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OutlineOutlineOutlineOutlineOutline

Outline

- Some Reviews on the Quizzes
- Goods Market and IS Curve
- Money Market and LM Curve
- IS-LM Model
- AD Curve and Short-run Equilibrium
- Consumption and Saving
- Investment

Outline

- Some Reviews on the Quizzes
- Goods Market and IS Curve
- Money Market and LM Curve
- IS-LM Model
- AD Curve and Short-run Equilibrium
- Consumption and Saving
- Investment

Quiz A

- 1 考察一个如右图所示的经济体，假定基期是2000年，请回答下面问题：
- (1) 如果商品A和B都是最终商品，那么这个经济体2001年的实际GDP是多少？GDP缩减指数是多少？
- (2) 如果商品A和B都是消费者一篮子产品中的商品，那么这个经济体2001年的CPI是多少？
- (3) CPI和GDP缩减指数是否相同？为什么？

Quiz A

- 2 画图说明在Solow模型里存在一个稳态；画图说明储蓄率上升将会对经济体的长期增长带来的影响。如何有效地鼓励一个经济体积累资本？
- 3 试述经济增长理论的发展历程。技术生产有何特征？如何把其内生？
- 4 什么是Phillips曲线？它是如何发展的？为什么能够翻译成短期供给曲线？
- Tips: 第1题第三问，要答出算法不同并且范围也不同。第2题第三问，关键要指出储蓄是可以内生的。第3题第二问答案很多，可以是固定成本低、边际成本高，外部性，非竞争性，创造性毁灭等等；第三问，可以通过外部性实现内生，人力资源有外部性，知识有外部性，等等，也可以答通过“干中学”，即在资本深化的过程中学习知识。第4题第二问，从工资增长率到通货膨胀，从无预期到有预期；第三问要说出奥肯定律，当然也要指出从工资增长率到通货膨胀的变化。

Quiz B

- 1 如何按照收入法核算GDP？假定一个经济体的总量生产函数是，市场是完全竞争的，生产要素按照边际贡献参与分配，请计算资本所得和劳动所得占GDP的比重是多少？劳动所得所占比重在什么情况下可能下降？
- 2 画图说明在Solow模型里存在一个稳态；画图说明人口增长速度下降将会对经济体的长期增长带来的影响。如何有效地鼓励一个经济体控制人口增长？
- 3 什么是增长核算？亚洲四小龙为什么能够没有靠技术进步就实现了快速增长？这种增长方式需要转变吗？为什么？
- 4 什么是预期通货膨胀？如何把它引入Phillips曲线？如何把它引入供给曲线？

Tips

- 1.收入法是按照生产要素的所得来核算gdp，如劳动报酬，资本所得等等。第二问注意不要搞出增长核算的公式来，比如劳动所得，应该是每单位劳动的工资乘以劳动总量再除以总收入，由于在竞争的市场里面要素价格等于其边际产出，故工资等于MPL，因此劳动所得MPL×L/Y，再把Y的公式带入即可。第三问的答案很多，容易想到的是改变产出弹性阿尔法（单说出这点没满分），垄断的市场，结构的变化，技术的进步，扭曲等等。
- 2.说说第三问，大家答些有经济学含量的答案。比如增加生育的成本，增加做妈妈的成本，补贴，发展经济等等。
- 3.要紧的是意识到，亚洲四小龙的高速增长是短期的，原因课本中有讲，勤劳（高劳动参与）、节俭（高储蓄）、人力资本、良好的竞争市场环境等等。后来四小龙的增速放缓了，一般认为是到了稳态（用带技术增长的 Solow model来解释），需要转变增长方式。（其他解释言之有理也可得分。）
- 4.预期的含义是基于现有信息的条件期望，答到相类似的意思即可，不一定要说出“数学期望”。其他两问参见Quiz A的提示。

Introduction: Establishment of Macroeconomics

John Maynard Keynes (1883-1946)

Introduction: Establishment of Macroeconomics

The General Theory of Employment, Interest and Money (1936)

Introduction: IS-LM Model

- The IS-LM model is the leading interpretation of Keynes’s theory.

The IS-LM model was introduced in the article by Sir John Hicks,"Mr Keynes and the Classics: A Suggested Interpretation ", 1937, Econometrica.

