macro econ bullock 1
TRANSCRIPT
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Long Run Growth
Small differences in long run growth makesignificant differences (compare 2% and 3% over50 years). (100 269 or 438)
Output growth; the rate of growth of output inthe entire economy
Per capita output growth is the rate of growth perperson in the entire economy ie the rate of
growth of Q/N. Productivity growth is the rate of growth of
output per worker ie the rate of growth of Q/L
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Productivity and Participation
If population grows faster than output, per capitaGDP falls
Q/N = Q/L x L/N => g Q/N = g Q/L + g L/N ie growth
rate of output per head is equal to the rate ofgrowth of output per worker (labourproductivity) plus the rate of growth of the labourforce as a fraction of the population.
Participation influenced by minimum workingage, retirement age, years of schooling,participation of women.
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Productivity
Output is dependent on labour (human capital) ,capital (physical) , and natural resources,entrepreneurship, management and technology.
The contribution of labour is dependent on
population growth, the percentage of thepopulation in the labour force, and averagelabour productivity: the education and training ofworkers, the quantity and quality of the capitalstock that workers use in production, the state of
technology, enterprise etc.. Health, education, R&D and the capacity to adapt
technology are important to long run growth.
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Short Term Fluctuations; Business
Cycle The long term growth rate is an average trend
and the economy, in the short run, may fluctuatearound that trend.
The business cycle moves from a peak (beginning
of recession), through a recession, a trough (endof recession), a boom and back to a peak. Informal definition of a a recession; negative
growth (economy contracts) for at least twoconsecutive quarters
Depression, a severe and protracted recession Boom; a particularly strong and protracted
expansion
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Potential Output or GDP
Potential output also known as full employmentoutput is the maximum sustainable level ofoutput that the economy can produce
Potential output is the maximum sustainableamount of output ( or real GDP).
Note maximum sustainable as output canexceed potential but not indefinitely.
Economic fluctuations may be due to changes inpotential output but will more likely be caused byfluctuations of actual output around potentialoutput.
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Output Gap
Defined as the difference between actual outputand potential output; Y-Y*, where Y* is potentialoutput.
YY* is a positive output or expansionary orinflationary gap where resources are utilized atabove normal rates resulting in inflation.
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Deflationary Output Gap
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Inflationary Output Gap
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The Nature of Macroeconomic Policy
To enhance the long run potential growththrough policy to enhance human capital,facilitate investment in physical capital, and
develop or adapt technology. Short run stabilization policy; to manage
aggregate demand to minimize deflationary andinflationary gaps.
Use of fiscal policy (government expenditure andtaxation), and monetary policy (money supplyand interest rates) for short run stabilization
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Aggregate Expenditure
Planned Aggregate Expenditure :
PAE = C + I+ G + X - M
C = C0 + bY , I = I0 , G = G0, X = X0, M= mY0 < b < 1 and 0 < m < 1
In (simple) closed economy without
Government, PAE=Y=C+I or I = (Y-C) =S and Y =C+S
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Determinants of Consumption
Income
Wealth
Interest Rates Price
Expectations about future income
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Consumption and Income
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Consumption Function
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Movements Along vs. Shifts of the
Consumption Function
A change in income a movement along the
consumption function
A change in any non-income determinant a
shift of the entire function, that is, a change in
autonomous consumption
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Non-Income Determinants of
Consumption
Wealth an increase will cause the
consumption function to shift upwards
Interest Rates a decrease will cause the
consumption function to shift upwards
Prices a decrease will cause the function to
shift upwards
Expectations positive expectations will shift
the function upwards
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Income, Consumption, Saving
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The Saving Function
Recall Y = C + I = C + S C = Co + bY
From first bullet, S = Y C = Y - (Co + bY)
= Y Co bY = -Co + (1 b)Y
Observe that the intercept is the negative of
the intercept of the consumption function and
the slope is (1 mpc)
E.g. C = 200 + 0.75Y S =Y C = Y- 200 -0.75Y
= -200 + 0.25Y
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Income, Consumption, Saving
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Determinants of Investment
Aggregate Income
Business Confidence
Technological Change The real interest rate
Tax Provisions
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Exogenous Investment
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Non-Income Determinants of
Planned Investment (IP)
Business Confidence an in business
confidence will planned Investment (IP)
Technological Change Improvements in
technology will Ip
Real Interest Rate a in the real interest
rate will Ip
Tax Credits an in tax credits for
investment will Ip
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Equilibrium Aggregate Output
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Circular Flow , Injections and
Withdrawals Circular flow of income is between households
(spending on goods and services) and firm
(paying incomes to households for factor
services. Injections are earnings of households that do not
result from spending of firms or earnings of firms
not from the spending of households (I, G, X) Withdrawals are incomes of households or firms
that are not passed on through respending in the
circular flow (S, T, M)
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Equilibrium in the Circular Flow
The circular flow of income is in equilibriumwhere there is no tendency for it to either
increase or decrease.
