Short-Run Macro Economic Equilibrium
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Transcript of Short-Run Macro Economic Equilibrium
![Page 1: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/1.jpg)
Short-run MacroeconomicShort-run MacroeconomicEquilibriumEquilibrium
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Short-run Macroeconomic EquilibriumShort-run Macroeconomic Equilibrium
Background to the Theory
Background to the Theory
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A simplified circular flow of income modelA simplified circular flow of income model
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Cd
A simplified circular flow of income modelA simplified circular flow of income model
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CdIncomes
A simplified circular flow of income modelA simplified circular flow of income model
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Cd
W = S + T + M
Incomes
A simplified circular flow of income modelA simplified circular flow of income model
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Cd
W = S + T + M
J = I + G + X
Incomes
A simplified circular flow of income modelA simplified circular flow of income model
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BACKGROUND TO THE THEORYBACKGROUND TO THE THEORY
• Defining aggregate demand and national income
• The 45° line diagram
– the significance of the 45° line
• Defining aggregate demand and national income
• The 45° line diagram
– the significance of the 45° line
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O
Cd, W, J
Y
Cd + W (=Y)
£100bn
£100bn
The 45 line
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BACKGROUND TO THE THEORYBACKGROUND TO THE THEORY
• Defining aggregate demand and national income
• The 45° line diagram
– the significance of the 45° line
• Consumption
• Defining aggregate demand and national income
• The 45° line diagram
– the significance of the 45° line
• Consumption
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BACKGROUND TO THE THEORYBACKGROUND 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
• Defining aggregate demand and national income
• The 45° line diagram
– the significance of the 45° line
• Consumption
– the consumption function
– the mpc
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0
20
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0 20 40 60 80 100 120 140
Con
sum
ptio
n (£
bn)
Y
C
Y (£bn)
50
50
C = 8
Y = 10
mpc = C / Y = 8/10 = 0.8
The consumption functionThe consumption function
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0
20
40
60
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120
0 20 40 60 80 100 120 140
Different consumption functions (a)Different consumption functions (a)C
onsu
mpt
ion
(£bn
)
Y
C1
Y (£bn)
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0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Different consumption functions (b)Different consumption functions (b)C
onsu
mpt
ion
(£bn
)
Y
C2
Y (£bn)
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0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Different consumption functions (c)Different consumption functions (c)C
onsu
mpt
ion
(£bn
)
Y
C3
Y (£bn)
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Different consumption functions (d)Different consumption functions (d)C
onsu
mpt
ion
(£bn
)
Y
C4
Y (£bn)
0
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40
60
80
100
120
0 20 40 60 80 100 120 140
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BACKGROUND TO THE THEORYBACKGROUND 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
• 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
![Page 18: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/18.jpg)
BACKGROUND TO THE THEORYBACKGROUND 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
• 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
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0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Con
sum
ptio
n (£
bn)
Y
Y (£bn)
Cnow
C5 years’ time
C10 years’ time
Long-run and short-run consumption functionsLong-run and short-run consumption functions
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0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Con
sum
ptio
n (£
bn)
Y
Clong run
Y (£bn)
Cnow
C5 years’ time
C10 years’ time
Long-run and short-run consumption functionsLong-run and short-run consumption functions
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BACKGROUND TO THE THEORYBACKGROUND 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
• 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
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0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
The consumption of domestic productThe consumption of domestic productC
onsu
mpt
ion
(£bn
)
Y
C
Y (£bn)
Cd
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• Withdrawals– net saving: the saving function
• the mps• determinants of saving
• Withdrawals– net saving: the saving function
• the mps• determinants of saving
BACKGROUND TO THE THEORYBACKGROUND TO THE THEORY
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40
