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Animal spirits
What determines the autonomous level of business investment according to John Maynard Keynes
Bracket Creep
A tax problem of the late 1970s
Stagflation
High inflation coupled with high unemployment
Money Illusion
A Keynesian notion in which workers are fooled by rising nominal wages while real wages actually fall
Twin Deficits Anomaly
Government spending>taxes = Imports>exports
C=f(yd)
Consumption is a function of disposable income
Labor force (L)
Employed and unemployed E+U
Individuals aged 16-66 who are not institutionalized and actively seeking employment
Unemployment rate
U/L Unemployed / Labor force
Cyclical Unemployment
Bad, unemployment due to changes in the business cycle
Frictional Unemployment
Unemployment due to job switching
Structural Unemployment
Unemployment due to changes in the overall composition of the economy (technology)
Seasonal Unemployment
Unemployment due to change of season based jobs
Full employment
Natural rate of unemployment (U^N). Frictional + Structural. When there is NO cyclical unemployment
Leading economic indicator
What will happen
Lagging economic indicator
What has happened
Coincident economic indicator
What is happening right now
Underemployed
Overqualified for one’s current position (masters degree working as a trash guy)
Business Cycle
changes in the overall measure of economic activity over time
Peak —> Trough
Contraction/depression/recession
Trough —> Peak
Expansion
Trough —> Previous peak height
Recovery
Classical View
The economy is inherently stable. Government intervention tends to destabilize the economy.
Favors governmental deregulation
Keynes View
The economy is inherently unstable. Government intervention tends to stabilize the economy.
Favors government intervention like creating jobs
C=f(y^d)
Consumption is a function of disposable income
Positive relationship
I=f(r )
Investment is a function of real interest rate
Inverse relationship
Nx=f(e)(x-m)
Net exports are a function of exchange rate
Inverse relationship
Y1
U>U^N, Recessionary Gap, Industry up
Y2
U<U^n, Inflationary gap, Industry down
Y*
U=U^N, natural rate of unemployment, frictional and structural, no cyclical
AES
1)Consumption (brings up)
2)Investment (brings up)
3)Government Spending (brings up)
4)Taxes (brings down)
Autonomous consumption
Y intercept, level of consumption that takes place when income is 0
Y=AE
45º Line, 1 to 1
Relationship between MPC and MPS
MPC+MPS=1
Income (Y)
C+S Consumption plus Savings
Savings
Y-C Income minus Consumption
MPC Definition
Marginal propensity to consume, change in consumption that takes place with one more $ of income.
MPS Definition
Marginal Propensity to spend, change in spending tha occurs with one more $ of income
Government Spending Multiplier
change in Y over change in G, or 1/1-MPC
Tax Multiplier
Change in Y over change in T, or -MPC/1-MPC
Leakage-Injections Stages
1) S=0
2) S=In
3)S=In+G
4)S+T=In+G
5)S+T+M=X+In+G
Income and Expenditures Stages
1) AE1=C
2)AE2=C+I
3)AE3=C+I+G
4)AE4=C(Y-T)+I+G
5)AE5=C(Y-T)+I+G+Nx
Keynesian Conjecture 1
Consumption is a function of disposable income
Keynesian Conjecture 2
The marginal propensity to consume is some number between 0 ≤ MPC ≤ 1
Keynesian Conjecture 3
As income rises, APC falls. APC=C/Y
Relationship between APC and APS
APC+APS=1 APC=C/Y APS=S/Y
As Y(income) rises, APC falls
Short run relationship between APC and Y
As Y(income) rises, APC levels out/remains constant
Long run relationship between APC and Y
Crowding out
Government spending gets too big and eliminates private investment
The change in income Y is the same as the change in Government Spending G and the change in taxes T.
Conditions:
1)if there is no crowding out
2) if the government spending multiplier equals the tax multiplier
Balanced budget
G=T When government spending is equal to taxes
G>T
Budget deficit
G<T
Budget surplus
1)GDP
=Depreciation+Indirect business taxes+rent+wages+interest+profit
2)NDP/Net Domestic Product (GDP-Depreciation)
=Indirect business taxes+rent+wages+interest+profit
3)National Income (GDP-Depreciation-Indirect business taxes)
=Rent+wages+interest+profit
4) Personal income
National income+government transfer payments-Social security contributions-undistributed corporate profits
5) Disposable Income
Personal income-Personal taxes
Real Purchases Effect
Describes why the AD curve is (-)
EX when prices are 1/3 off consumption goes up as price goes down.
Interest Rate Effect
Describes why the AD curve is (-)
EX When the price of cars drops Investment goes up and interest rate goes down.
Net Exports Effect
Describes why the AD curve is (-)
EX When domestic goods are cheaper than foreign goods, exports increase and imports decrease, leading Net Exports to increase making price decrease. Output increases (Y)
Equation of Exchange
Describes why the AD curve is (-)
(M)(V)=(P)(Y)
Shift in AD
Increase in change in C,I,G,T,NX,V,M
When increased, all shift the AD curve right except Taxes, which when increased, shift the curve left
Keynesian View/Section of AS
Low levels of output
Short Run
Output is change, price level is held constant (Sticky Prices)
Where Fiscal Policy is most effective
Helps describe why the AS curve is (+)
Classical view/Section of AS
High levels of output
Long run
Output is constant, price level varies (fixed output over time)
Where fiscal policy is the most Ineffective
Helps describe why the AS curve is (+)
Compromise Section of AS
Where Fiscal policy is moderately effective
Helps describe why the AS curve is (+)
Aggregate Supply Curve
Fiscal Policy
Change in G and/or Change in T
Expansionary Fiscal Policy
Positive change in G and/or Negative change in T
Contractionary Fiscal Policy
Negative change in G and/or Positive change in T
Monetary Policy
Change in M^s
Inflation formula
π=π^e -B(U-U^N) + ε