Injections increase the circular flow Withdrawals reduce the circular flow
The circular flow is in equilibrium where
withdrawals are equal to injections;(S+T+M)=(I+G+X)
In closed economy without Government
equilibrium is where S =I
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The Saving Investment Approach
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The Paradox of Thrift
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Algebra of Income
Y = C + I = C0 + bY + I0
Y bY = C0
+ I0
Y(1 b) = C0 + I0
Y = (C0 + I0 ) x 1/( 1 b)
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Algebra of the Multiplier I
Recall Y = (C0 +I0)/(1-b) = AE x 1/(1-b)
Therefore Y =AE x 1/(1-b)
= (C0
+ I0) x 1/(1-b)
If C0 = 0 Then Y = I0 x 1/(1-b)
= I0 x k
Where k = 1/(1-b) is the multiplier for a closedeconomy without government.
Note 0 < b < 1 k > 1
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Algebra of the Multiplier II
In closed economy without government,
equilibrium in aggregate expenditure may be
alternatively expressed as S = I
The maintenance of equilibrium requires that
a change in S is matched by a change in I
Therefore S = I and S/Y = I/Y
Therefore Y = I x 1/(S/Y) =I x 1/mps
Where k = 1/mps = 1/(1-mpc) = 1/(1-b)
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Intuition of the Multiplier
The multiplier is dependent on subsequent
rounds of respending based on the mpc.
The change in income from an initial $25
change in investment is:
$25+(.75x$25)+(.752x$25)+(.753x$25)+
+(.75n
x$25)$25(1+.75+.752+.753+.+.75n)=$25x1/1-.75
=$25x4.
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EXAMPLE
In a closed economy without Government,
consumption is given by C = 500 + 0.8Y and I=50.
Find a) the equilibrium level of income b) The
multiplier c) The equilibrium level of income if Iincreases by 25 d) The equilibrium level of
income if the mps increases to 0.4 e) The
equilibrium level of income if saving at zero
income increases to minus 400. (Assume all
changes from the original C and I)
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Answers a) and b)
a) Y = C + I = 500 + 0.8Y + 50
Y (1 -0.8) = 550
Y = 1/(1-0.8) x 550
= 5 x 550 = 2750
b) k = 1/(1- mpc) = 1 / (1 0.8) = 5
or If I increases by 25 then Y = 500+0.8Y+50+25 Y(1-0.8) = 575 and Y = 575x1/(1- 0.8) =2875
k = Y / AE = (2875-2750)/25 = 5
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Answers c) and d)
C) Y2 = C + I + I = 500 + 0.8Y + 50 + 25
Y2 ( 1 0.8) = 500 + 50 + 25
Y2
= 1(1-0.8)x575 = 5 x 575 = 2875
or Y = k x AE = 5 x 25 = 125
Y2 = Y1 + Y = 2750 + 125 = 2875
d) mps = 1mpc => mpc= 1mps = 1-0.4 = 0.6Y2 = (1/ 1-0.6) x 550 =2.5 x 550 = 1375
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Answer e)
e) Saving at zero income is equal to minus consumption
( -C) at zero income => consumption at zero income
is equal to minus consumption at zero income.
When consumption at zero income was 500, savingwas -500. If saving at zero income increases
(becomes less negative) to -400, then consumption
falls from 500 to 400.
Solve Y = 400 + 0.8 Y + 50 for Y
or Y2 = Y1 + Y where Y = k x AE and AE = -100
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Readings
Baumol & Blinder Chs 24-26
Frank & Bernanke Chs 19, 22, 23
Case fair Oster Chs 22 &23