50
60
70
80
90
100
110
120
130
140
150
160
170
180
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
UK consumption and savingUK consumption and saving£m
Disposable income
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40
50
60
70
80
90
100
110
120
130
140
150
160
170
180
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
UK consumption and savingUK consumption and saving£m
Disposable income
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40
50
60
70
80
90
100
110
120
130
140
150
160
170
180
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
UK consumption and savingUK consumption and saving£m
Disposable income
Consumer expenditure
Saving
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Household saving as % of personal disposable incomeHousehold saving as % of personal disposable income
Source: Datastream
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• Withdrawals– net saving: the saving function
• the mps• determinants of saving
– net taxes: tax functions
• Withdrawals– net saving: the saving function
• the mps• determinants of saving
– net taxes: tax functions
BACKGROUND TO THE THEORYBACKGROUND TO THE THEORY
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• Withdrawals– net saving: the saving function
• the mps• determinants of saving
– net taxes: tax functions• the tax rate and the mpt
• Withdrawals– net saving: the saving function
• the mps• determinants of saving
– net taxes: tax functions• the tax rate and the mpt
BACKGROUND TO THE THEORYBACKGROUND TO THE THEORY
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• 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
• 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 THEORYBACKGROUND TO THE THEORY
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• 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
• 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 THEORYBACKGROUND TO THE THEORY
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• 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
• 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 THEORYBACKGROUND TO THE THEORY
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• 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
• 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 THEORYBACKGROUND TO THE THEORY
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• 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
• 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 THEORYBACKGROUND TO THE THEORY
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• 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
• 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 THEORYBACKGROUND TO THE THEORY
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OY
Cd + W (=Y)
W
Cd, W
Cd
100
100
70
30
The W and Cd functionsThe W and Cd functions
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• Injections
– investment
• increased consumer demand
• expectations
• cost and efficiency of capital
• rate of interest
– government expenditure
– exports
– the injections function
• Injections
– investment
• increased consumer demand
• expectations
• cost and efficiency of capital
• rate of interest
– government expenditure
– exports
– the injections function
BACKGROUND TO THE THEORYBACKGROUND TO THE THEORY
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The injections and withdrawals functionsThe injections and withdrawals functions
OY
W
Cd, W, J
J
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Short-run Macroeconomic EquilibriumShort-run Macroeconomic Equilibrium
Determination of National IncomeDetermination of National Income
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DETERMINATION OF NATIONAL INCOMEDETERMINATION OF NATIONAL INCOME
• Equilibrium national income
– withdrawals equal injections
• Equilibrium national income
– withdrawals equal injections
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OY
W
Cd, W, JDeriving equilibrium national incomeDeriving equilibrium national income
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OY
W
Cd, W, J
J
Y1
b
a
Deriving equilibrium national incomeDeriving equilibrium national income
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OY
W
Cd, W, J
J
Y2
c
d
Deriving equilibrium national incomeDeriving equilibrium national income
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OY
W
Cd, W, J
J
Ye
x
Deriving equilibrium national incomeDeriving equilibrium national income
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DETERMINATION OF NATIONAL INCOMEDETERMINATION OF NATIONAL INCOME
• Equilibrium national income
– withdrawals equal injections
– income equals expenditure
• Equilibrium national income
– withdrawals equal injections
– income equals expenditure
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OY
Y = Cd + W
W
Cd, W, J
J
Deriving equilibrium national incomeDeriving equilibrium national income
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OY
W
Cd, W, J
J
Cd
Y = Cd + WE = Cd + J
J
Deriving equilibrium national incomeDeriving equilibrium national income
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OY
