Short-run Macroeconomic Equilibrium Background to the Theory

Slide3:

A simplified circular flow of income model

Slide4:

Cd A simplified circular flow of income model

Slide5:

Cd Incomes A simplified circular flow of income model

Slide6:

Cd W = S + T + M Incomes A simplified circular flow of income model

Slide7:

Cd W = S + T + M J = I + G + X Incomes A simplified circular flow of income model

BACKGROUND TO THE THEORY:

BACKGROUND TO THE THEORY Defining aggregate demand and national income
The 45° line diagram
the significance of the 45° line

The 45° line:

O Cd, W, J Y Cd + W (=Y) The 45° line

BACKGROUND TO THE THEORY:

BACKGROUND TO THE THEORY Defining aggregate demand and national income
The 45° line diagram
the significance of the 45° line
Consumption

BACKGROUND TO THE THEORY:

BACKGROUND TO THE THEORY Defining aggregate demand and national income
The 45° line diagram
the significance of the 45° line
Consumption
the consumption function
the mpc

The consumption function:

Consumption (£bn) Y C Y (£bn) 50 50 The consumption function

Different consumption functions (a):

Different consumption functions (a) Consumption (£bn) Y C1 Y (£bn)

Different consumption functions (b):

Different consumption functions (b) Consumption (£bn) Y C2 Y (£bn)

Different consumption functions (c):

Different consumption functions (c) Consumption (£bn) Y C3 Y (£bn)

Different consumption functions (d):

Different consumption functions (d) Consumption (£bn) Y C4 Y (£bn)

BACKGROUND TO THE THEORY:

BACKGROUND TO THE THEORY Defining aggregate demand and national income
The 45° line diagram
the significance of the 45° line
Consumption
the consumption function
the mpc
other determinants of consumption

BACKGROUND TO THE THEORY:

BACKGROUND TO THE THEORY Defining aggregate demand and national income
The 45° line diagram
the significance of the 45° line
Consumption
the consumption function
the mpc
other determinants of consumption
short-run and long-run consumption functions

Long-run and short-run consumption functions:

Consumption (£bn) Y Y (£bn) Long-run and short-run consumption functions

Long-run and short-run consumption functions:

Consumption (£bn) Y Clong run Y (£bn) Cnow C5 years’ time C10 years’ time Long-run and short-run consumption functions

BACKGROUND TO THE THEORY:

BACKGROUND TO THE THEORY Defining aggregate demand and national income
The 45° line diagram
the significance of the 45° line
Consumption
the consumption function
the mpc
other determinants of consumption
short-run and long-run consumption functions
the consumption of domestically produced goods

The consumption of domestic product:

The consumption of domestic product Consumption (£bn) Y C Y (£bn) Cd

BACKGROUND TO THE THEORY:

Withdrawals
net saving: the saving function
the mps
determinants of saving BACKGROUND TO THE THEORY

UK consumption and saving:

UK consumption and saving £m Disposable income

UK consumption and saving:

UK consumption and saving £m Disposable income

UK consumption and saving:

UK consumption and saving £m Disposable income Consumer expenditure

Household saving as % of personal disposable income:

Household saving as % of personal disposable income Source: Datastream

BACKGROUND TO THE THEORY:

Withdrawals
net saving: the saving function
the mps
determinants of saving
net taxes: tax functions BACKGROUND TO THE THEORY

BACKGROUND TO THE THEORY:

Withdrawals
net saving: the saving function
the mps
determinants of saving
net taxes: tax functions
the tax rate and the mpt BACKGROUND TO THE THEORY

BACKGROUND TO THE THEORY:

Withdrawals
net saving: the saving function
the mps
determinants of saving
net taxes: tax functions
the tax rate and the mpt
expenditure taxes and Cd BACKGROUND TO THE THEORY

BACKGROUND TO THE THEORY:

Withdrawals
net saving: the saving function
the mps
determinants of saving
net taxes: tax functions
the tax rate and the mpt
expenditure taxes and Cd
imports: import functions BACKGROUND TO THE THEORY

BACKGROUND TO THE THEORY:

Withdrawals
net saving: the saving function
the mps
determinants of saving
net taxes: tax functions
the tax rate and the mpt
expenditure taxes and Cd
imports: import functions
the mpm BACKGROUND TO THE THEORY

BACKGROUND TO THE THEORY:

