spending caused by an increase in another sector’s spending Complete Crowding Out A dollar-for-dollar decline in one sector’s spending caused by an increase in another sector’s spending Fiscal Policy with a Budget Deficit Interest Rate Total Supply of Funds (Saving) 7% B A 5% C DI H DC D2 = Ip + G2 – T D1 = Ip + G1 – T 1.75 2.05 2.25 Funds ($Trillions) Fiscal Policy with a Budget Surplus S2 = Savings + T – G 2 Interest Rate S1 = Savings + T – G1 B 7% 5% H C A D = Planned Investment Funds ($ Trillions) 1.25 1.75 1.55