Download Document

Chapter 23
Essentials of
the Keynesian
System
PowerPoint Presentation by Charlie Cook
Copyright © 2004 South-Western. All rights reserved.
Fundamental Issues
1. What are the key relationships implied by
the circular flow of income and
expenditures?
2. What are the components of aggregate
desired expenditures in the basic Keynesian
model?
3. How is equilibrium real income determined
in the basic Keynesian model?
4. How does the basic Keynesian theory
explain short-run business cycles?
Copyright © 2004 South-Western. All rights reserved.
23–2
Fundamental Issues (cont’d)
5. Why does the basic Keynesian model
indicate that there may be a potential
stabilizing role for monetary policy?
6. How is the equilibrium trade balance
determined, and what role may monetary
policy play in affecting the size of the trade
balance?
Copyright © 2004 South-Western. All rights reserved.
23–3
Circular Flow
of Income and
Expenditures
Figure 23–1
Copyright © 2004 South-Western. All rights reserved.
23–4
Uses of Real Income Earnings
• Real net taxes:
 The amount of real taxes paid to the government
by households, net of transfer payments.
• Transfer payments:
 Governmentally managed income redistributions.
• Real consumption:
 The real amount of spending by households on
domestically produced goods and services.
Copyright © 2004 South-Western. All rights reserved.
23–5
Uses of Real Income Earnings (cont’d)
• Real imports:
 The real flow of spending by households for the
purchase of goods and services from firms in other
countries.
• Real saving:
 The amount of income that households save
through financial markets.
Copyright © 2004 South-Western. All rights reserved.
23–6
The Incomer Identity
• Income identity:
 An identity that states that real national income
equals the sum of real consumption, real saving,
real net taxes, and real imports.
Copyright © 2004 South-Western. All rights reserved.
23–7
Key Terms
• Real realized investment:
 Actual real expenditures by firms in the product
markets.
• Real exports:
 The real value of goods and services produced by
domestic firms and exported to other countries.
Copyright © 2004 South-Western. All rights reserved.
23–8
The Product Identity
• Product identity:
 An identity that states that real national product is
the sum of real consumption, real realized
investment, real government spending, and real
exports.
Copyright © 2004 South-Western. All rights reserved.
23–9
Household Consumption and Savings
• Real disposable income:
 A household’s real after-tax income.
• Changes in disposable income:
Copyright © 2004 South-Western. All rights reserved.
23–10
Marginal Propensities
• Marginal propensity to consume (MPC):
 The additional consumption caused by an increase
in disposable income; a change in consumption
spending divided by a corresponding change in
disposable income; the slope of the consumption
function.
• Marginal propensity to save (MPS):
 The additional saving caused by an increase in
disposable income; a change in saving divided by a
corresponding change in disposable income; the
slope of the saving function.
Copyright © 2004 South-Western. All rights reserved.
23–11
Marginal Propensities (cont’d)
• Marginal propensity to import (MPIM):
 The additional import expenditures stimulated by
an increase in disposable income; a change in
import spending divided by a corresponding
change in disposable income; the slope of the
import function.
Copyright © 2004 South-Western. All rights reserved.
23–12
The Savings Function
• Induced saving
 Saving brought about by the receipt of disposable
income.
• Autonomous dissaving,
 The amount by which households would need to
draw from their wealth to make purchases of
domestic consumption and foreign imports.
Copyright © 2004 South-Western. All rights reserved.
23–13
The Savings Function
Figure 23–2a
Copyright © 2004 South-Western. All rights reserved.
23–14
The Import Function
Figure 23–2b
Copyright © 2004 South-Western. All rights reserved.
23–15
The Consumption Function
Figure 23–2c
Copyright © 2004 South-Western. All rights reserved.
23–16
Factors Causing
Changes in
Desired Investment
Figure 23–3
Copyright © 2004 South-Western. All rights reserved.
23–17
U.S.Final Sales of Computers and the Real Price of
Computers
SOURCES:SOURCE:Michael Pakko,“Accounting for Computers,”
Federal Reserve Bank of St.Louis National Economic Trends, May 2001.
Copyright © 2004 South-Western. All rights reserved.
Figure –4
23–18
The Government Spending and Net Tax Schedules
Figure 23–5
Copyright © 2004 South-Western. All rights reserved.
23–19
The Export Schedule
Figure 23–6
Copyright © 2004 South-Western. All rights reserved.
23–20
Aggregate Measures
• Aggregate expenditures schedule:
 A schedule that represents total desired
expenditures by all the relevant sectors of the
economy at each and every level of real national
income.
• Aggregate net autonomous expenditures:
 The sum of autonomous consumption, autonomous
investment, autonomous government spending,
and autonomous export spending, all of which are
independent of the level of national income in the
basic Keynesian model.
Copyright © 2004 South-Western. All rights reserved.
23–21
Deriving the Aggregate Expenditures Schedule
Figure 23–7
Copyright © 2004 South-Western. All rights reserved.
