Académique Documents
Professionnel Documents
Culture Documents
'l'he
in
1,l'.s-,ll
in outs
ue.s.
clon'ntuln in the banking and financial secrors ripplccl thr ough the rest of the econonrr'. Drrrirrg brrsincss (lowlrturris, jobs are hird to find, factories :u'e
ill all ol
\\t tllcn
.()30s
ol
irr.f
apar in the
1990s.
126
of the
cvcle.
sLrnrrnarize
the basics of
aggreg;rte
. !\t'
a27
*business cycles"?
.9
:Et
o
o
o
'6
d
t28
CHAPTER
'
broad, as
World War ll
c
o
o
62c
Koraan War
Vietnam War
o)
Primary
postwar
o
.9
.q
oo)
-40
Bearmament
The Greal
Depresson
1930
1940
Year
l9l9
rrthors.
it.s
ltL sl
Bv c<lrrtlast. tlrc intrnal thcor-it-s look [<rr nrechrrisrns rvithin thc cconornic svsterl itself. In tlris
cxr:rnsion.
a29
bank fiilures, a rrul oll thc burks, iurd a banking crisis. Outpr.rt and prices rvould fall sharpl,v in the panic.
Eventuallr,, rfter the rr'orst excesses \vere \\'rlrng out,
the economy rt'oLrld begin to exp:urd again.
Hvperinflation occurs rthen prices rise at 100 percent ()f' more prr tnonlh- The most f'amous hl'perinf lati<r.r in histor,v occr.u'red in Gernranv in 1923.
The government wars unable to nleet its financial
obligations throlrgh taxing and borrowing, so it
trrrlred t< the monetrn printing press. Bv the end
of lfl23. crlrlencv rvas prinf ed rvitlr more ancl more
digits. and tlre largest banknote ir circrtlrtion was
for 2ir billion marks! Central banks todav are vigilant in their defense agrinst even the most nroderate infl:rtion.
The New-Econ omy Bubble. The classic pattern of
specrrlatire hoonl rvas seen again irt the late 1990s.
The phenornetral pattern of gr<xvth irnd irttcr'arion in the "nerr'-econom\i' sectors-itrcltrcling soliware, the Internet, and the nervlv inr elttcd dot.corll
conr pan ies-prrdttced ir speculative boont in nerveconornv stocks. Oornpanies sold online dating se[vices, gave a\{at free electronic birthda' cards, antl
issued stock for Flooz.conr, rvhich soltl il rvo thlcss
digital ctrrrencr'. Oollegc stltdents droppt'tl otrt of'
school to becotne ittstattt rnilliolraircs (ol so thcl
dreirmed). All ol this spttrtctl tcal irlvcstltrcttt in contputcrs, sofiware, arrrl tclccorn lrr u n icaf ions. Investment il infbnnation-proce ssiug cquirrncrrt rose by
70 percent from 1995 to 2000. rcprescntilrg onefiftlr
of the entir-e rise in real (iDP tlrtring this pcriotl.
t30
nclv
credir-brrt it rvas llving against powcritrl lrearlwilrds.,,\s tht'r'alrrc ol stocks fi'll nore sharplv than
af anv lirn(' irr ir cclrtrrr-y, nrarrr,fillarrcial irrstitrrti<lns
werc on lht'r'clgc ol bankrrrptcv. Nlarrl ol the l:rrge
invcstrncrrt banking f ir rns clisappcarcd. The Fe<leral
Rcscrr c anrl L. .S. Ii-casu v loarrctl rrrassir,c amornts
of ltrlcral nrorrc\ artl lailctl orrt severrl financial
lirrns.
\tt.
irrlt'stnrent in cornrrrf
thcil cllbl
ts.
ol'little or no
.iob status.
B1,
All went rvell as long:r-s horrsirrg rrices lvere risirrg. as thev did starting in 1995. I\rr tlren in 2006
tlte hotrsing bubble burst---echoirrg the errd r'f Ih<'
speculative dot.com stock-narket brrbble f'orn
agr-cgatc
con
t3l
of
r,l
c<-rrrsrrrnption
is
four
tllat
Dl
icc lcvcl.
o
Real GDP
expors (X).
