ECON 1113 1st Edition Lecture 12 Outline of Last Lecture I Review of Previous Lectures II Keynesian Cross Model Outline of Current Lecture I The Keynesian Cross Model A The Inventory Adjustment Mechanism B The Concept of Non Inflationary Full Employment GDP Y C Unemployment in the Model 1 Fiscal Policies to Combat Unemployment 2 Case Study The Revenue Act of 1932 D Inflation in the Model 1 Fiscal Policies to Combat Inflation 2 Political Issues and Anti Inflationary Fiscal Policies Current Lecture I I The Keynesian Cross Model A The Inventory Adjustment Mechanism 1 Diagram Explanation a Planned Total Expenditure PTE the amounts households firms governmental units and foreign traders exports and imports intend or plan on spending found on the y axis b Nominal GDP Y the amounts households firms governmental units and foreign traders exports and imports actually spend found on the x axis c A 45 degree reference angle begins at the origin of the graph and extends outward known as the Keynesian Cross equilibrium line Equilibrium conditions in the Keynesian Cross Planned Total Expenditure Actual Total Expenditure d The PTE line equals C I G X M e The point at which the two lines cross each other signifies optimal inventory 2 When the PTE is not equal to the ATE then inventories goods produced in the past and placed in inventory will adjust and bring the PTE and ATE into equality These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute a If the nominal GDP value is low or below the equilibrium point the PTE and ATE are low and the amount produced does not reach the amount required to sustain the desired inventory b The distant between the two lines displays an unintended decrease in inventory because what people plan to buy exceeds what suppliers produce B The Concept of Non Inflationary Full Employment GDP Y 1 Will equilibrium Y Ye necessarily equal Y non inflationary fullemployment GDP a Implies no inflation and no voluntary unemployment b Positive Employment Rate of approximately 5 voluntary changing jobs or looking for new job c Frictional Unemployment is desirable because it implies economic efficiency d Keynes answered this question No because he observed unemployment greater than 5 when he wrote his book in the early 1930s at which time there was a 25 unemployment rate C Unemployment in the Model 1 Fiscal Policies to Combat Unemployment a In this instance the government seeks to raise the graphical line of the PTE through the alterations in consumer spending C and government spending G b Changes in G and or tax collections T designed to change Y nominal GDP overall measure of economic activity As G increases and or T decreases the PTE moves upward c The 45 degree reference angle or the ASk does not change d Y assumes a 5 unemployment rate naturally however when the Ye is lower than the more desirable Y the unemployment rate at Ye is greater than 5 e A GDP gap is the dollar value of all goods and services not produced due to involuntary unemployment and occurs graphically between Ye and Y on the x axis 2 Case Study The Revenue Act of 1932 D Inflation in the Model 1 Fiscal Policies to Combat Inflation 2 Political Issues and Anti Inflationary Fiscal Policies
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