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Presentation Transcript

Slide1: 

Short-run Macroeconomic Equilibrium

Short-run Macroeconomic Equilibrium: 

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