Aggregate demand shifLs when drere rre changes in
policies (such as monetaw-policy changes
or clrangts irr grlr'(.lrrrrrt'nt <'xX'rt<lil ulr:s {)r tax rates) or
whcn exogertotts ev('Irts changc sx'tt<litt (as rvorrlrl llt'
the case rr'ith chirnges in foreigu outpttt, affctting X, or itr
brrsiness conlidence, affecting / ).
nrac r<ccrnornic
THE DOWNWARD.SLOPING
AGGREGATE DEMAND CURVE
One importarrt point 1'ou should noticc is that the
aBgregate demand curve irr l-igurc 7-3 slopcs downward. This lneans that, lolding othcr thilrgs constant,
the level of real spcncling dcclincs as the overall Price
level in thc ecorrornv liscs.
some govcrl)rlrctIt
tt
t32
CHAPTER
Varible
7 .
T<
A(:C;REG.{IE DEMANI)
surnrnarize:
in the economy
to decline as the price level rises, holding
tends
Monetary pocy
Monetaw expansion may lower interest rates and loosen credit conditions,
inducing higher levels of investment and consurnption ofdrrrable goods. In an
open economy, monetary policy also affecs the exchange rate and net exports.
Firal policy
Foreign output
Asset Yalues
Advnces in lech"olog[
Technological adr"ances can open up new opponunities for business investment. Impoftant examples have been the railroad, e automobile, and
comPuters.
Other
TABLE 7- l. Many Factoni Can Increase Aggregate Demand and Shift out e ,4D Curve
The aggregate denrard cun'e relates totrl spending to the price level. But nunr(:rrllrs ('thcr
influences aflect aggregate demand-sor.rre policy var-iables, otlrcn <:xor'rrorrs facton. Tlrc
mble Iists changes thar rvould tend to increasc agglr:at<' tlt'rnand anrl slrift orr rhe ,{1) cune.
I IIt.. l)(
t33
because consumers tend to substitute bread and potatoes for meaL using more of the relatively inexpensive
commodiries and less of the reladvely expensive one.
The aggregate demand curve is downward-sloping
for completely different reasons: Total spending falls
when the overall price level rises because consumer
thrt increased
Two Reminders
2.
or shock.
Brrsiness<-r'cle fluctrrations
in
ortt.rtrl, t'ntpkrt,
rrt,llt. and pr-ices ale tficu carrsccl lrv shilts irt :r4glcg:rtt' dcnrnrtd. Thcsr occrrr:rs consunler:, lnsincsses,
t34
CHAPTER
-o
200
-9
.3
1s0
fi
rso
'E
fL
100
'1
5,000
00
5,000
FIGURE 7-4. Movement along rs. Shifts of the Aggregate Demand Curve
Iu (a),
a higher price level rvith giverr rrorninal rlorrcy irrcornt.s lrwt'rs r'al rlisxrsablt.
irrcorne; this lcads to lright'r' intt:rt:st rat<.s arrrl <k'r'linirrg srcn<ling on ill terest+cnsitive
irrvestnl('nt an(l consurrr[)(()n, T]ris illrrstrat<'s m.ntm"nl atngthc -,lI) curre om I to
ll wlr<'n olh<'r thirrgs arr.hcl(l (()nstar)1.
In (b), other rhings are no longer constant. Changes in rariables rrnderlring ,V)-such
as the monev suppl;-. nx policy, or militan spending-lead to changes in total spending at a
giren price lerel. This leads to a shiJi oJ the.{,D cun'e.
I
Qr)
an Economic Downturn
a real Depressior'r.
What were the sources of the Great Modemtion? Some believe that capitalisrn is inlre rcntly nrorc
stable norv than it rra-s in earlicr tirrres. Sornc of that
stabilitv colnes from a larger and nrore rrcdictablc
3b,
(L
Polential
o'o
Ral outpul
a better
OTI
II'I
'
liottt sttorvballirtg
irrto depressior-rs.
realistic possibilitv? While busincss ct'clcs ltalc trtotlerated in America over the lirst quarte r-tcntttry, thcy
have arcttralll' become rnole prevalcttt in otlte r ccottr>
mies. So take heed of the fbllowing propltctic rvortls
t35
RES
in 2007-2009:
ale now generallr consi<lcred to bc firndarrlr'rtallr' l)r('vcnt;rl)l(:, likc airrlane crrshes urd rtulike
hurricirrrcs Btt rvt'lllrt'rrot lanislttrl i ctasltcs liorl
tlre hnd. lnd it is n<t clcar that rtt lravc tht rvistlrllt tr'
the ability to elintinlte rect'ssiotrs. 1'lre diurgcr has ttot
rlisappe;uec[. l he t<rces tl)at pr()ducc recurrcnt recessirrs ar c still irr the rlings, rnerelv rr;aiting lil theil'clrc.