W
Cd, W, J
J
Cd
Y = Cd + WE = Cd + J
Y1
f
e
Deriving equilibrium national incomeDeriving equilibrium national income
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OY
W
Cd, W, J
J
Cd
Y = Cd + WE = Cd + J
Y2
h
g
Deriving equilibrium national incomeDeriving equilibrium national income
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OY
W
Cd, W, J
J
Cd
Y = Cd + WE = Cd + J
Ye
x
z
Deriving equilibrium national incomeDeriving equilibrium national income
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DETERMINATION OF NATIONAL INCOMEDETERMINATION OF NATIONAL INCOME
• Equilibrium national income
– withdrawals equal injections
– income equals expenditure
• The multiplier: introduction
• Equilibrium national income
– withdrawals equal injections
– income equals expenditure
• The multiplier: introduction
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DETERMINATION OF NATIONAL INCOMEDETERMINATION 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
• Equilibrium national income
– withdrawals equal injections
– income equals expenditure
• The multiplier: introduction
– the circular flow of income and effects of changes in injections
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Cd
W = S + T + M
J = I + G + X
Incomes
A simplified circular flow of income modelA simplified circular flow of income model
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DETERMINATION OF NATIONAL INCOMEDETERMINATION 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
• 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
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DETERMINATION OF NATIONAL INCOMEDETERMINATION OF NATIONAL INCOME
• The multiplier: the withdrawals and injections approach– graphical analysis: shift in the J line
• The multiplier: the withdrawals and injections approach– graphical analysis: shift in the J line
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OY
W
W, J
J1
Ye1
a
The multiplier: (a) a shift in injectionsThe multiplier: (a) a shift in injections
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OY
W
J1
J2
Ye1
a
Ye2
b
W, JThe multiplier: (a) a shift in injectionsThe multiplier: (a) a shift in injections
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DETERMINATION OF NATIONAL INCOMEDETERMINATION 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: the withdrawals and injections approach– graphical analysis: shift in the J line
– the formula: 1 / mpw or: 1 / (1 – mpcd )
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OY
W
J1
J2
Ye1
a
Ye2
b
Y
c
WJJ1
J2
Multiplier = Y / J
= Y / W= ca / bc
W, JThe multiplier: (a) a shift in injectionsThe multiplier: (a) a shift in injections
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OY
W
J1
J2
Ye1
a
Ye2
b
Y
c
WJJ1
J2
Multiplier = Y / J= Y / W= ca / bc
= 1/mpw
W, JThe multiplier: (a) a shift in injectionsThe multiplier: (a) a shift in injections
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DETERMINATION OF NATIONAL INCOMEDETERMINATION 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 multiplier: the withdrawals and injections approach– graphical analysis: shift in the J line
– the formula: 1 / mpw or: 1 / (1 – mpcd )
– numerical illustration
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DETERMINATION OF NATIONAL INCOMEDETERMINATION 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 withdrawals and injections approach– graphical analysis: shift in the J line
– the formula: 1 / mpw or: 1 / (1 – mpcd )
– numerical illustration
– the withdrawals multiplier
![Page 63: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/63.jpg)
OY
W1
J
Ye1
a
W, JThe multiplier: (b) a shift in withdrawalsThe multiplier: (b) a shift in withdrawals
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OY
W1
J
Ye1
a
W, J
W2
Ye2
c
The multiplier: (b) a shift in withdrawalsThe multiplier: (b) a shift in withdrawals
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OY
W1
J
Ye1
a
W, J
W2
Ye2
c
Y
W b
Multiplier = Y / W= ca / ab
The multiplier: (b) a shift in withdrawalsThe multiplier: (b) a shift in withdrawals
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DETERMINATION OF NATIONAL INCOMEDETERMINATION 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
• 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
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DETERMINATION OF NATIONAL INCOMEDETERMINATION 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: 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
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OY
E, W, J
Y
E1
Ye1
The multiplier: (c) a shift in the expenditure curveThe multiplier: (c) a shift in the expenditure curve
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OY
Y
E1
Ye1
E2
Ye2
E, W, JThe multiplier: (c) a shift in the expenditure curveThe multiplier: (c) a shift in the expenditure curve
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OY
Y
E1
Ye1
E2
Ye2
Multiplier = Y / J= ca / ba
a
c
Y
J
E, W, J
b
The multiplier: (c) a shift in the expenditure curveThe multiplier: (c) a shift in the expenditure curve
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DETERMINATION OF NATIONAL INCOMEDETERMINATION 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