Sir John Hicks(1904-1989)

1971 Nobel Prize Winner

Introduction: IS-LM Model versus theGeneral Theory

The IS-LM model ignores:

- Time
- Uncertainty
- Expectations
- Speculation
- Animal spirits

Outline

- Some Reviews on the Quizzes
- Goods Market and IS Curve
- Money Market and LM Curve
- IS-LM Model
- AD Curve and Short-run Equilibrium
- Consumption
- Investment

Goods Market: Assumptions

- 1) A closed economy
- 2) Sticky prices (So Changes in aggregate demand influence income)
- 3) Firms are willing to sell any amount of output at the given level of prices. (i.e. the AS curve is entirely flat.)

The Consumption Function

- Note: Private saving

Marginal Propensity to Consume (MPC)

Marginal Propensity to Save (MPS)

Aggregate (Planned) Expenditure

- Planned(or desired) investment and government spending are given here.

Equilibrium (continued)

- Solve
- i.e.
- We have

Multiplier

- Investment multiplier
- Multiplier of autonomous consumption
- Multiplier of government purchase
- Tax multiplier

[Appendix] Explanation of Multiplier

- Suppose there is an increase in government purchases. The increase raises income, it also raises consumption, which further raises income, which further raises consumption, and so on. Now, consider the total effect on income:

Initial Change in Government Purchases

First Change in Consumption

Second Change in Consumption

Third Change in Consumption

Automatic Stabilizer

- Now treat tax as proportional income tax:
- Back to our equilibrium equation
- We have

Automatic Stabilizer

- For example, the multiplier of investment is
- Proportional income tax automatically reduces the amount by which output changes in response to a change in autonomous demand without case-by-case government intervention.
- Automatic stabilizer: A policy that reduces the amplitude of economic fluctuations without regular and deliberate changes in economic policy.

Example: Paradox of Thrift

- Suppose the consumption function is

where is a parameter called autonomous consumption and is the marginal propensity to consume.

- 1) What happens to equilibrium income when the society becomes more thrifty, as represented by a decline in
- 2) What happens to equilibrium saving?
- 3) Why do you suppose this result is called the paradox of thrift?

(Gregory Mankiw, Macroeconomics(5th edition), P280)

Example: Balanced Budget VS Automatic Stabilizers

- It is often argued that a balanced budget amendment would actually be destabilizing. To understand this argument, consider the following model of the economy:
- and are both constant
- 1) Solve for equilibrium output.
- 2) Solve for taxes in equilibrium.

Example: Balanced Budget VS Automatic Stabilizers

- Suppose that the government starts with a balanced budget and that there is a drop in .
- 3) What happens to Y? What happens to taxes?
- 4)suppose that the government cuts spending in order to keep the budget balanced . What will be the effect on Y? Does the cut in spending required to balance the budget counteract or reinforce the effect of the drop in on output?

Olivier Blanchard, Macroeconomics (2nd edition), P57

Key

- 1
- 2
- 3 c0 drops to c2

Key

- 4 reinforce the effect.
- Let G1 be the new equilibrium government spending.
- Then
- Since the government starts with a balanced budget

Deriving IS Curve: Investment Function

- The planned level of investment is a function of (real) interest rate. We specify this form:

i

Investment function

I(i)

Deriving IS Curve: A Graphical Approach

Suppose the interest rate rises….

Y=E

E

Demand

Income, Output, Y

i

i

Investment function

The IS Curve

I(i)

IS

Income, Output, Y

Investment, I

IS Curve: Algebraic Form

- Equilibrium
- Multiplier of government purchases
- Autonomous spending
- Thus, IS Curve

What Is IS Curve?

- IS stands for “investment” and “saving”, and the IS curve represents what’s going on the market for goods and services.
- IS curve: The negative relationship between the interest rate and the level of income that arises in the market for goods and services.

IS Curve: Some Details

- The larger the sensitivity of investment spending to the interest rate and the larger the multiplier, the flatter the IS curve.

Policies and IS Curve

Note: recall

i

- When income tax rate decreases

A, b remains the same, but

increases

Y

More Analysis

- Increases in autonomous consumption or investment or transfers. That’s, only autonomous spending A increases.

i

IS

IS’

Y

Outline

- Some Reviews on the Quizzes
- Goods Market and IS Curve
- Money Market and LM Curve
- IS-LM Model
- AD Curve and Short-run Equilibrium
- Consumption and Saving
- Investment

Money Demand: Theory of Liquidity Preference

- Demand for real balances
- The theory of liquidity preference
- For simplicity, we use linear expression

Money Supply: Some Reviews

- M1, M2, M3
- High-powered money, monetary base
- Reserve, reserve ratio, Fed
- Money multiplier
- The instruments of monetary control: open market operations, the discount rate, and the required-reserve ratio
- A model:

Equilibrium in Money Market

The LM Curve

- Md=Ms

Interest rate, i

Interest rate, i

Supply

i2*

i2*

Demand,L(i,Y2)

i1*

i1*

Demand,L(i,Y1)

M/P

Y1

Y2

Suppose income increases….