Rr.t cssitns
OUTPUT DETERMINED BY
TOTAL EXPENDITURES
Our initial discussion of tlre nrultiplicr rrtrlcl anal1'zes how ir)\estnrent and constttttption spencling
intemct rvith incornes to detennille rlatiolrrl otttput.
This is callecl rbe lolal ulnndilurc altprcurh t() determining national orrtptrt.
Recarll Chapter-6's picttrre of the Itatiottirl cortsumption firnction. \Aie have dr. r,tr a retttitttler gt aplt
is
si m
=o.
E
GDP
0
Gross domeslrc producl
of
r3
CHAPTER
C+
l=TE
F.
(l)
c
o
o.
o)
7 .
DI,\,f.{){I)
I I or If
cun'e.
GDP
M
Gross domestic oroduct
investment to consumDrion.
t37
\bu shrlrld
rlso rv<rk
cse,
'l'hcrc
Inventories rvill be at their plarrrted lcvcls.
rvill not be any-' tttrexpectctl orttc s. f it tns cantrot
improle profits bv ch:rrrging otttptrt bccartsc rlatrned
consttmption needs lttr.e lleclt Iltct. So lt'otltrction,
employment. incone, attcl spctrcling rvill rcnrailr tlre
same. Ir this case GDP stavs at poirrt l:, ancl tvc cal]
righ tf v
caf
l ir tn eruilibttn.
Colrunns (ir) and (6) are the crucial <.nes. Colurnn (l'r) shorrs the toml GDP. It is simpl,v column
(l) copied agairr into colttmn (5). The gures in
colunrn (6) replesent total plannecl expenditures
at each level of GDP; that is, it equals the planned
consulnprioll spencling plus planned investment. It
is thc ll * / schedule from Figure 7-7 in numbers.
Whcrr busirresses as a whole are producing too
rrrrrch outptrt (higher thatr the sum of rvhat constlmcrs anrl businesses \{ant to purchase). inventories of
trnsold goods rvill be piling up.
Reading 'om the top row of Table 7-2, we see
rhat if fir-ms are ir.ritially producing $4200 billion of'
GDP, planrrcd or desired spendir.rg fshorvn in column
((i) I is orrlv $-1000 billion. In this situation, excess
irrvcntolies will be accrrn rtlating. Firms rvill respond
bv leduciug their prodr-rction lerels, and GDP lrill
fall. In the opposite case, represented in the bottoln
row ofTable 7-2, total spending is $3000 billion but
outprrt is onlv $2700 billion. Inventorics arc being
depleted and firms rvill expirnd opcratiotrs, raising
ouDut.
!V'e see, then. tlrat rvhen bttsirlesses as a wholc antenrporaril'r' producing more than thcy call profitablv
sell, thet'will redtrce prodrtction and GDP *'ill lll.
\{hen thev are sellirrg more thau their cttrrettt prtxluction, thel'lrill ircrese their output, and GDP rvill 'isc.
r38
CHAPTER
D[V-\NI)
(l)
(2)
(3)
Levels
GDP
and DI
4,200
3,900
5,600
3,300
3,000
2,700
of
Planned
Planned
saviDg
consumption
(3)=(l)-(2)
3,800
3,600
400
300
200
3,400
3,200
3,000
2,800
100
-100
(4)
(5)
Planned
investment
200
200
200
200
200
200
(6)
Total planned
consumpon
Level
of GDP
(5) = (l)
4,200
3,900
3,600
3,300
3,000
2,700
(7',
Resulfing
tendency of
and investnen! TE
(6)=(2)+(4)
>
>
=
<
<
<
ouqtut
4,000
3,800 J
3,600
3,400 t
3,200
3.000
Contraction
(lontraction
F4uilibriun
F.xpansion
Expansion
Expansion
TABLE 7-2. Equilibrium Output Can Be l'orrnd Arithntetically at c Level l{here Planned
Spending Equals GDP
The darker green rorv depicts thc cqrrililrrirrrrr (lf)P lt'vcl, rvhcre the $3600 at is being
produced isjnst rnatcherl bv thr: $3600 that hoLscholds plirn to consume and that tirms plan
to invest- Irt trpJrer rows, finrs will be forced into unintended inventon int.estmelrl and u,ill
respond bv cntting back production until equilibrirur CDP is caclrr:rl. Intcrpret the lower
rows' tendencY torvard expansion of-(lDP tormrcl equilibriurrr.
