assign5 - Intro Macro N. Sheflin ASSIGNMENT 5 NOTES We look...

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n t r o M a c r o N . S h e f l i n ASSIGNMENT 5 NOTES We look at fiscal policy (G and T for stabilization purposes) in the short-run, including some aspects of business cycles (short-run economic fluctuations), the multiplier, and begin to develop the short-run Keynesian model by looking at aggregate demand and its main components, Consumption and Investment, in some detail. You will also work on your resume and do some econometrics – estimate a consumption function. Note that we will NOT be developing or using the 45 degree line diagram (aka Keynesian Cross) which is a ‘cute’ way of showing the simultaneous solution of C=f(Y) and Y=f(C). and demonstrates the multiplier. It can be used to derive the aggregate demand curve. It is much more effort to explain and use this than it is worth – this is a case where a few words are better than a picture (but feel free to read and understand it) KEY Keynesian points: desired saving and investment (leakages) need not be equal at full employment, and if they are not, the economy will contract or expand. o Note that as an accounting matter, actual saving must equal actual investment with unintended inventories making up the difference o If desired saving is greater than desired investment (people are consuming too little) then unintended inventories will increase as business gets ‘stuck’ with the leftovers. Then will then cut production and output the economy can be in equilibrium BELOW full employment if aggregate demand is below that necessary to ensure full employment (i.e. Agg D=C+I+G+X-M, < full employment output) o if Agg D too low (because C and/or I too low) then Gov’t can raise G to raise agg D ± or lower T to raise C Fiscal policy o Changing G or T to change Agg D and y o Changes in G (or T) lead to multiple changes in D and Y in the SR- the multiplier Work on your resume . In addition to having one when the President offers you a position, it will show you if you are doing the right things in college ( see below ). More on advisement And do the Consumption Function Estimation Assignment (in Resources/Assignments) READING Samuelson – Chapters 6, 7 C (only the “THE MULTIPLIER” section). D (only the “FISCAL- POLICY MULTIPLIERS’ section); Ignore/Skim discussion of the 45 degree / Keynesian Cross diagram and analysis And Mankiw’s (2008 and 2009) pieces http://www.nytimes.com/2008/11/30/business/economy/30view.html malink Fiscal Policy (2009) http://www.frbsf.org/publications/economics/letter/2009/el2009-20.html - ignore the expectations discussion. Focus on multipliers and facts about the fiscal stimulus package. Also
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This document was uploaded on 10/25/2011 for the course ECONOMICS 01:220:103 at Rutgers.

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assign5 - Intro Macro N. Sheflin ASSIGNMENT 5 NOTES We look...

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