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Simple Macro Model

Simple Macro Model. Econ 10 Holmes. Review. C. D. Consumers. Firms. I. Y (income). Y. Circular Model. S. -(S A )= C A. C. Multiplier. D A. Y. S. I A. I. New setup. This guy is tricky. If S goes up then C must go down. Sample Problem.

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Simple Macro Model

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  1. Simple Macro Model Econ 10 Holmes

  2. Review

  3. C D Consumers Firms I Y (income) Y Circular Model S

  4. -(SA)= CA C Multiplier DA Y S IA I New setup This guy is tricky. If S goes up then C must go down.

  5. Sample Problem • Suppose MPC=.5, MPI=.25, and CA=100. Find • multiplier •  eq Y • total S, C, I First compute multiplier. MPS=MPC+MPI=.5 + .25 = .75 1/(1-MPS) =1/(1-.75) =1/.25 =1/(1/4) =4 DA=25 Y=100 Y/ DA=4

  6. -(SA)= CA C Multiplier DA Y S IA I Using the Chart CA=100 MPC=.5 MPI=.25 -(-100) 100 200 400*.5 100 400 400*(1-.5) 200 4 0 100 400*.25 total S=-100 + 200 = 100 total C= 100 + 200 = 300 total I= 0 + 100 = 100

  7. Another MPSave=.2, MPI=.15. SA=-20, IA=20 .2 + .15 ? Want MPC, not MP Save... MPS=.8+.15 = .95 Multiplier = 1 / (1-.95) = 1 / .05 = 20 100/5 = 20

  8. -(SA)= CA C Multiplier DA Y S IA I Using the Chart SA=-20 IA=20 MPC=.8 MPI=.15 -(-20) 20 640 800*.8 40 800 800*.2 160 20 20 120 800*.15 total S=-20 + 160 = 140 total C= 20 + 640 = 660 total I= 20 + 120 = 140

  9. A Check 1. Total change in Y = total change in C + total change in I = 660 + 140 = 800 2. Total change in Y = total change in C + total change in S = 660 + 140 = 800

  10. Fallacy of Composition Suppose SA=100. MPC=.7, MPI=.2. Society is saving more. What happens in eq? Mult = 1/(1-(.7+.2)) = 1 / .1 = 10

  11. -(SA)= CA C Multiplier DA Y S IA I Using the Chart SA=100 MPC=.7 MPI=.2 -(100) -100 -1000*.7 -700 -100 -1000 -1000*.3 -300 10 0 -200 -1000*.2 total S=100 + -300 = -200 total C= -100 + -700 = -800 total I= 0 + -200 = -200

  12. So…. Society is saving more, but has repercussions that lead to a net decrease in saving. “Paradox of Thrift” Why? As people save money, less consumption. I spend $100 less, so the people at the grocery store get laid off, they spend less, etc….

  13. One for the road Suppose MPC=.7, MPI=.1. IA=-10. • Find • multiplier • Y • total S, C, I • Explain intuitively why IA has the effect it does.

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