THE MULTIPLIER
W'here is the multiplier in all this? To answer this
questiorl. rve neccl to cxaurine horv a change in exogenous investment spcnding aff ects GDP. k is logical
that an increase in investrnerrt will raise the level of
in crogcnous expendittrles on
on total outplt.
For examplc, sLtppose investment increases by
$100 billion. If tllis causes an increase in output
of $300 billion, thc rnulriplier is 3. If, instead, the
resulting increase in outprt is $400 billion, the mul-
tiplier is .1.
Woodsheds ond Corpenters. lVhy is
hire
THT:
\,I L'I
t39
TIPI,I[-R
$looo.o0
+
'://
666.67
X $tooo
(i'l'
144.14
X $ 1000
+
296.30
+
Q',t'
197.53
('/ )' X
$ 1000
+
s 1000
$3000.(x)
sh<rrvs
(l -
('ll;tltgt
irr orrlrrrt
,l
I x ( lll|lq( in in\('\un('nl
lll\
I - ,\f/-'ll
'
l-r*'+r'+
lorrg
ls ,ll/{l (, ) i\
'I'lrc s:rnre ec()n()nrv crn be described by the mtrltirlicr diirgrarn in the top panel of Figtu'e 7-8. The
nrrrltiplicr eqrrilihrirrrn gives the sanie level of otttpttt
as thc ,'1S-,'11) eqrrilibrirrnr-b()th lead to a real (lDP
of' (l Thev sinrplv stress difl'erent f'eatures of otttpttt
rlt'tcl nrinatirn.
lcss rhrn
:rs
is
(r)
Part
This
I in
pr'()l.ir-( ssr()r is
l,
abr<ltrtc valttc.
t40
CHAPTER
7 .
thc poprrlation.
C+l=TE
!rJ
o
0)
0Qop
Real GDP
Kevnesian policies are, first, the explicit clcclication ol rnacroeconornic policv instrurnents to real
<'rrrrrlric goals, in panicular full emplovment and
real grorvth of narional income. Second. Ke;-nesian
dem:rnd managemert is activist. 'fhird. Kevrrcsians
have wished to put both fiscal anrl uroncLalv roli< it:s
ir.l col.lsistent and coorclinatcd llar nt:ss irr thc orrrsrrir
ol macr-oecouonric obicctivcs.
In tlris
-g
OJ
0o
GDP
Real GDP
,4S-AD
The muldplier model is a way ol underslantlirrg thc workings of tl.re A.!-,41) equilibrirrrn.
(a) Thc top rancl shors the outprrtrxpendirure equilit>
lirlr in thc rrrrrltiplier nrodel. At point l, the spending line
.just cuts e 45" line, Ieading to equilibnum outprrr ol Q
(b) The equilibriunl can also be sr:r'n in tlrc l)()ttom
p:rnel, where lhe ,,lD curve culs tll('
curve at point ',
^.S
ln this simplesr busincss<yclc model wages
and prices are
assuned lr lx'fixcd, so the Scurve is horizonal until full
(:rrl)l()yrncn t is reached. Both approaches lead to exactly
th(' sanr(: e<rrilibrium output, Q.
I0\1' (;OvI.:RN
Nf
t4r
4,000
_!
=
b
$300 billion
3,500
ll,l,t
= '/:
$200 billion.
\crifi
that
L1''.
3,000
4,000
3.500
Gross domestic product (bilhons of dollars)
s.
D1
Altelnatively, we can plot the new colrstInption finction as a parallel dotonuarul shift by'200. As
Gl)P
consurnption cxrcnclittr re
+ gloss pli\atc dontcstic inlcstmcrll
+ govcrnrncnt prrrchascs ol'goods alrd
sc rvlc cs
rrcL cxp()rls
: (+ I + (;+
n<w, rvc consirlcl a closed economy with no forcign traclc, so orrr GDP corrsists of the first three
cornpor)cnts, (: + I + (;. (\\'e adcl the final compcF
ncnt, nct cxport-s, rvhen we consicler open-economy
For
rnaclocconomics. )
Figulc 7-10 shors thc effect of inclrrding govelnrncnt prrrchascs. 'l his diagrarn is very simil:rr to
the onc trscd carlict'in this charter (see Figure 7-7).
