Bài giảng Macroeconomics - Chapter 18: Spending, Output, and Fiscal Policy

Chapter 18: Spending, Output, and Fiscal PolicyIdentify the key assumptions of the basic Keynesian model and explain how this affects firms' production decisionsDiscuss the determination of planned investment and aggregate consumption spending and how these concepts are used to develop a model of planned aggregate expenditureAnalyze how an economy reaches short-run equilibrium in the basic Keynesian model, using both numbers and graphsShow how a change in planned aggregate expenditure can cause a change in short-run equilibrium output and how this is related to the income-expenditure multiplier5. Explain why the basic Keynesian model suggests that fiscal policy is useful as a stabilization policy, and discuss the qualifications that arise in applying fiscal policy in real-world situationsKeynesian ModelBuilding block for current theories of short-run economic fluctuations and stabilization policiesIn the short run, firms meet demand at preset pricesFirms typically set a price and meet the demand at that price in the short runMenu costs are the costs of changing pricesFirms change prices when the marginal benefits exceed the marginal costs John Maynard Keynes (1883 – 1946)After World War I, Keynes recognized that the terms of the peace would lead to another warPlanned Aggregate ExpenditurePlanned aggregate expenditure (PAE) is total planned spending on final goods and servicesFour components of planned aggregate expenditureConsumption (C) by householdsInvestment (I) is planned spending by domestic firms on new capital goodsGovernment purchases (G) are made by federal, state, and local governmentsNet exports (NX) equals exports minus importsPAE = C + IP + G + NXConsumption FunctionThe consumption function is an equation relating planned consumption to its determinants, notably disposable income (Y – T)C = C + (mpc) (Y – T), where C is autonomous consumption spendingmpc is the change in consumption for a given change in disposable income 0 < mpc < 1Autonomous consumption is spending not related to the level of disposable incomeA change in C shifts the consumption functionConsumption FunctionC = C + (mpc) (Y – T)The wealth effect is the tendency of changes in asset prices to affect household's wealth and thus their consumption spendingThis effect is included in CAutonomous consumption also captures the effects of interest rates on consumptionHigher rates increase the cost of using credit to purchase consumer durables and other itemsMore on the Consumption FunctionC = C + (mpc) (Y – T)Marginal propensity to consume (mpc) is the increase in consumption spending when disposable income increases by $1mpc is between 0 and 1 for the economyIf households receive an extra $1 in income, they spend part (mpc) and save part(Y – T) is disposable incomeOutput plus government transfers minus taxesMain determinant of consumption spendingPlanned Aggregate Expenditure (PAE)Two dynamic patterns in the economyDeclines in production lead to reduced spendingReductions in spending lead to declines in production and incomeConsumption is the largest component of PAEConsumption depends on output, YPAE depends on YPlanned aggregate expenditure has two partsAutonomous expenditure, the part of spending that is independent of outputInduced expenditure, the part of spending that depends on output (Y)Short-Run EquilibriumShort-run equilibrium is the level of output at which planned spending is equal to outputNo change in output as long as prices are constantOur equilibrium condition can be writtenY = PAEOutput Greater than EquilibriumSuppose output reaches 5,000Planned spending is less than total outputUnplanned inventory increasesBusinesses slow down productionOutput goes downPAEOutput (Y)960PAE = 960 + 0.8Y45oY = PAE4,8005,000Output Less than EquilibriumSuppose output is only 4,500Planned spending is more than total outputUnplanned inventory decreasesBusinesses speed up productionOutput goes upPAEOutput (Y)960PAE = 960 + 0.8YY = PAE4,8004,700Lower EquilibriumOutput YPlanned aggregate expenditure (PAE)960EPAE = 960 + 0.8Y45oY = PAE4,800Y*Recessionary gapPAE = 950 + 0.8Y950F4,750New EquilibriumAutonomous consumption, C, decreases by 10Causes a downward shift in the planned aggregate expenditure curveThe economy eventually adjusts to a new lower level of equilibrium spending and output, $4,750Suppose that the original equilibrium level, $4,800, represented potential output, Y*A recessionary gap developsSize of the recessionary gap is 4,800 – 4,750 = $50Entire decrease is in consumption spendingSame process applies to a decrease in IP, G, or NX–What Caused U.S. Recession 2007 - 2009Housing price bubble burst summer 2006House prices increased an average 7% per year from 2001 - 2006Last period of high increase was 1976 – 19794.9% per year increase on averageUsing the rule of 72, house prices would double in 10 years as compared to 15-19 yearsHousing prices declined 6% 2006 – 2007 and 19% 2007 – 2009Financial market crisisWhat Caused the U.S. Recession 2007 - 2009Decline in spending by businesses and householdsDifficult to borrowUncertainty about the state of the economyDecline in planned aggregate expenditureDownward shift of the PAE lineRecessionary gapIncome-Expenditure MultiplierThe income – expenditure multiplier shows the effect of a one-unit increase in autonomous expenditure on short-run equilibrium outputPrevious exampleInitial planned expenditure = 960 + 0.8 YNew planned expenditure = 950 + 0.8 YEquilibrium changed from $4,800 to $4,750A $10 change in autonomous expenditures caused a $50 change in outputMultiplier = 5The larger the mpc, the greater the multiplierStabilization PolicyStabilization policies are government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gapsExpansionary policies increase planned expenditureContractionary policies decrease planned expenditureFiscal policy uses changes in government spending, transfers, or taxesMonetary policy uses changes in the money supplyGovernment SpendingGovernment spending is part of planned spendingChanges in government spending will directly affect planned aggregate expendituresSuppose planned spending decreases $10 from Y = 960 + 0.8 Y to Y = 950 + 0.8 YEquilibrium Y decreases from $4,800 to $4,750Recessionary gap is $50Stabilization policy indicates a $10 increase in government spending will restore the economy to Y* at $4,800Taxes and TransfersNet tax ( T) = total taxes – transfer payments – government interest paymentsPlanned aggregate expenditures are influenced by changing total taxes and/or transfer paymentsThe effect is indirect, channeled through the effects on disposable incomeLower taxes or higher transfers increase disposable incomeIncreases in disposable income lead to higher CSupply-Side Effects of Fiscal PolicyFiscal policy may affect potential output as well as potential spendingInvestment in infrastructure increases Y*Taxes and transfers affect incentives and can change potential output, Y*Supply-side economists emphasize the supply-side effects of fiscal policyCurrent thinking is more moderateDemand-side effects of spending matterSupply-side effects also matterFiscal Policy and Deficit SpendingGovernment deficit is the difference between government spending and net taxes, (G – T)Large and persistent budget deficits reduce national savingLess saving means less investment which means less growthManaging the impact of the deficit limits the government's ability to use fiscal policy as a stimulusPolitical considerations make it difficult to use contractionary fiscal policyAutomatic stabilizers increase government spending or decrease taxes when real output declinesFiscal policy may be useful to address prolonged periods of recession