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