Hcrc, wc havc arklccl a ncrv expendittrre stream, G, to
the constrruption and irrvcstnrerlt amolrnLs. Diagramnlaticalh,, wc placc thc nc.w variable, (J (government
t42
CHAPTER
ll(
of
C+l+G=TE
4,000
0)
rrr
C+l
=
5
corrsrr
rt (lDP
3,500
Govornment
purchases
l
!
o
()
.o
Inveslmenl
3,000
Consumption
3,000
3.500
4,000
OP
prlrchases of goods and sen'ices), on top of the corsunrption fttnction and the fixed rmorrnt of itrvestrnent. The vertical distance between the l.' -f / line
and the new 77i : C + I + (; line is.just rhe quanrirv
()l (;.
\\fhv tlo rre simply add G on the t<lp? Becarrse
spcndirrg on government buildings (G) lras rhe salre
rnacroeconomic impact. as spe rrding ot private brrildirrgs (1); the collective expcnditure invoh'ed in buvirrg a government vetricle ((J) has the same effecr olr
jobs as private consllrnption expenditrlres ()u alltorrrobilcs ( (,').
trl'e end up with the three-layer crke rf -fli:
+
C
I + G, calculating the uorrnt of total spending fbrthcoming at each level of GDP lVe norv rnust
Iocate the point of intersection of the 7Z line with
the 45' line to fir)d rhe equilibriun level of CDP. Ar
this equilibriurn GDP level, denoted by poirrr /i in
Figure 7-10, tot:rl planned speudil)g exacrl,v equrls
lmpoct of Toxation on
Aggregote Demond
How rlocs govcr nrr)cnt Laxation tcrrtl to rcdrrce aggregatc dcrrraud allrl thc lcvcl ot GDP? Extra taxcs lowcr
orrr disposablc irrcoulcs, anr[ Iowcrtlisposablc incornes
,\FFU(11 ()L
l Pt l
43
slrifis the O =
plcst mrrltiplit'r- nrodel. Tlle first c<lrrrrrr shorr's a re[crcllct' Icvcl ol' ( )DP, rrhile tht' sccond shorvs :r fixcd
lcvcl ol'taxcs, 5300 billion. Disposahlc ircorne in
coltrnrr (3) is (;l)P lcss taxcs. Plnncd consurnption.
lakclr :rs a firnction ol 1)/, is shrr'n in colrrnrn (4).
Colrrrnrr (ir) shous tlrc lixccl lcvcl of rlanrrccl irrvestrncnt. rrhilc toltrrrr ((i) cxhilits thc lcvcl ol'gorclrrrrrcnt purclrascs.'Ib f inrl total Illannc(l cxrcrrrlitrrrcs,
77j. in colrrnrn ( 7). *c aclcl t()l{cthcl thc (1. 1, arttl (J in
colrurns (4) tlu otrglr (6).
Finallr. rvc conlparc total dcsilctl cx1;crrdittut's
,f
* li
lbu
librium (iDP?)
A Numericol Exomple
The poirrts made up to no$ rre illustrated in
Table 7-3. This table is ven sirnilar to Table 7-2.
rrhiclr illrrstrated orrtprrt deterrr inatio r in the sinr-
ncu'. lrruer (: - I + li schedrrle in Figrrle 7-10. (bnlir-rn tlrat its lrcw int('rsectiotr rrith tht'{ir' line tnltst
bc at a l()wcr cqrrilihrirrrn level of GDP
Kt'cr in lnirrrl that li is gort'rntrtettt pttrchases of
goorls irncl scr-r'ices. It t'xclurlt's spendirrs on tl:rnsfet's
strclr as u ncrrr )lo\ lnen t insttrance or social secttritv
pir\,ncnts. llresc tr:ursfcrs irrc fr('at('d :rs Itegati\1'
$l
r)0
irrclcirsc in socitl
$3(X)
(l)
(2)
(4)
(3)
(5)
(6)
Initial
level
Taxes
of
GDP T
.1,200 300
3.900 300
3,600 300
3,300 300
3,000 300
Planned
inYestment
Government
3.{i00
2(X)
3.4(X)
3,200
3.000
200
200
200
200
200
200
2.r'](x)
:100
Disposable
income
Planned
consurnption
DI
3,900
3,(i(x)
3,300
3,000
2,700
expenditure
2(X)
200
(7)
(8)
Total
planned
expcnditure, TE
(c+ I+ G)
Resulting
tendency
of economy
4,000
3,800 J
3,600
3,400 T
3,200
Corrtlaction
Clontrction
Equilibrium
Expansion
Expansion
TABLE 7-3. Government Purchases. Taxes. and Investment.Also f)etermirrt' Eruilibriunr GDP
llicr.nrrldc|'Itltltist.xatttl|r..ti|\('silt('.'ltttltrsttttt..
