Week 9 notes of chp.13 and chp.15 - Macroeconomics 2105
Week 9 notes of chp.13 and chp.15 - Macroeconomics 2105 ECON 2105 080
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This 8 page Class Notes was uploaded by Gunawork on Sunday October 25, 2015. The Class Notes belongs to ECON 2105 080 at Georgia State University taught by Brian Hunt in Fall 2015. Since its upload, it has received 37 views. For similar materials see PRINCIPLES OF MACROECONOMICS in Economcs at Georgia State University.
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Date Created: 10/25/15
MaeroEeon 2105 Week 9 Notes Chapter 13 LongRun Macroeconomic Equilibrium 39 The economy is in longrun macroeconomic equilibrium when the point of shortrun macroeconomic equilibrium is on the longrun aggregate supply curve Aggregate price level LRAS SRAS P E Longrun macroeconomic cqw h bn um AD YL Real GDP Potentiai output Intersection of 3 curves LRASyfkc YZAK ooLloo Technological advances AD f C I G TB trade balance Recessionary Gap 1 Nominal wages decreases 2 Commodity input prices decreases 3 Productivity increases Inflationary Gap 1 Nominal wages increases 2 Commodity input increases 3 Productivity decreases Gap Recap There is a recessionary gap when aggregate output is below potential output There is an inflationary gap when aggregate output is above potential output The output gap is the percentage difference between actual aggregate output and potential output Actual aggregate output Potential output Out ut a P g p Potential outPUt X 100 The economy is selfcorrecting when shocks to aggregate demand affect aggregate output in the short run but not the long run 339 Where s the De ation I The AD AS model says that either a negative demand shock or a positive supply shock should lead to a fall in the aggregate price level that is de ation In fact however the United States hasn t experienced an actual fall in the aggregate price level since 1949 Negative Supply Shocks Negative supply shocks pose a policy dilemma a policy that stabilizes aggregate output by increasing aggregate demand will lead to in ation but a policy that stabilizes prices by reducing aggregate demand will deepen the output slump Supply Shocks versus Demand Shocks in Practice I Recessions are mainly caused by demand shocks But when a negative supply shock does happen the resulting recession tends to be particularly severe I There s a reason the aftermath of a supply shock tends to be particularly severe for the economy macroeconomic policy has a much harder time dealing with supply shocks than with demand shocks Macroeconomic Policy I Economy is selfcorrecting in the long run I Most economists think it takes a decade or longer I John Maynard Keynes In the long run we are all dead I Stabilization policy is the use of government policy to reduce the severity of recessions and rein in excessively strong expansions The Multiplier An Informal Introduction I The marginal propensity to consume or MPC is the increase in consumer spending when disposable income rises by 1 I The marginal propensity to save or MPS is the increase in household savings when disposable income rises by 1 A Consumer spending MPG A Disposable income Increase in investment spending 100 billion Secondround increase in consumer spending MPC gtlt 100 billion Thirdround increase in consumer spending MPC2 gtlt 100 billion Fourthround increase in consumer spending MPC3 gtlt 100 billion Total increase in real GDP I MPC MPC2 MPC3 gtlt 100 billion So the 100 billion increase in investment spending sets off a chain reaction in the economy The net result of this chain reaction is that a 100 billion increase in investment spending leads to a change in real GDP that is a multiple of the size of that initial change in spending How large is this multiple Total increase in real GDP from 100 billion rise in I 1 MPC 1 X 100 billion The Multiplier Numerical Example Rounds of Increases of Real GDP When MPC 06 Increase in Total increase in real GDP real GDP billions billions First round 100 100 Second round 60 160 Third round 36 196 Fourth round 216 2176 Final round 0 250 In the end real GDP rises by 250 billion as a consequence of the initial 100 billion rise in investment spending 1 1 06 X 100 billion 25 X 100 billion 250 billion The Multiplier An Informal Introduction An autonomous change in aggregate spending is an initial change in the desired level of spending by rms households or government at a given level of real GDP 1 1MPCgtltMAS 1177 I The multiplier is the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change AY 1 AAAS 1 MPC Multiplier output input income wages interest rent pro ts overall change in y Ay Awages Ainterest Arent Apro ts Assumptions 1 Taxes are 0 T 2 P piA2 0 3 r 4 No trade IncomeExpenditure Equilibrium I The economy is in income expenditure equilibrium when aggregate output measured by real GDP is equal to planned aggregate spending I Income expenditure equilibrium GDP is the level of real GDP at which real GDP equals planned aggregate spending GDPCI C IPlanned IUnplanned P anne Un anne AB 1 d I pl d I When planned aggregate spending is larger than Y unplanned inventory investment