• 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
![Page 72: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/72.jpg)
DETERMINATION OF NATIONAL INCOMEDETERMINATION 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
• 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
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Showing the multiplier effect on the 45o line and AD/AS diagramsShowing the multiplier effect on the 45o line and AD/AS diagrams
Y
Cd, W, JY
E1
Ye1
O
![Page 74: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/74.jpg)
AS
AD1
Showing the multiplier effect on the 45o line and AD/AS diagramsShowing the multiplier effect on the 45o line and AD/AS diagrams
P
Y
Y
Cd, W, JY
Ye1
O
O
E1
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Showing the multiplier effect on the 45o line and AD/AS diagramsShowing the multiplier effect on the 45o line and AD/AS diagrams
P
Y
Y
Cd, W, JY
Ye1
O
O
AD1
E1
E2
Ye2
AS
![Page 76: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/76.jpg)
AD2
Showing the multiplier effect on the 45o line and AD/AS diagramsShowing 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
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Short-run Macroeconomic EquilibriumShort-run Macroeconomic Equilibrium
Simple Keynesian Analysis of Unemployment and
Inflation
Simple Keynesian Analysis of Unemployment and
Inflation
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UNEMPLOYMENT AND INFLATIONUNEMPLOYMENT AND INFLATION
• The deflationary gap
– withdrawals and injections approach
• The deflationary gap
– withdrawals and injections approach
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OY
W
W, J
J
Ye
The deflationary gapThe deflationary gap
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OY
W
W, J
J
YeYF
Deflationary gap
c
d
The deflationary gapThe deflationary gap
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UNEMPLOYMENT AND INFLATIONUNEMPLOYMENT AND INFLATION
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
![Page 82: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/82.jpg)
OY
W, J, E
YeYF
Y
E
The deflationary gapThe deflationary gap
![Page 83: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/83.jpg)
OYYe
YF
Y
Ea
b
Deflationary gap
W, J, EThe deflationary gapThe deflationary gap
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OY
W
J
YeYF
c
d
Y
Ea
b
Deflationary gap
W, J, EThe deflationary gapThe deflationary gap
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UNEMPLOYMENT AND INFLATIONUNEMPLOYMENT AND INFLATION
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
![Page 86: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/86.jpg)
UNEMPLOYMENT AND INFLATIONUNEMPLOYMENT AND INFLATION
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
– withdrawals and injections approach
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
– withdrawals and injections approach
![Page 87: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/87.jpg)
OY
W
W, J
Ye
J
The inflationary gapThe inflationary gap
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OY
W
W, J
YeYF
J
The inflationary gapThe inflationary gap
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OY
W
W, J
YeYF
Inflationary gap
Jg
h
The inflationary gapThe inflationary gap
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UNEMPLOYMENT AND INFLATIONUNEMPLOYMENT 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 deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
– withdrawals and injections approach
– income and expenditure approach
![Page 91: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/91.jpg)
OY
YE
W, J, E
Ye
The inflationary gapThe inflationary gap
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OY
YE
W, J, E
Ye
The inflationary gapThe inflationary gap
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OYYF
YE
Inflationary gap
W, J, E
e
f
Ye
The inflationary gapThe inflationary gap
![Page 94: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/94.jpg)
OYYe
YF
YE
Inflationary gap
e
f
W
Jg
h
W, J, EThe inflationary gapThe inflationary gap
![Page 95: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/95.jpg)
• Inflation and unemployment at the same time
– inflationary pressures before the full-employment level of income
– implications for shape of AS curve
• Inflation and unemployment at the same time
– inflationary pressures before the full-employment level of income
– implications for shape of AS curve
UNEMPLOYMENT AND INFLATIONUNEMPLOYMENT AND INFLATION
![Page 96: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/96.jpg)
Unemployment and inflationUnemployment and inflation
OY
Pri
ce le
vel
YF
AS1
![Page 97: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/97.jpg)
OY
AS1
Pri
ce le
vel
YF
AS2
Unemployment and inflationUnemployment and inflation
![Page 98: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/98.jpg)
• 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
• 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 INFLATIONUNEMPLOYMENT AND INFLATION
![Page 99: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/99.jpg)