23–22
The 45-Degree Line
A line that cuts in half the
90-degree angle of the
coordinate axes on a
diagram relating real
income to aggregate
desired expenditures;
every point on the 45degree line could, in
principle, be a point of
equilibrium at which real
income equals aggregate
desired expenditures.
Figure 23–8
Copyright © 2004 South-Western. All rights reserved.
23–23
Two Approaches
to Determining
Equilibrium Real
Income
Figure 23–9
Copyright © 2004 South-Western. All rights reserved.
23–24
The Leakages-Injections Approach To
Determining Equilibrium Real Income
Copyright © 2004 South-Western. All rights reserved.
23–25
The Determination of Equilibrium Real Income
Figure 23–10
Copyright © 2004 South-Western. All rights reserved.
23–26
Multiplier Effects
• Multiplier effect:
 The ratio of a change in the equilibrium real income
to an increase in autonomous net aggregate
expenditures.
 When the aggregate expenditures schedule shifts
vertically, the equilibrium level of national income
changes by a multiple of the amount of the shift.
Copyright © 2004 South-Western. All rights reserved.
23–27
Multiplier Effects (cont’d)
• Autonomous expenditures multiplier:
 A measure of the size of the multiple effect on
equilibrium real income caused by a change in
aggregate net autonomous expenditures
 In the simple Keynesian model, the multiplier is
equal to 1/(MPS+MPIM)=1/(1-MPC).
Copyright © 2004 South-Western. All rights reserved.
23–28
Multiplier Effects (cont’d)
• Calculating the autonomous expenditures
multiplier:
Copyright © 2004 South-Western. All rights reserved.
23–29
The Multiplier Effect on
Real Income Caused by a
Decline in Real Investment
Figure 23–11
Copyright © 2004 South-Western. All rights reserved.
23–30
Keynesian Theory of Business Cycles
• Equilibrium real income changes are a
multiple of any changes in aggregate net
autonomous expenditures.
 Variations in autonomous spending can cause
equilibrium real income to vary from a level
consistent with the economy’s long-run growth
path.
 The amount by which equilibrium real income
diverges from its long-run level is a multiple of the
change in net autonomous expenditures.
Copyright © 2004 South-Western. All rights reserved.
23–31
Linking
Monetary
Policy to
Equilibrium
Real Income
Figure 23–12
Copyright © 2004 South-Western. All rights reserved.
23–32
Monetary
Policy Effects
on Equilibrium
Real Income
Figure 23–13
Copyright © 2004 South-Western. All rights reserved.
23–33
The Keynesian Monetary Policy
Transmission Mechanism
• Liquidity effect:
 A fall in the equilibrium nominal interest rate
resulting from sustained open market purchases,
holding the price level unchanged.
• Interest Elasticity
 The proportionate response of desired investment
spending to a given percentage change in longerterm interest rates relevant to investment
decisions.
Copyright © 2004 South-Western. All rights reserved.
23–34
The Keynesian Transmission Mechanism of Monetary
Policy
Figure 23–14
Copyright © 2004 South-Western. All rights reserved.
23–35
Interest Elasticity and Investment
• Interest-elastic reserve demand:
 Demand for depository institution reserves that is
relatively sensitive to interest rate variations.
• Interest-inelastic reserve demand:
 Demand for depository institution reserves that is
relatively insensitive to interest rate variations.
Copyright © 2004 South-Western. All rights reserved.
23–36
Interest Elasticity and Investment
• Interest-inelastic desired investment:
 Desired investment spending that is relatively
insensitive to interest rate variations.
• Interest-elastic desired investment:
 Desired investment spending that is relatively
sensitive to interest rate variations.
Copyright © 2004 South-Western. All rights reserved.
23–37
Short-Term Interest Rates
in Japan since 1990
SOURCES: Michael Hutchison, “Japan’s Recession: Is the Liquidity Trap Back?” Federal
Reserve Bank of San Francisco Economic Letter, No.2000-19, June 16, 2000; Bank of Japan.
Copyright © 2004 South-Western. All rights reserved.
Figure 23–15
23–38
Trade Balance Schedule
• Calculating the trade balance schedule:
Copyright © 2004 South-Western. All rights reserved.
23–39
Determining the Equilibrium Trade Balance
Figure 23–16
Copyright © 2004 South-Western. All rights reserved.
23–40
Monetary Policy and the Trade Balance
• Expenditure-switching policies:
 Governmental policies, such as tariffs or subsidies,
that induce an increase in export spending while
reducing import spending, thereby improving a
nation’s trade balance.
• Expenditure-reducing policies:
 Governmental policies, such as contractionary
monetary policy actions, that reduce overall
spending by home residents, thereby reducing
import spending and improving a nation’s trade
balance.
Copyright © 2004 South-Western. All rights reserved.
23–41
Real Consumption,
Government Spending,
Investment, and Exports
since 1993
Figure 23–17
Copyright © 2004 South-Western. All rights reserved.
23–42
U.S. Equipment and Software Investment
Figure 23–18
Copyright © 2004 South-Western. All rights reserved.
23–43