Chapter 8 04 03 2014 07 08 00 Macroeconomic models Classical model if we look at the economy over a long period of time rather than short yearly we see that the economy performs Keynesian model argues that the classical model can be a very long time in arriving and in the mean time production can be stuck o Keynesian model helps us to understand economic o Classical model helps us to understand the long run trend rather well below its potential fluctuations itself Classical model Assumption is that the price in every market will adjust until quantity supplied and quantity demanded are equal market clearing Economy achieves full employment on its own Labor supply curve how many people in the country will want to work at each wage rate households supply labor Slopes upward because as wage increases more and more people decide that they are better off working than not working Labor demand curve the number of workers the firm wants to hire at any real wage Diminishing returns to labor rise in output gets smaller and smaller with each successive worker Each additional worker causes a firm s output and revenue to rise but by less and less for each new worker Equilibrium total employment Real wage adjusts until the quantities of labor supplied and demanded are equal The production function shows the total output the economy can produce with different quantities of labor given that technology and resources are constant labor Upward sloping but flattens out at the top diminishing returns to total output total income total spending in a simple economy with just households and firms Say s law the idea that total output will equal total spending States that by producing goods and services a firm creates a demand for goods and services equal to what they have produced supply creates its own demand Assures us that spending will be just high enough for firms to sell all of the output that a fully employed labor force can produce full employment can be maintained investment I minus the change in inventories over the period Planned investment spending Ip over a period of time is total Ip I inventories transfer payments Net tax T are total government tax revenue minus government T Total tax revenue Transfers Disposable income total income net taxes Household savings disposable income C C consumption spending Total spending C Ip G savings and net taxes leakages and injections leakages income that the household receives but does not spend on output injections spending from sources other than households two types governments purchases of goods and services and planned investment spending o total spending total output if and only if total leakages total injections S T G Ip The loanable funds market where the economy s saving is made available to those who need additional funds households receive interest payments on the funds that they loan budget deficit when government goods and services are greater than net taxes G T o budget deficit the government demand for loanable funds Crowding out increase in some other sector s spending is a decline in one sector s spending caused by an 04 03 2014 07 08 00 04 03 2014 07 08 00
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