Shifts in the LM Curve

Supply

The LM Curve1

i

i

i1*

i1*

The LM Curve2

i2*

i2*

Demand,L(i,Y1)

Income,

output,Y

M/P

Y1

What is LM Curve?

- LM stands for “liquidity” and “money”, and the LM curve represents what’s happening to the supply and demand for money.
- LM curve: The positive relationship between the interest rate and the level of income (while holding the price level fixed) that arises in the market for real money balances.

- Some Reviews on the Quizzes
- Goods Market and IS Curve
- Money Market and LM Curve
- IS-LM Model
- AD Curve and Short-run Equilibrium
- Consumption and Saving
- Investment

IS-LM Model and Short Run Equilibrium

i

Only at the intersection of the IS and LM curves are both equilibrium conditions in goods and money market satisfied.

LM

i*

IS

Y *

Income,

output,Y

Dynamics of IS-LM Model

Goods Market

Money Market

i

i

IS

LM

Y

Y

The adjustment of output level is slow. However, interest rates adjust quickly, so that the LM relation is always satisfied.

Dynamics of IS-LM Model

- Now let’s look at the effects of a monetary contraction…

i

LM2

i’

LM1

i**

i*

IS

Y **

Y *

Income,output,Y

- Some Reviews on the Quizzes
- Goods Market and IS Curve
- Money Market and LM Curve
- IS-LM Model
- AD Curve and Short-run Equilibrium
- Consumption and Saving
- Investment

The AD Curve: Definition

- The aggregate demand (AD) curve shows the combinations of the price level and level of output at which the goods and money markets are simultaneously in equilibrium.

Deriving AD Curve: A Graphical Approach

i

LM2(for P2>P1)

i**

i**

LM1(for P1)

i*

i*

IS

Y

Y **

Y *

P

P2

P1

The AD Curve

Y

Y **

Y *

Deriving AD Curve: An Algebraic Approach

- Solve IS:
- LM:
- We obtain
- Or equivalently

Where

- and
- Or equivalently

AD schedule

Multiplier

- Fiscal policy multiplier
- Monetary policy multiplier

Application: Crowding Out

- Consider the following model of the economy:
- What is the equilibrium level of income Y and interest rate i? Suppose that government purchases are raised from 100 to 150, h0w large is the crowding out?

Two Special Cases

- The Classical Quantity Theory of Money
- The Keynesian Liquidity trap

The Classical Quantity Theory of Money

- The classical quantity theory of money assumes that the interest rate does not influence the quantity of real money demand.

or

where is the constant velocity of money

i

LM Curve

Y

The Liquidity Trap(Keynes, 1936)

- The interest rate is so low that the opportunity cost of holding money is negligible.
- A liquidity trap occurs when the nominal interest rate is close or equal to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools.

The Liquidity Trap

- Monetary policy will be ineffective stimulating production.
- Instead, fiscal policy might be more effective since it will push the IS curve to higher levels of production.

Interest rate,i

LM Curve

Income,output,Y

i

Y

Y

IS

AD

LM（p0）

LM(p0)

Shifts in AD Curve- Suppose there is an increase in money supply.
- Note: Any expansive fiscal or monetary policy could shift AD curve to the right.

AD

- Some Reviews on the Quizzes
- Goods Market and IS Curve
- Money Market and LM Curve
- IS-LM Model
- AD Curve and Short-run Equilibrium
- Consumption and Saving
- Investment

Some Facts

- Consumption accounts for large proportion of aggregate demand.

Keynesian Theories: Consumption Function

- Marginal propensity to consume (MPC) is between zero and one.
- Income is the primary determinant of consumption
- Interest rate does not have an important role.

Reviews on Microeconomics:Irving Fisher

- Intertemporal budget Constraint:

Suppose there is a consumer who lives in two period. He earns income , consumes in period one and earns income and consumes in period two given interest rate .

The saving is .