P
Cd, W, J, E
Y
Y
AS
P1
Y1
AD1
Allowing for inflation in the 45° line and AD / AS diagramsAllowing for inflation in the 45° line and AD / AS diagrams
![Page 100: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/100.jpg)
Y1
E1
P
Cd, W, J, E
Y
Y
AS
P1
Y
AD1
Allowing for inflation in the 45° line and AD / AS diagramsAllowing for inflation in the 45° line and AD / AS diagrams
![Page 101: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/101.jpg)
Y2
P
Cd, W, J, E
Y
Y
AS
AD1
Y1
Y
E1
AD2
E2
P1
P2
Allowing for inflation in the 45° line and AD / AS diagramsAllowing for inflation in the 45° line and AD / AS diagrams
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P
Cd, W, J, E
Y
Y
AS
AD1
P1
Y1
Y
E1
AD2
E2
Y2
E3
Y3
P2
Allowing for inflation in the 45° line and AD / AS diagramsAllowing for inflation in the 45° line and AD / AS diagrams
![Page 103: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/103.jpg)
Short-run Macroeconomic EquilibriumShort-run Macroeconomic Equilibrium
Keynesian Analysis of the Business Cycle
Keynesian Analysis of the Business Cycle
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KEYNESIAN ANALYSIS OF THE BUSINESS CYCLEKEYNESIAN ANALYSIS OF THE BUSINESS CYCLE
• The accelerator
– changes in national income and induced investment
• The accelerator
– changes in national income and induced investment
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The accelerator effectThe accelerator effect
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The accelerator effectThe accelerator effect
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The accelerator effectThe accelerator effect
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The accelerator effectThe accelerator effect
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The accelerator effectThe accelerator effect
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KEYNESIAN ANALYSIS OF THE BUSINESS CYCLEKEYNESIAN ANALYSIS OF THE BUSINESS CYCLE
• The accelerator
– changes in national income and induced investment
– the accelerator coefficient
• The accelerator
– changes in national income and induced investment
– the accelerator coefficient
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KEYNESIAN ANALYSIS OF THE BUSINESS CYCLEKEYNESIAN ANALYSIS OF THE BUSINESS CYCLE
• The accelerator
– changes in national income and induced investment
– the accelerator coefficient
– the instability of investment
• The accelerator
– changes in national income and induced investment
– the accelerator coefficient
– the instability of investment
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Indicator of industrial confidence in the EUIndicator of industrial confidence in the EUB
alan
ces
(%)
Source: European Economy Business and Consumer Surveys (Commission of the European Communities)
EU Euro area
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Indicator of level of capacity utilisation (%) in the EUIndicator of level of capacity utilisation (%) in the EU
02
%
Source: European Economy Business and Consumer Surveys (Commission of the European Communities)
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KEYNESIAN ANALYSIS OF THE BUSINESS CYCLEKEYNESIAN 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
• The accelerator
– changes in national income and induced investment
– the accelerator coefficient
– the instability of investment
• The multiplier / accelerator interaction
![Page 115: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/115.jpg)
-14
-12
-10
-8
-6-4
-2
0
2
4
6
8
1012
14
16
18
20
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
GD
P, I
nves
tmen
t (%
ann
ual c
hang
e)Fluctuations in UK real GDP and investment: 1978-2002Fluctuations in UK real GDP and investment: 1978-2002
![Page 116: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/116.jpg)
-14
-12
-10
-8
-6-4
-2
0
2
4
6
8
1012
14
16
18
20
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
GD
P, I
nves
tmen
t (%
ann
ual c
hang
e)Fluctuations in UK real GDP and investment: 1978-2002Fluctuations in UK real GDP and investment: 1978-2002
GDP
![Page 117: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/117.jpg)
-14
-12
-10
-8
-6-4
-2
0
2
4
6
8
1012
14
16
18
20
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
GD
P, I
nves
tmen
t (%
ann
ual c
hang
e)Fluctuations in UK real GDP and investment: 1978-2002Fluctuations in UK real GDP and investment: 1978-2002
GDP
Investment
![Page 118: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/118.jpg)
KEYNESIAN ANALYSIS OF THE BUSINESS CYCLEKEYNESIAN 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
• The accelerator
– changes in national income and induced investment
– the accelerator coefficient
– the instability of investment
• The multiplier / accelerator interaction
• Fluctuations in stocks
![Page 119: Short-Run Macro Economic Equilibrium](https://reader036.fdocuments.us/reader036/viewer/2022062623/5528b9cb49795921048b4b34/html5/thumbnails/119.jpg)
• 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?
• 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 CYCLEKEYNESIAN ANALYSIS OF THE BUSINESS CYCLE