Withdrawals
net saving: the saving function
the mps
determinants of saving
net taxes: tax functions
the tax rate and the mpt
expenditure taxes and Cd
imports: import functions
the mpm
effect of imports on Cd BACKGROUND TO THE THEORY

BACKGROUND TO THE THEORY:

Withdrawals
net saving: the saving function
the mps
determinants of saving
net taxes: tax functions
the tax rate and the mpt
expenditure taxes and Cd
imports: import functions
the mpm
effect of imports on Cd
the withdrawals function BACKGROUND TO THE THEORY

BACKGROUND TO THE THEORY:

Withdrawals
net saving: the saving function
the mps
determinants of saving
net taxes: tax functions
the tax rate and the mpt
expenditure taxes and Cd
imports: import functions
the mpm
effect of imports on Cd
the withdrawals function
the mpw BACKGROUND TO THE THEORY

The W and Cd functions:

O Y Cd, W The W and Cd functions

BACKGROUND TO THE THEORY:

Injections
investment
increased consumer demand
expectations
cost and efficiency of capital
rate of interest
government expenditure
exports
the injections function BACKGROUND TO THE THEORY

The injections and withdrawals functions:

The injections and withdrawals functions O Y W Cd, W, J J

Short-run Macroeconomic Equilibrium:

Short-run Macroeconomic Equilibrium Determination of National Income

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME Equilibrium national income
withdrawals equal injections

Deriving equilibrium national income:

O Y Cd, W, J Deriving equilibrium national income

Deriving equilibrium national income:

O Y Cd, W, J Y1 Deriving equilibrium national income

Deriving equilibrium national income:

O Y W Cd, W, J J Deriving equilibrium national income

Deriving equilibrium national income:

O Y W Cd, W, J J Ye Deriving equilibrium national income

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME Equilibrium national income
withdrawals equal injections
income equals expenditure

Deriving equilibrium national income:

O Y W Cd, W, J J Deriving equilibrium national income

Deriving equilibrium national income:

O Y W Cd, W, J J Y = Cd + W Deriving equilibrium national income

Deriving equilibrium national income:

O Y W Cd, W, J J Cd Y = Cd + W E = Cd + J Y1 Deriving equilibrium national income

Deriving equilibrium national income:

O Y W Cd, W, J J Cd Y = Cd + W E = Cd + J Y2 Deriving equilibrium national income

Deriving equilibrium national income:

O Y W Cd, W, J J Cd Y = Cd + W E = Cd + J Ye Deriving equilibrium national income

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME Equilibrium national income
withdrawals equal injections
income equals expenditure
The multiplier: introduction

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME Equilibrium national income
withdrawals equal injections
income equals expenditure
The multiplier: introduction
the circular flow of income and effects of changes in injections

Slide53:

Cd W = S + T + M J = I + G + X Incomes A simplified circular flow of income model

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME Equilibrium national income
withdrawals equal injections
income equals expenditure
The multiplier: introduction
the circular flow of income and effects of changes in injections
definition of the multiplier: Y/J

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME The multiplier: the withdrawals and injections approach
graphical analysis: shift in the J line

The multiplier: (a) a shift in injections:

O Y W W, J J1 The multiplier: (a) a shift in injections

The multiplier: (a) a shift in injections:

O Y W J1 J2 Ye1 a W, J The multiplier: (a) a shift in injections

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME The multiplier: the withdrawals and injections approach
graphical analysis: shift in the J line
the formula: 1 / mpw or: 1 / (1 – mpcd )

The multiplier: (a) a shift in injections:

O Y W J1 J2 Ye1 a Ye2 b J1 J2 W, J The multiplier: (a) a shift in injections

The multiplier: (a) a shift in injections:

O Y W J1 J2 Ye1 a Ye2 b J1 J2 W, J The multiplier: (a) a shift in injections

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME The multiplier: the withdrawals and injections approach
graphical analysis: shift in the J line
the formula: 1 / mpw or: 1 / (1 – mpcd )
numerical illustration

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME The multiplier: the withdrawals and injections approach
graphical analysis: shift in the J line
the formula: 1 / mpw or: 1 / (1 – mpcd )
numerical illustration
the withdrawals multiplier

The multiplier: (b) a shift in withdrawals:

O Y W1 J Ye1 a W, J The multiplier: (b) a shift in withdrawals

The multiplier: (b) a shift in withdrawals:

O Y W1 J Ye1 a W, J W2 The multiplier: (b) a shift in withdrawals

The multiplier: (b) a shift in withdrawals:

O Y W1 J Ye1 a W, J W2 Ye2 c The multiplier: (b) a shift in withdrawals

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME The multiplier: the withdrawals and injections approach
graphical analysis: shift in the J line
the formula: 1 / mpw or: 1 / (1 – mpcd )
numerical illustration
the withdrawals multiplier
The multiplier: the income and expenditure approach

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME The multiplier: the withdrawals and injections approach
graphical analysis: shift in the J line
the formula: 1 / mpw or: 1 / (1 – mpcd )
numerical illustration
the withdrawals multiplier
The multiplier: the income and expenditure approach
graphical analysis

The multiplier: (c) a shift in the expenditure curve:

O Y E, W, J Y E1 The multiplier: (c) a shift in the expenditure curve

The multiplier: (c) a shift in the expenditure curve:

O Y Y E1 Ye1 E2 Ye2 E, W, J The multiplier: (c) a shift in the expenditure curve

The multiplier: (c) a shift in the expenditure curve:

O Y Y E1 Ye1 E2 Ye2 a E, W, J The multiplier: (c) a shift in the expenditure curve

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME The multiplier: the withdrawals and injections approach
graphical analysis: shift in the J line
the formula: 1 / mpw or: 1 / (1 – mpcd )
numerical illustration
the withdrawals multiplier
The multiplier: the income and expenditure approach
graphical analysis
numerical illustration

DETERMINATION OF NATIONAL INCOME:

DETERMINATION OF NATIONAL INCOME The multiplier: some qualifications
deriving the mpcd from the mpc
effects of changes in one injection or withdrawal on other ones
Relationship between the 45° line diagram and the AD and AS diagram

Showing the multiplier effect on the 45o line and AD/AS diagrams:

Showing the multiplier effect on the 45o line and AD/AS diagrams Y Cd, W, J Y Ye1 O

Showing the multiplier effect on the 45o line and AD/AS diagrams:

Showing the multiplier effect on the 45o line and AD/AS diagrams P Y Y Cd, W, J Y Ye1 O O E1

Showing the multiplier effect on the 45o line and AD/AS diagrams:

Showing the multiplier effect on the 45o line and AD/AS diagrams P Y Y Cd, W, J Y Ye1 O O AD1 E1 E2 Ye2 AS

Showing the multiplier effect on the 45o line and AD/AS diagrams:

Showing the multiplier effect on the 45o line and AD/AS diagrams P Y Y Cd, W, J AS Y Ye1 O O AD1 E1 E2 Ye2

Short-run Macroeconomic Equilibrium:

Short-run Macroeconomic Equilibrium Simple Keynesian Analysis of Unemployment and Inflation

UNEMPLOYMENT AND INFLATION:

UNEMPLOYMENT AND INFLATION The deflationary gap
withdrawals and injections approach

The deflationary gap:

O Y W W, J J Ye The deflationary gap

The deflationary gap:

O Y W W, J J Ye YF The deflationary gap

UNEMPLOYMENT AND INFLATION:

UNEMPLOYMENT AND INFLATION The deflationary gap
withdrawals and injections approach
income and expenditure approach

The deflationary gap:

O Y W, J, E Ye YF Y E The deflationary gap

The deflationary gap:

O Y Ye YF Y E W, J, E The deflationary gap

The deflationary gap:

O Y W J Ye YF c d Y E a b Deflationary gap W, J, E The deflationary gap

UNEMPLOYMENT AND INFLATION:

UNEMPLOYMENT AND INFLATION The deflationary gap
withdrawals and injections approach
income and expenditure approach
The inflationary gap

UNEMPLOYMENT AND INFLATION:

UNEMPLOYMENT AND INFLATION The deflationary gap
withdrawals and injections approach
income and expenditure approach
The inflationary gap
withdrawals and injections approach

The inflationary gap:

O Y W W, J Ye J The inflationary gap

The inflationary gap:

O Y W W, J Ye YF J The inflationary gap

The inflationary gap:

O Y W W, J Ye YF J The inflationary gap

UNEMPLOYMENT AND INFLATION:

UNEMPLOYMENT AND INFLATION The deflationary gap
withdrawals and injections approach
income and expenditure approach
The inflationary gap
withdrawals and injections approach
income and expenditure approach

The inflationary gap:

O Y Y E W, J, E Ye The inflationary gap

The inflationary gap:

O Y Y E W, J, E Ye The inflationary gap

The inflationary gap:

O Y YF Y E W, J, E Ye The inflationary gap

The inflationary gap:

O Y Ye YF Y E Inflationary gap e f W J g h W, J, E The inflationary gap

UNEMPLOYMENT AND INFLATION:

Inflation and unemployment at the same time
inflationary pressures before the full-employment level of income
implications for shape of AS curve UNEMPLOYMENT AND INFLATION

Unemployment and inflation:

Unemployment and inflation O Y Price level YF

Unemployment and inflation:

O Y AS1 Price level YF AS2 Unemployment and inflation

UNEMPLOYMENT AND INFLATION:

Inflation and unemployment at the same time
inflationary pressures before the full-employment level of income
implications for shape of AS curve
relationship between 45° line diagram and the AD & AS diagram UNEMPLOYMENT AND INFLATION

Allowing for inflation in the 45° line and AD / AS diagrams:

P Cd, W, J, E Y Y AS AD1 Allowing for inflation in the 45° line and AD / AS diagrams

Allowing for inflation in the 45° line and AD / AS diagrams:

P Cd, W, J, E Y Y AS P1 Y AD1 Allowing for inflation in the 45° line and AD / AS diagrams

Allowing for inflation in the 45° line and AD / AS diagrams:

P Cd, W, J, E Y Y AS AD1 Y1 Y E1 E2 P1 Allowing for inflation in the 45° line and AD / AS diagrams

Allowing for inflation in the 45° line and AD / AS diagrams:

P Cd, W, J, E Y Y AS AD1 P1 Y1 Y E1 AD2 E2 Y2 Y3 P2 Allowing for inflation in the 45° line and AD / AS diagrams

Short-run Macroeconomic Equilibrium:

Short-run Macroeconomic Equilibrium Keynesian Analysis of the Business Cycle

KEYNESIAN ANALYSIS OF THE BUSINESS CYCLE:

KEYNESIAN ANALYSIS OF THE BUSINESS CYCLE The accelerator
changes in national income and induced investment

The accelerator effect:

The accelerator effect

The accelerator effect:

The accelerator effect

The accelerator effect:

The accelerator effect

The accelerator effect:

The accelerator effect

The accelerator effect:

The accelerator effect

KEYNESIAN ANALYSIS OF THE BUSINESS CYCLE:

KEYNESIAN ANALYSIS OF THE BUSINESS CYCLE The accelerator
changes in national income and induced investment
the accelerator coefficient

KEYNESIAN ANALYSIS OF THE BUSINESS CYCLE:

KEYNESIAN ANALYSIS OF THE BUSINESS CYCLE The accelerator
changes in national income and induced investment
the accelerator coefficient
the instability of investment

Slide112:

Indicator of industrial confidence in the EU Balances (%) Source: European Economy Business and Consumer Surveys (Commission of the European Communities) EU Euro area

Slide113:

Indicator of level of capacity utilisation (%) in the EU 02 % Source: European Economy Business and Consumer Surveys (Commission of the European Communities)

KEYNESIAN ANALYSIS OF THE BUSINESS CYCLE:

KEYNESIAN ANALYSIS OF THE BUSINESS CYCLE The accelerator
changes in national income and induced investment
the accelerator coefficient
the instability of investment
The multiplier / accelerator interaction

Fluctuations in UK real GDP and investment: 1978-2002:

Fluctuations in UK real GDP and investment: 1978-2002

Fluctuations in UK real GDP and investment: 1978-2002:

Fluctuations in UK real GDP and investment: 1978-2002 GDP

Fluctuations in UK real GDP and investment: 1978-2002:

Fluctuations in UK real GDP and investment: 1978-2002 GDP Investment

KEYNESIAN ANALYSIS OF THE BUSINESS CYCLE:

KEYNESIAN ANALYSIS OF THE BUSINESS CYCLE The accelerator
changes in national income and induced investment
the accelerator coefficient
the instability of investment
The multiplier / accelerator interaction
Fluctuations in stocks

KEYNESIAN ANALYSIS OF THE BUSINESS CYCLE:

Analysing the phases of the business cycle
causes of the upturn
causes of the expansion
causes of the peaking out
causes of the recession
Conclusions
why do booms and recessions persist?
why do booms and recessions come to an end? KEYNESIAN ANALYSIS OF THE BUSINESS CYCLE

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By: chillhitt44 (49 month(s) ago)

this very good topics and good matterial