Transcript Slide 1

19
85
19
86
19
87
19
88
19
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19
90
19
91
19
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95
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98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
(Trillions of Chained 2000 Dollars)
GDP
12
11
10
9
8
7
6
5
19901991
2001
Year
19
19 85
19 86
19 87
19 88
19 89
19 90
19 91
19 92
19 93
19 94
19 95
19 96
19 97
19 98
20 99
20 00
20 01
20 02
20 03
20 04
05
Unemployment Rate
12
10
8
6
4
2
0
19901991
2001
Year
Inflation Rate
10
8
6
4
2
0
-2
-4
19901991
2001
-6
Year
GDP
Contraction
Expansion
Peak
Peak
Y*
Trough
Year
The Early Years of the Great Depression in the United States
1929
1933
(a)
Real Standard and Poor’s
Stock Index
100.0
45.7
(b)
Unemployment rate (official)
3.2%
24.9%
(c)
Price level (CPI)
100.0
75.4
(d)
Real gross domestic product
865.2 billion
635.5 billion
(e)
Real personal consumption
expenditures
661.4 billion
541.0 billion
Real gross private domestic
investment
91.3 billion
17 billion
(g)
Real private debt
88.9 billion
102.0 billion
(h)
Bankruptcy cases
56,867
67,031
(i)
Non-farm real estate
foreclosures
134,900
252,400
(j)
Food energy per capita per day
(calories)
3460
3280
(f)
Production
generates
incomes
Output
Income
(Y )
(Y )
Incomes give
actors the
ability to spend
Spending
stimulates
firms to
produce
Spending
(Aggregate Demand or AD )
Production
generates
income to
households
Output (Y )
Income (Y )
leakage
Sufficient to
sustain output at
a steady level
?
Consumption (C )
Saving (S )
households decide how
much to consume and
save
Spending (AD )
injection
firms decide
how much to
invest
Intended Investment ( II )
Interest rate
Supply of
Loanable
Funds
E1
5%
Demand for
Loanable
Funds
140
Quantity of funds
borrowed and lent
Interest rate
Supply of
Loanable
Funds
E0
5%
3%
E1
Original
Demand
New Demand
60
140
Quantity of funds
borrowed and lent
Production
generates
income
Income (Y* )
Output (Y* )
leakage
Consumption (C )
Spending
stimulates
firms to
produce
Spending sufficient
to sustain full
employment
AD = Y*
Saving (S )
Equilibrium in
the market for
loanable
funds
injection
Intended Investment
(II ) is equal to S
The Consumption Schedule (and Saving)
(1)
(2)
Income Autonomous
(Y )
Consumption
C
0
100
200
300
400
500
600
700
800
20
20
20
20
20
20
20
20
20
(3)
The part of consumption
that depends on income,
with mpc = 0.8
=0.8  column(1)
0
80
160
240
320
400
480
560
640
(4)
Consumption
C = 20 + 0.8 Y
(5)
Saving
S=Y–C
= column(2)
+ column(3)
20
100
180
260
340
420
500
580
660
= column(1)
– column(4)
-20
0
20
40
60
80
100
120
140
Consumption =
Income Line
500
Consumption (C )
Consumption (C )
(= C + mpc Y)
400
340
300
Saving (S)
Slope = mpc
200
100
C = 20
45
0
100
400
Income (Y )
__
Intended Investment (II )
II
II = 60
Intended
Investment (II )
(= II )
Income (Y )
Deriving Aggregate Demand from the Consumption Function and Investment
(1)
Income
(Y )
(2)
Consumption
(C )
0
300
400
500
600
700
800
20
260
340
420
500
580
660
(3)
Intended
Investment
(II )
60
60
60
60
60
60
60
(4)
Aggregate Demand
AD = C + II
= column (2) + column (3)
80
320
400
480
560
640
720
Consumption, Investment, and
Aggregate Demand
Aggregate Demand (AD )
= C + II
Consumption (C )
400
Intended Investment (II )
340
C +II = 80
400
Income (Y )
Aggregate Demand with Higher Intended Investment
(1)
Income
(Y)
0
300
400
500
600
700
800
(2)
Consumption
(C)
20
260
340
420
500
580
660
(3)
Intended Investment
(II)
140
140
140
140
140
140
140
(4)
Aggregate Demand
(AD)
160
400
480
560
640
720
800
Aggregate Demand
1000
AD (II = 140)
AD (II = 60)
800
700
600
500
480
400
300
200
C +II = 160
C +II =100
80
0
100
400
800
Income (Y )
The Possibility of Excess Inventory Accumulation or Depletion
(1)
Income
(Y)
(2)
Aggregate
Demand
(AD)
300
400
500
600
700
800
320
400
480
560
640
720
(3)
Excess Inventory
Accumulation (+)
or Depletion (-)
= column(1)column(2)
-20
0
20
40
60
80
(4)
Intended
Investment
(II)
(5)
Investment
(I)
= column(3)
+ column(4)
60
60
60
60
60
60
40
60
80
100
120
140
(6)
Check that the
macroeconomic
identity still
holds:
Y = C+I
300
400
500
600
700
800
Aggregate Demand and Output
Output =
Income Line
Aggregate Demand (AD )
1000
800
unintended
investment
(build up of
inventories)
700
720
600
500
E
400
300
200
100
80
45
0
100
400
800
Income (Y )
Aggregate Demand and Output
Full Employment
1000
E0
800
AD0 (II = 140)
700
600
500
400
300
200
160
100
45
0
100
400
800
Y*
Income (Y )
Aggregate Demand and Output
Full Employment
1000
E0
800
AD0 (II = 140)
AD1 (II = 60)
700
600
500
400
E1
300
200
160
100
80
0
Persistent
unemployment
equilibrium
45
100
400
800
Y*
Income (Y )
Output (Y* )
Production
generates
income
Income goes
to households
Income (Y* )
Lower Income
Lower Spending
Lower Output
AD = lower Y
Insufficient Spending
AD < Y*
If leakages
are larger
than
injections…
The Multiplier at Work
(1)
Change in
Intended
Investment
1. Investors
lose
confidence.
Δ II = 80
(2)
Change in Aggregate Demand
(as C or II change)
and in Output and Income
(as firms respond to changes in AD)
(3)
Change in Consumption
ΔC = mpc Δ Y
= .8  Column (2)
2. Reduced investment spending leads directly to Δ
AD = 80.
Producers respond to reduced demand for their
goods by cutting back on production.
Δ Y =  80
3. Less production means less
income. With income reduced
by 80, households cut
consumption
by mpc Δ Y
= .8  80
ΔC = 64
4. Lowered consumption spending means lowered
AD
Δ AD = 64
Producers respond.
Δ Y = 64
5. Households cut
consumption
by mpc Δ Y
= .8  64
ΔC = 51.2
6. Δ Y = 51.2
7. mpc Δ Y = .8  51.2
ΔC = 40.96
8. Δ Y = 40.96
9. ΔC = 32.77
10. Δ Y = 32.77
11. ΔC = 26.21
etc.
etc.
Sum of changes in Y
= 80 + 64 + 51.2 + 40.96 + 32.77 +. . . .
= 400
80
60
40
20
0
-20
-40
-60
Personal consumption expenditures
Gross private domestic investment