144
CHAPTER
7 .
-{\D
AGGREGATE DEMANI)
cxactly t'ight.
answer as Figure 7- I I .
!!'e can sum up:
r.rLrtrrrt
ditrrr
FIGURE 7- |
Output
l.
rrprvard the C
ro (:+ I+ G'.
_!
+ I + Gline
by $100 billion
=
o)
.E
(l)
-l =
:,
;__:_;
t7t
.o
3,600
3,900
Gross domestic product (billions of dollars)
t4s
FIS(:AI--POI,I(]Y MUT.TIPT,IERS
buildup
Increase in defense
spending as
pertent of GDP
World War I
World War II
l9I6-1918
10.2
13.0
t939-1941
9.7
41.4
8.0
26.7
69.1
1.9
0.3
9.7
_ 1.3
0.1
0.5
lVar
1939-19,14
1950:3-1951:3
1965:&-1967:l
lfX)0:3-1991:l
2003:l-2003:2
over buildup
period (%)
10.5
the ncrese n
C.
defense
lmpoct of Taxes
Taxes also have an impact upon equilibriurn GDP,
although the size of tax multipliers is smaller than
that of expenditure multipliers. Consider the follnwing example: Srrppose the economv is at is potcrrtial GDP and the nation rises defense spending by
$200 billion. Such sudden increases have occurrcd
at many points in the history of the United Statesin the early 1940s for World \4hr II, in l9l-r I for tl'rc
Korean wa in the mid-1960s for the Viefnam war,
and in the earl), 1980s clrrring the Reagan adrninistration's military builrlup. Furthermorc, say that ccG
nomic planners wish to raise taxes just crrorrgh to
offset the effect on GDP of the $200 billion incrcasc
in G. I{ow much wolrld taxes have to bc raiscd?
CHAPTER 7 .
146
ru-c 7-$.
in 7'r-cduccs rlisposable income by.just enough to prc>
cltcc a constunptinn decline of $2ff) billion rvhen the
l]\)isr/t. Put differcntl1', a tax increase of $30O billion
+I+
up tlrc
(,'
incrc:rsc shif
' lor
sirrrplicrty. we trkc thc absolutc riltc ()f lhe lax mulripli<'r (sirr<c thc rnultiplicr is actrrlly rrcgative). Tltc difTerent
mukipliers can he sccn rrsing thc dc!icr'ol the "expcnditttrc
rourrds- shown on pagc | 39. l,ct thc M/{, bc r. Then if (i goes
up bl' I unit. the tourl ircrerse in spcnding is the sttrn ofseconclary rcs'nding rottrttls:
I * * :'+'*...=:
I
l-
-I'lrus
|-
! | r t
'= L,
_
to innovation or pessimism, or
spcnding dte to war,
irt
gr-rvcrnrncnt
fluctuati<-xls
invcstn)crrl duc
war breaks out and the countrv incrcascs nrilitar), spending (as illustratcd b;- thc tnany cascs in
Table 7-4). G increases, arrd this lcads to a mtrltiplied increase in out-rut, as sccn in F'igure 7-l l.
lf vou lotk back at Figurc 7-2 on pagc 128, yorr
cln see horv large wars rvcrc accotnpanicd by large
in
t47
SU ItI I'A RY
eno-nrtuslv
quitc difll'r'crr
tl1',
it
tnre of the economv. One of the most signicirnt ornissions is tlre inrpact of nancial markets and moneurn'
ld
SUIrIMARY
A. What are Business Cycles?
l. Business cyclcs <>r fluctuations arc sngs
in
tourl
national <lrrtprrt, irrc<me, and empklvment, merrked bv
widespread exrarrsion or crnt:rction in rnan sr.rtors
in
irrsrfIir-iclrt
nronetiirv printing press cirn lcad to runan':r,v inflation. Undenturnding the fi>rces that allect aggregate
lrggrcgutc
5.
