FILE: 252N06.HTML
FALL 2005
CLASS
NOTES FOR ECONOMICS 252/WEEK 6
DR.
WILLIAM SHINGLETON
PLEASE
NOTE: THE USE OF CALCULATORS IS ALLOWED ON DR. SHINGLETON’S QUIZZES AND EXAMS
BUT THEY CANNOT BE SHARED BETWEEN STUDENTS.
ADD DATA REPORT/TALK ABOUT NEWS
RETURN/REVIEW QUIZ
LAST WEEK CH 9
IMPORTANT CONCLUSIONS
ECONOMISTS AGREE SHORT-RUN FAILURE IS POSSIBLE
EQUILIBRIUM
CAN BE ANY NUMBER OF JOBS
INCREASED AD DOES NOT SHIFT AS
INCREASED AS DOES NOT SHIFT AD
UNLESS EXPECTATIONS ARE INVOLVED
AD/AS EXPLANATION OF RECESSIONS
TEXT USES AD EXPLANATION
EXPLAIN INCONSISTENCY WITH DATA
CONSUMER
SPENDING/CONSUMPTION FUNCTION
C = DPI - SAVING
MARGINAL PROPENSITY TO CONSUME (MPC)
CONSUMER CONFIDENCE
SALES = PRODUCTION
SALES =
C + I + G + X - M
AT WHAT GDP DOES PRODUCTION = SALES?
EQUILIBRIUM GDP = SALES = C + I + G + X – M
TEXT USES DPI = FRACTION OF TOTAL
THIS WEEK
MULTIPLIER PROCESS CH 10
4 JUNK CONCEPTS (DON’T
BOTHER WITH THIS IDIOTIC STUFF)
45 DEGREE LINE
INFLATIONARY GAP
RECESSIONARY GAP
DEMAND PULL INFLATION
MULTIPLIER
EFFECT/ADJUSTMENT CYCLE
dSALES => dGDP => dDPI =>
dSALES
d CONSUMER SALES = MPC * dDPI
LEAKAGES (SAVING, TAXES, IMPORTS)
INJECTIONS (INVESTMENT, GOVERNMENT, EXPORTS)
INVENTORIES AS THE SYMPTOM
DO FLEXIBLE INTEREST
RATES BALANCE SAVING AND INVESTMENT?
YES: CLASSICAL ECONOMISTS
SUPPLY AND DEMAND
SOMETIMES:
CREDIT CONDITIONS
DECLINING
SALES-> LESS INVESTMENT
BUSINESS CONFIDENCE
DECLINING
SALES-> LESS INVESTMENT
ACCELERATOR HYPOTHESIS
DECLINING
SALES-> LESS INVESTMENT
IDEAL
OUTPUT = .75 * CAPACITY
BUSINESS TAXES
NO INVESTMENT WITHOUT PROFIT
MULTIPLIER PROCESS: THE
LOGIC
dSALES => dGDP => dDPI =>
dSALES
FINAL CHANGE IS A MULTIPLE OF ORIGINAL CHANGE
MULTIPLIER PROCESS: THE
MECHANICS:
MULTIPLIER = 1/(1-MPC)
SHOW AND EXPLAIN/USE WORKSHEET DATA
WORKSHEET DATA
PROBLEM SET NUMBER 1.1
CONSUMPTION C = 200+.60*DPI
INVESTMENT I = 400
GOVERNMENT G = 600
TRADE BALANCE X = -200
TAXES T = 0
ANSWERS
GDP 2500
DISPOSABLE INCOME 2500
CONSUMER SPENDING 1700
SAVING 800
PARTIAL SOLUTION TO
FIRST EXAMPLE
EQUILIBRIUM => GDP =
C + I + G + X
GDP = 200 +.60 * DPI + 400 + 600
+ -200
GDP = 1000 +.60 * DPI
NOTE THAT DPI = GDP - TAX
DPI = GDP - 0
DPI = GDP
GDP = 1000 +.60 * GDP
.40 * GDP = 1000
GDP = 1000/.40
GDP = 2500
PROBLEM SET NUMBER 1.2
AND 1.3
C = 400+.75*DPI C = 2500+.80*DPI
I = 800 I = 700
G = 1200 G = 1400
X = -400 X = 1000
T =
0 T = .10
ANSWERS
GDP 8000 20000
DPI 8000 18000
CONSUMER SPENDING
6400 16900
SAVING 1600 1100
MULTIPLIER EFFECT
MULTIPLIER CONCEPT
dSALES => dGDP => dDPI
=> dSALES
BE ABLE TO EXPLAIN THE
SEQUENCE OF EVENTS
PROBLEM SET NUMBER 2.1
CONSUMPTION C=400+.75*DPI
INVESTMENT I = 450
GOVERNMENT G = 200
TRADE BALANCE X = 500
TAXES T =
0
ANSWERS GDP = 6200
CONSUMER SPENDING 5050
SAVING 1150
PROBLEM SET NUMBER 2.2
C= 400+ .75*DPI
I = 400
G = 200
X = 600
T = .20
ANSWERS
GDP 4000
DISPOSABLE INCOME 3200
CONSUMER SPENDING 2600
SAVING 600
PROBLEM SET NUMBER 2.3
C = 8000 +.80*DPI
I = 24,000
G = 4600
X = -600
T = .20
DISCUSSION QUESTIONS
1. FIND THE EQUILIBRIUM
LEVEL OF OUTPUT.
