ECN 302-602 (4), The Simple Keynesian Model

ECN 302-602 (4), The Simple Keynesian Model - Chapter 3 -...

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Chapter 3 -- The Simple Keynesian Model Fundamental inflexibility assumptions: W -- inflexible P -- inflexible i -- inflexible Overriding theme -- Production Responds to Economic Activity (focus on goods and services expenditure)
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Simplifying Assumptions Business Saving = 0 (All private saving is personal saving) Taxes don’t depend upon income. T = G (Balanced Budget) NX = 0 Assumptions imply that Macro Identity is now S = I .
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Causes of Consumption (C) Disposable Income (YD = Y - T) YD C Real GDP, or Total Income (Y) Y YD C Net Taxes (T) T YD C Consumer Confidence (CC) CC C
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More Causes of Consumption (C) Real Interest Rate (r = i - π e ) r C Nominal Interest Rate (i) i r C Expected Inflation Rate ( π e ) π e r C Real Wealth (A) A C
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Measures -- YD C Relationship Average Propensity to Consume (APC) APC = C/YD Marginal Propensity to Consume (MPC) MPC = C/ YD
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Handling Multiple Causes of Consumption Causes of Consumption -- Y, T, CC, i, π e , A. We generally graph C versus Y. Autonomous Consumption (C 0 ) -- changes in C due to causes other than Y. Changes in C 0 -- described as shifts of the consumption graph
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Causes of Investment (I) Business Confidence (BC) BC I Business Taxes (BT) BT I
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More Causes of Investment Real Interest Rate (r = i - π e ) r I Nominal Interest Rate (i) i r I Expected Inflation Rate ( π e ) π e r I Note: Investment does not depend upon current income (Y)
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Government Purchases of Good and Services (G) Government purchases of goods and services is a policy variable, controlled by the government no causing variables. The previous properties imply that I and G are completely autonomous.
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A Numerical Example Y T YD C S I G 5 5 0 10 -10 10 5 25 5 20 25 -5 10 5 45 5 40 40 0 10 5 65 5 60 55 5 10 5 85 5 80 70 10 10 5 105 5 100 85 15 10 5 125 5 120 100 20 10 5
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The Saving-Investment Relationship Recall -- macro identity S + (T - G) + -NX = I With simplifying assumptions: S = I Why doesn’t S = I in numerical example?
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Intentions Versus Actual Occurrences Must distinguish between intended, desired, planned S and I versus actual or realized S and I.
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ECN 302-602 (4), The Simple Keynesian Model - Chapter 3 -...

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