HOOct25 - Economics 201, Witte, Tuesday, October 25, 2005...

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Quiz: TA section: Draw a 45-degree, income-expenditure diagram (KW p. 284), Aplia Chapter 11 PS II (due Tuesday, November 1, 9:PM) I’ll have office hours today, 2-4, and Wednesday 9:30-11:30. We have a new Greenspan! http://slate.msn.com/id/2128630/ http://slate.msn.com/id/2128679/ “Education: the inculcation of the incomprehensible into the indifferent by the incompetent.” – John Maynard Keynes “Knowledge is power. Power corrupts. Study hard, be evil.” – I don’t know who said this, but it sounds like an economist to me. Keynes: Good and Bad Macroeconomic Equilibrium I. Malthus: What if savings is too big so that we have no equilibrium but instead have general gluts of everything, including labor? II. Ricardo: Fear not, if savings is big, then the price of savings, the interest rate, will be low, and this will encourage investment demand to grow. You know, like Say’s Law. III. Malthus: But sometimes we see the economy fall apart, what’s up with that? IV. Keynes: What if what Malthus thought was not an equilibrium really was one, just a bad one? a. Failure of AD sometimes. But why? b. What if the economy is in equilibrium in the short run with AS= AD, but at the wrong level? i. Recessionary gap: AS = AD, but where unemployment is very high. This was Keynes’s main focus because he was writing during the Great Depression. ii. Inflationary gap: AS = AD, but where unemployment is very low. c. Need a very good understanding of consumption to see why we might get “bad equilibria.” Macro Equilibrium I. In Macro Equilibrium, the following must hold: a. Production = Spending (like in “circle flow” diagrams) b. AS = AD c. Y = C + Id + G + (X-Im) i. (Now, subtract (C + T) from both sides of the above.) d. (Y-T)-C = Id + (G-T) + (X-Im) i. Savings = (Y-T) - C = Disposable Income – C e. S = Id + (G-T) + (X-Im) f. Id = S + (T-G) + (Im-X) = S + (Government Surplus) + (International Capital Flows) i. Investment is financed by private savings, government surpluses, and trade deficits (which represent foreigners investing in the US) ii. Government deficits (G>T) use of private savings that could otherwise have gone to finance investment. g. S + T + X = Id + G + X i. Leakages = Injections II. If we are not in macro equilibrium: a. AS does not equal AD b. Leakages to not equal Injections c. If AS > AD i. Leakages > Injections ii. Production > Spending iii. Inventories will rise, and firms will respond by cutting back production d. If AS < AD i. Leakages < Injections ii. Production < Spending iii. Inventories will fall, and firms will respond by raising production Keynes Tries to Model the Economy I. Consumption is 2/3rds of AD, so must model it carefully. II.
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This note was uploaded on 01/14/2012 for the course ECON 201 taught by Professor Witte during the Spring '08 term at Northwestern.

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HOOct25 - Economics 201, Witte, Tuesday, October 25, 2005...

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