Consumption in period two

Rewrite the equation in a discounting form

Modigliani: Life-Cycle Theory

- The life-cycle (LC) hypothesis views individuals as planning their consumption and savings behavior over long periods with the intention of allocating their consumption in the best possible way over their entire lifetimes.
- Annual labor income YL
- Working life WL
- The number of years of life NL
- Annual consumption C
- Formula

Friedman: Permanent-Income Hypothesis

- Permanent income is the steady rate of expenditure a person could maintain for the rest of his or her life, given the present level of wealth and the income eared now and in the future.
- Consumption is proportional to permanent income:

C=c YP

where YP is permanent (disposable) income.

LC-PIH: An Algebraic Explanation

- A consumer finds his job when he’s 22 years old. He retires when he’s 62. And he dies at the age of 82. Suppose, when he’s working, the annual income is 100 thousand. No interest or discounting. To maximize his utility throughout his life, what’s his annual consumption?

Still that consumer, he wins 1 million when he’s 32 in a lottery . What do you think of his MPC?

- The MPC out of permanent income is large and the MPC out of transitory income is small, fairly close to zero.

LC-PIH: A Summary

- A rational consumer maximize his utility throughout his lifetime.

Conclusion:

- Smooth consumption over the lifetime.
- Consumption does not respond much to transitory income

Adding Uncertainty: Random-Walk Model

- Smooth consumption over the lifetime
- Random walk

Compared with Traditional Theory

- Strategy(Campbell,Mankiw,1989):
- Results:

Some Controversy on LC-PIH:

- Liquidity constraint
- Myopia
- Buffer-stock saving

Saving

- Personal saving:

If the interest rate increases, will saving be larger?

It’s ambiguous! Income effect and substitution effect.

- Gross national saving= government saving + private saving
- Private saving= business saving + personal saving

Note: business saving consists of retained earnings, that amount of profits not paid out to the owners of the business.

注：有同学问通胀对赤字的影响。不考虑特殊的情况下，通胀会降低债务人的负担，即国债的偿还压力，这样有减轻赤字的作用。

David Ricardo

Barro-Ricardo Equivalence- Barro -Ricardo equivalence (Barro-Ricardo problem, Barro-Ricardo equivalence proposition, Ricardian equivalence, etc.): Debt financing by bond issue merely postpones taxation and there, in many instances, is strictly equivalent to current taxation.

Ricardian Equivalence: A Model

- Suppose the government imposes taxes:
- Suppose the government issues bonds currently and pay the debt by taxation in the next generation:

- Some Reviews on the Quizzes
- Goods Market and IS Curve
- Money Market and LM Curve
- IS-LM Model
- AD Curve and Short-run Equilibrium
- Consumption and Saving
- Investment

Basic Concepts

- Capital: the stock of equipment and structures used in production.
- Investment: the flow of spending that adds to the physical stock of capital.
- Business fixed investment: Equipment and structures that businesses buy for use in future production.
- Inventory investment: The change in the quantity of goods that firms hold in storage, including materials and supplies, work in process, and finished goods.
- Residential investment: New housing bought by people to live in and by landlords to rent out.
- Irreversible investment

Gross vs. Net Investment

- Gross investment
- Depreciation
- Net investment
- Relationship
- Accumulative equation

Classical Theory

Assumptions:

- The market is competitive
- Firms rent capital and hire labors
- Price of product is normalized to 1
- Price of labor is w, price of capital is rK
- Firms maximize their profits

Classical Theory (continued)

Suppose output increases

Components of Price of Capital

where i is real interest rate and d stands for depreciation rate

- From
- we have

Other Theories

- The accelerator model
- The flexible accelerator model
- Neoclassical investment theory
- Tobin’s Q

- Some Reviews on the Quizzes
- Goods Market and IS Curve
- Money Market and LM Curve
- IS-LM Model
- AD Curve and Short-run Equilibrium
- Consumption and Saving
- Investment

Reference

- 王志伟译著，Rudiger Dornbusch, Stanley Fischer and Richard Startz, Macroeconomics , Tenth Edition (东北财经大学出版社,2008)
- N. Gregory Mankiw, Macroeconomics, Fifth Edition (Worth Publishers,2003)
- David Romer, Advanced Macroeconomics, Second Edition (McGraw-Hill, 2001)
- 徐现祥编著，图解宏观经济学，第一版（中国人民大学出版社，2008）
- 方福前等译，罗杰·E.A法默（Roger E.A. Farmer）著，宏观经济学，第二版（北京大学出版社，2009）
- Olivier Blanchard，Macroeconomics， Second Edition （Prentice Hall，2000）
- 张一弛编著，宏观经济分析：理论与政策（中国经济出版社，1996）

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