Office hours Wednesday 9 30 11 40 2 30 4 in 7416 Social Science Thursday 5 6 30 in 6203 Social Science Keynesian Cross AE o Consider 2 scenarios Ye Boom AE Yfe Y Ye Low unemployment Y AE AE Y AE Y AE AE Ye Yfe Y High unemployment Y AE If you produce Yfe inventory Y Recession AE If you produce Yfe inventory Y o Can be in equilibrium but be producing the wrong level of output for unemployment but the economy will always move toward equilibrium Keynesian insight o If the economy s Ye does not equal Yfe it is possible to engage in activist policy to get the economy to Yfe Illustration of activist policy and multiplier o Y multiplier government spending o OR Y tax multiplier taxes o G or T fiscal policy If Ye Yfe recession Not enough spending Need to increase spending G and or T If Ye Yfe boom Too much spending Need to lower spending G and or T o Simple multiplier 1 1 b Used when a G I or X M o Tax multiplier b 1 b Used when T o E g Suppose MPC 0 8 and that the government spends 100 at business A The owner of business A receives 100 and spends 80 80 at business B The owner of business B receives 80 and spends 80 64 at business C The owner of business C receives 64 and spends 80 etc multiplier effect when the economy is injected with the people who receive it will continue to spend portions of it Given C 10 0 8 Y T TR T TR 20 G 20 I 10 X M 10 Y e 170 AE G Y AE AE AE Ye Yfe Y Y o Numeric e g Yfe 200 AE Y AE AE Y 170 Ye 200 Yfe Y Yfe Ye 200 170 Y 30 Y multiplier G 30 1 1 b G 30 1 1 0 8 G G 6 OR Y tax multiplier T 30 b 1 b T 30 0 8 1 0 8 T T 7 5 Lower T TR by7 5 to 12 5 In equilibrium Y AE Y C I G X M Y 10 0 8 Y 12 5 10 20 10 Y 50 0 8Y 10 0 2Y 40 Y Ye 200 Yfe You can either increase G by 6 or decrease taxes by 7 5 changing G is cheaper because the multiplier is larger o Balanced Budget Amendment When increasing G T must also be increased so that G T to finance the spending by the government This sounds good in principle but most economists are against it It is a very expensive way to stimulate the economy Y multiplier G tax multiplier T Y 1 1 b G b 1 b T Y 1 1 b G b 1 b G Y 1 1 b b 1 b G Y 1 b 1 b G Y G G must 30 to stimulate the economy enough very expensive Points of the Keynesian model o Can alter the level of output and therefore the level of employment through fiscal policy o There are expensive and less expensive ways to do fiscal policy o Although we have not proved it in lecture in equilibrium leakages injections o We have created a simple model that can help us understand SR business cycle fluctuations Fiscal crisis of 2008 o Real estate market bubble burst Houses worth less less spending because people felt poorer Financial market uncertainty less spending More unemployment less spending Less confidence less spending more saving o Paradox of thrift lack of adequate spending makes a recession worse even though it is smart on the individual level
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