Econ Lecture 10 Handout: Short Run Fluctuations & Determination of Equilibrium Output, Study notes of Economics

Download Econ Lecture 10 Handout: Short Run Fluctuations & Determination of Equilibrium Output and more Study notes Economics in PDF only on Docsity! University of California, Berkeley Department of Economics Economics , Summer 2003 Lecture 10 Handout, July 28 1 Short Run Fluctuations Fluctuations in Aggregate Spending main source of recessionary and expansionary gaps. C, G, NX: actual = planned Investment Spending= IP planned Inventory investment Business Fixed investment Planned vs Actual Spending I ! I P I > I P: actual > planned sales low I < I P actual < planned sales high Consumption T)- c(Y C C += not function of income -wealth -real interest rate (more in lec 11) -consumer confidence c & Y-T Disposable income Incomes - Net Tax 0 < c < 1 MPC marginal propensity to consume Economic Naturalist 26.2 What effect did 2000 to 2002 decline in stock market have on consumption spending? 13.3 T to 6.5T $1 fall mean fall in C 3 to 7 cents Other factors counteract stock market wealth effect University of California, Berkeley Department of Economics Economics , Summer 2003 Lecture 10 Handout, July 28 2 Spending depends on Income PAE = C + Ip + G + NX C=620 + 0.8(Y-T) G=300 NX=20 T=250 Ip=220 PAE = 960 + 0.8Y = autonomous + induced Output depends on Spending Meeting demand at set prices Production = PAE (demand) Y = PAE Short-Run Equilibrium Output (1) Output Y 4,000 4,160 -160 No 4,200 4,320 -120 No 4,400 4,480 -80 No 4,600 4,640 -40 No 4,800 4,800 0 Yes 5,000 4,960 40 No 5,200 5,120 80 No (2) Planned aggregate expenditure PAE = 960 + 0.8Y (3) Y - PAE (4) Y = PAE? Y < SR Equil Y I < Ip inventory drawn down more sales than planned firms expand production to meet demand Determination of Short-Run Equilibrium Output (Keynesian Cross) Output Y Pl an ne d ag gr eg at e ex pe nd itu re P A E 960 Expenditure line PAE = 960 + 0.8Y Slope = 0.8 45o Y = PAE 4,800 Equilibrium=4800 • Y < 4,800, PAE > Y actual < planned • Y > 4,800, PAE < Y actual > planned A Decline In Planned Spending Leads To A Recession Output Y Pl an ne d ag gr eg at e ex pe nd itu re P A E 960 E Expenditure line PAE = 960 + 0.8Y 45o Y = PAE 4,800 Y* Recessionary gap F Expenditure line PAE = 950 + 0.8Y A decline in autonomous aggregate expenditure (C) shifts the expenditure line down 950 4,750