is negative there is an unanticipated reduction in inventories and rms increase production I When planned aggregate spending is less than Y unplanned inventory investment is positive there is an unanticipated increase in inventories and rms reduce production The Keynesian cross is a diagram that identi es income expenditure equilibrium as the point where a planned aggregate spending line crosses the 45degree line Y C Iplanned Iunplanned G PE Y Iunplanned O Iunplanned Y C Iplanned G PE gt Y Iunplanned lt O Iunplanned Y PE PE gt Y Iunplanned gt O 339 Output is wealth when translated to income Consumer Spending I The consumption function is an equation showing how an individual household s consumer spending varies with the household s current disposable income CaMPCgtltyd The Consumption Function Deriving the Slope of the Consumption Function Slope of consumption function Rise over run 2 AcAyd MPC Ayd Ayd MPC Aggregate Consumption Function I The aggregate consumption function is the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending Investment Spending I Planned investment spending is the investment spending that businesses plan to undertake during a given period I It depends negatively on gt interest rate gt existing production capacity I And positively on gt expected future real GDP I According to the accelerator principle a higher rate of growth in real GDP leads to higher planned investment spending I According to the accelerator principle a lower growth rate of real GDP leads to lower planned investment spending Inventories and Unplanned Investment Spending I Inventories are stocks of goods held to satisfy future sales I Inventory investment is the value of the change in total inventories held in the economy during a given period I Unplanned inventory investment occurs when actual sales are more or less than businesses expected leading to unplanned changes in inventories I Actual investment spending is the sum of planned investment spending and unplanned inventory investment I IUnplanned IPlanned IncomeExpenditure Model Assumptions underlying the multiplier process 1 Changes in overall spending lead to changes in aggregate output The aggregate price level is xed 2 The interest rate is xed 3 Taxes transfers and government purchases are all zero 4 Exports and imports are both zero There is no foreign trade Planned Aggregate Spending and GDP GDP C I YD GDP C A MPC gtlt YD I Planned aggregate spending is the total amount of planned spending in the economy AE Cl Planned planned Chapter I 5 Outlays and Revenue US government spends 3 trillion each year 10000 for every citizen Transfer payments Payments made to individuals when no good or service is received in return Income assistance welfare Social security Government outlays Government spending Transfer payments Difference between government spending and transfer payments Spending is when the government buys something in the marketplace A transfer is when money is moved from one group to another Major Categories of National Government Spending Mandatory outlays Determined by ongoing programs such as Social Security and Medicare Cannot be altered during the budget process Altering requires longrun changes to existing laws Discretionary outlays Can be altered when the annual budget is set Bridges roads payments to government workers defense spending Social Security and Medicare Social Security Governmentadministered retirement program Set up in 1935 by FDR as part of the New Deal Requires workers to contribute a portion of their earnings to the Social Security Trust Fund Guarantee that no American worker retires without at least some retirement income Social Security Historically Social Security in its infancy No retirees Lots of workers contributing to the trust fund Workers paid in 2 of wages half paid by workers half by employer Social Security today Social security tax is now 124 Millions of baby boomers beginning to retire Fewer workers paying into the program Medicare 0 Medicare Federal program that funds health care for retirees Established in 1965 by Lyndon Johnson Law requires current workers to pay Medicare taxes with promise of insurance upon retirement Goal Ensure that all retired workers have some funding for their health care Social Security and Medicare 0 Demographic changes are the main reason why Social Security and Medicare currently make up such a large portion of the budget 1 People are living longer today than ever before and draw postretirement bene ts longer 2 Those who paid into the programs for many years are now retired and drawing bene ts 3 The babyboom generation is now entering retirement age Baby boomers were born in the years 1946 1964 The oldest boomers reached 65 years old in 2011 The First SS Recipient The rst Social Security recipient was Ida May Fuller Received check 00000001 in January 1940 0 Taxes and outlays Ida May Fuller worked for three years under the program and was taxed a total of 2475 She lived to be 100 years old and collected a total of 2288892 from the program If this were a typical experience the program would not be sustainable
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