2. AT EQUILIBRIUM, HOW
MUCH DO CONSUMERS SPEND?
HOW MUCH DO THEY SAVE?
3. WHAT IS TAX
REVENUE? WHAT IS THE FEDERAL DEFICIT?
4. IN THE LAST PROBLEM,
IF A DECREASE IN BUSINESS CONFIDENCE WOULD CAUSE INVESTMENT SPENDING TO FALL TO
15,000, WHAT WOULD BE THE ANSWERS FOR THE ABOVE QUESTIONS?
5. IN EACH PROBLEM, IF
INVESTMENT SPENDING ROSE BY TWO PERCENT, WHAT WOULD BE THE ANSWERS FOR THE
ABOVE QUESTIONS? HOW DO THE ANSWERS TO (4) COMPARE TO THE ANSWERS IN (5)?
6. IN EACH PROBLEM, IF
THE CONSTANT IN THE CONSUMPTION
FUNCTION ROSE BY 1000,
WHAT WOULD BE THE ANSWERS FOR THE ABOVE QUESTIONS? HOW DO THE ANSWERS TO (6) COMPARE TO THE
ANSWERS IN (5)?
7. SUPPOSE THAT OUTPUT
WAS 400 ABOVE (OR BELOW) EQUILIBRIUM.
HOW AND WHY WOULD THE PRIVATE SECTOR RESPOND? WHAT WOULD BE THE BEGINNING AND FINAL TOTALS
FOR SALES? EXPLAIN THE ADJUSTMENT
PROCESS. FOCUS ON THE INVENTORY SIGNAL.
8. MOST GDP NUMBERS ARE
HEADLINED IN THE NEWSPAPERS AS
PERCENTAGE
CHANGES. WHAT COULD CAUSE A 5 PERCENT INCREASE IN GDP
IN EACH OF THE ABOVE CASES?
9. WHAT CAN YOU SAY
ABOUT THE UNEMPLOYMENT RATE IN EACH CASE?
PROBLEM SET NUMBER 3
CASE 3.1
C = 6000 + .75 DPI
I = 13000
G = 10350
X = -7250
TAX = .10
ANSWER
GDP = 68,000
CASE 3.2
C= 7000 + .70 DPI
I = 6000
G = 3800
X = 8000
TAX = .20
ANSWER
GDP = 20,000
CASE 3.3
C= 32000 + .80 DPI
I = 1600
G = 6400
X = 160
TAX = .15
ANSWER
GDP = 124,500
FOR EACH CASE:
1. FIND THE EQUILIBRIUM
OUTPUT.
2. AT EQUILIBRIUM, HOW
MUCH DO CONSUMERS SPEND? WHAT IS TAX
REVENUE? WHAT IS THE FEDERAL DEFICIT?
3. IF INVESTMENT
SPENDING ROSE BY 10% WHAT WOULD BE THE NEW ANSWERS FOR THE ABOVE QUESTIONS?
4. SUPPOSE OUTPUT WERE
$1000 (A) BELOW OR (B) ABOVE
EQUILIBRIUM. HOW AND WHY WOULD THE PRIVATE SECTOR RESPOND?
WHAT WOULD BE THE INITIAL AND FINAL VALUES OF C, T. AND I?
5. SUPPOSE THAT THE
GOVERNMENT WANTED TO (A) INCREASE OR (B) REDUCE INCOME BY $1000. HOW COULD THIS BE DONE? GIVE AT LEAST THREE OPTIONS, INCLUDE THE
SPECIFIC NUMBERS.
6. HOW WOULD A CHANGE IN
THE MARGINAL TAX RATE AFFECT THE SYSTEM?
7. MOST GDP NUMBERS ARE
HEADLINED IN THE NEWSPAPERS AS
PERCENTAGE
CHANGES. WHAT COULD CAUSE A 5 PERCENT INCREASE IN GDP
IN EACH OF THE ABOVE CASES?
8. THERE ARE NO INTEREST RATES IN THE ABOVE
MODELS. HOW WOULD INCLUDING A ROLE FOR
INTEREST RATES AFFECT YOUR ANSWERS? WOULD THE CHANGES BE LARGER OR SMALLER? WHY?
NEXT WEEK:
FISCAL POLICY FOR POLLYANNA CH 11