Aggrt'gatc dcrrrarrrl r clrcst'rrts thc total ruarr tity of orrtput willnf{h,bought at a given price levrl, othcr things
hcld c<nstant. OclmponenLs of spenclirrg inclrrde
(n) cr>nsrrmption, which clepends primaril- rrpon dis
posable income; () investment, which depends rrpon
present and expectcd lirtrrre output and upotr interest
-at<'s and taxr:s; (r') g()v('tnnt(:nt trrr<lras<'s of grxxls
and senices: and (/) net cxports, wlriclr deprntl upon
t48
7.
employment.
I
I =
I
: I
IPC I'fP.l
l-
|
multiplier is numerically equal t<r
I + r+ I + ...=
'I'he
simplest
t/(r -
MPot.
of ontput. In the simplest approach, household constmption is a [unction of disposable income, while
invesnent is lixcd. People's desire to consume and
thc willingness of brrsiresses to irrvest are brought into
balanct: by a(liustIn('nts rr r)rrtput. Tlrt: t'rrrilibrirtnt
lcvcl ofnaliorral olt[)ut r( ( u r'i wlr(:n rlanrrrrl sx'rr<lirr4
cqrrals planned outpr.rt. LIsinH the expen(litrrrc<)lrtput
approach, equilibrium output comes at the intersection o[ the total expenditrrre ( 7)fi) consumption-plusinYestment schedule:rnd thc 45' line.
l. lf people:rlwa;rs
resotrces.
level,
find orrtput highcr tharr sales, widr irrvr:rrtorit's rilirr ur irrvolrrrr tarily irrrrl rrrrfit.s rlrrnlnct irt3.
Finrrs lhcrcf<rt: cllt pnxlu( tion anrl r:rrr lk rlrnt'n t back
toward the rquilibrium levcl. The onl,v srrstainablc
level of output comes when buvers desire to prrchase
brrsin<'ss<:s
Aggregate Demand
('xpansl()n,
(:()n t ra(:l
t(
)rl
rcccssion
flucluations
agHr('K.rl(' rk'rnan<1, ,4/) < rrrlr'
major c()mponcnts of agHrcgatc
demand:
O,
I,
G,
downwarcl-sloping,{-D cun'e
ltrv('
vs.
449
multiplier
=t+MPC+(,!l/{j)r+...
_l_l
I - IIIP(: ML'S
(,'* 1* (i
fiscal rolicy:
G efl'ect on e quilibritrnr CIDP
7'cffect on (;C and on GDP
curve
rritten
Thc classic
stu<ly.'
7-h
(hntrtl'l'lmnl
oJ
influential
l<><ks. 'l he
liconomie ()msenurnts
of the Peru e (1\ll\l), rlr:dictt.rl with rrrrcanny accru acy that tht.
Trcatr' of \e naillcs worlt'l lcd to disastrors consequences
for Europe.
Websites
consortium
of
macroeconomists participates
in
the
business<vcle del'el<omens.
nr(v(:nrent.s
4.
5.
ln the sinrple mulplier model, assume that investrrt.rl is alwavs zt.r'o. Shrw that cquilibrium output in
this special casc worrkl corn( at thc blr:ak<'vcn xrint
of the consumpon function. l4hy would equilibrium
outprr come aboae the break-even point when investrrcnt is positive?
l)t'lirrr: t ax:lirlly w'lrat is nreant
b,v
equilibrium in the
t50
7.
cHAPTER
8. Fix;lain in wortls
expenditure multplier.
of nations depends
cnrcially on saling and investment. furd from youth
thrift
is
ln a slriking argur('nt
called
tlsirrt'ss<'s
7 .
7,2,
likc a o'r'lc.l
12. Dafa problem: Sorrrc ccorromisls preler an objective,
qrantitative definition of a recession to the more subjectire approach tsed bv the NBER. These economiss
define a recession as any period during which leal
C}DP declined lbr at least two qrrarlcrs ir a rrw. Notc
liorn lhc tcxl that this is zr,/ thc way the NBER defines
A recetslon.
a.
b.
l.
Advanced problem 57ting e multiplier-accelerator mechanism: Find two dice and use the following
technique to see if you can generate something that
is the paradox
tlrrif t: When the conlnruniry desiles to savc nl()r'(.. tlrr: <'lli'ct nra,, at lrrallv lx.
a lorvcring rf irrrorrc antl rtrrtlrt with no increase <tf
savi n g.
Ilere then
Rt_TStNESS TiYCLF.S
c.
is
calcrrlated as lbllows:
&:400 "
-';