ECON 1113 1st Edition Lecture 13 Outline of Last 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 Outline of Current Lecture I Review of Previous Lecture II Unemployment in the Keynesian Cross Model the Revenue Act of 1932 III Inflation in the Keynesian Cross Model A Fiscal Policies to Combat Inflation B Political Issues and Anti Inflationary Policies IV Multiplier Concept Current Lecture I II Review of Previous Lecture A If Ye Y this implies involuntary unemployment B Fiscal Policy to Combat Unemployment 1 Increase government spending G 2 Decrease taxation T Unemployment in the Keynesian Cross Model the Revenue Act of 1932 A Diagram 1 The graph includes the 45 degree reference angle referred to as ASk in which the y axis PTE value equals the x axis Y value 2 The economy of 1932 resulted in a nominal GDP Y below the target nominal GDP Y 3 Under conditions of Y unemployment rates are approximately 5 naturally however in 1932 the original unemployment rates were 15 4 In an attempt to heighten the PTE to reach Y and close the GDP gap the Revenue Act decreased G and increased T 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 III IV 5 This contrarily lowered the PTE and increased the unemployment rate to 25 B Keynes did not publish his work on this subject until 1936 which would have informed policy makers to do the opposite of what they actually decided C WWII G increased and the restoration of Y began in 1939 Inflation in the Keynesian Cross Model A Diagram 1 If Ye Y it implies inflation and policy makers seek to lower the PTE line in an effort to reach the Y value B Recall Y nominal GDP which equals price unit multiplied by number of units which equals P x Q 1 When the economy reaches Y Q becomes fixed due to scarcity 2 Example a Y 500 5 unit x 100 units b Ye 600 6 unit x 100 units C Fiscal Policies to Combat Inflation 1 Decrease G and or increase T 2 What hasn t Post WWII G decreased and T increased a Political bias against G cuts and T increases b G decreases are generally but not specifically popular D Unemployment occurs when Ye Y and raising PTE to lessen unemployment can be done by increasing G and decreasing T E Inflation occurs when Ye Y and lowering PTE to lessen inflation can be done by decreasing G and increasing T Multiplier Concept A Indicates by how much Y changes when there is a change in PTE Y Y Y Y Y Y Y B Multiplier PTE C I G G X M Y 0 C PTE D A given change in PTE systematically results in a multiple Y E Suppose G 100 1 Individual Income increases by 100 2 Individual Consumer Spending increases by 80 3 Recipient Income increases by 80 4 Recipient Consumer Spending increases by 64 5 This process continues onward F Initial change in PTe is the goal and in the process generates increase in total increase G The multiplier depends on the Marginal Propensity to Consume MPC
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