ECON 1113 1st Edition Lecture 13 Outline of Last Lecture I. The Keynesian Cross ModelA. The Inventory Adjustment MechanismB. The Concept of Non-Inflationary, Full-Employment GDP (Y*)C. Unemployment in the Model1. Fiscal Policies to Combat Unemployment2. Case Study: The Revenue Act of 1932D. Inflation in the Model1. Fiscal Policies to Combat Inflation2. Political Issues and Anti-Inflationary Fiscal PoliciesOutline of Current Lecture I. Review of Previous LectureII. Unemployment in the Keynesian Cross Model: the Revenue Act of 1932III. Inflation in the Keynesian Cross ModelA. Fiscal Policies to Combat InflationB. Political Issues and Anti-Inflationary PoliciesIV. Multiplier ConceptCurrent LectureI. Review of Previous LectureA. If Ye <Y*, this implies involuntary unemploymentB. Fiscal Policy to Combat Unemployment1. Increase government spending (G)2. Decrease taxation (T)II. Unemployment in the Keynesian Cross Model: the Revenue Act of 1932A. Diagram1. The graph includes the 45 degree reference angle referred to as ASk, in which the y-axis PTE value equals the x-axis Y value2. 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 TThese 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.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 decidedC. WWII: G increased and the restoration of Y* began in 1939III. Inflation in the Keynesian Cross ModelA. Diagram1. If Ye > Y*, it implies inflation, and policy makers seek to lower the PTE linein an effort to reach the Y* valueB. Recall: Y = nominal GDP, which equals price/unit multiplied by number of units, which equals P x Q1. When the economy reaches Y*, Q becomes fixed due to scarcity2. Examplea. Y* = $500 = $5/unit x 100 unitsb. Ye = $600 = $6/unit x 100 unitsC. Fiscal Policies to Combat Inflation1. Decrease G and/or increase T2. What hasn’t Post WWII G decreased and T increased?a. Political bias against G cuts and T increasesb. G decreases are generally but not specifically popularD. Unemployment occurs when Ye < Y* and raising PTE to lessen unemployment can be done by increasing G and decreasing TE. Inflation occurs when Ye > Y* and lowering PTE to lessen inflation can be done bydecreasing G and increasing TIV. Multiplier ConceptA. Indicates by how much Y changes when there is a change in PTEB. Multiplier = ∆ Y∆ PTE∨∆Y∆ C∨∆ Y∆ I∨∆ Y∆ G∨∆ Y∆G∨∆ Y∆ X∨∆ Y∆ MC.∆ Y∆ PTE>0D. A given change in PTE systematically results in a multiple ∆ YE. Suppose ∆ G = $1001. Individual Income increases by $1002. Individual Consumer Spending increases by $803. Recipient Income increases by $804. Recipient Consumer Spending increases by $645. This process continues onwardF. Initial change in PTe is the goal and in the process generates increase in total increaseG. The multiplier depends on the Marginal Propensity to Consume