Macro 11
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The document summarizes macroeconomic concepts related to the classical and Keynesian models, aggregate demand and supply, and the multiplier effect. It explains that the classical model assumes prices adjust to changes in aggregate demand, while the Keynesian model recognizes prices may be "sticky" in the short run, leading to unemployment. It also outlines the aggregate demand-aggregate supply model and how fiscal policy like government spending can be used to increase aggregate demand under the Keynesian view. Finally, it discusses the consumption function and multiplier effect, how autonomous consumption and marginal propensity to consume impact consumption levels, and how to calculate the multiplier.
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Macro 11
- 2. Macroeconomics Lecture 11 Classical and Keynes Models
- 3. Questions
- 4. Video Project 5% of Grade 2-5 Minutes Introduction Concept Definition Equation Chart Example
- 5. Classical Model Changes in Aggregate Demand would simply change the price level
- 6. P2 Price Level Real GDP orY Aggregate Demand Long Run Aggregate Supply Classical Model P1 18
- 7. Price Level Real GDP orY Aggregate Demand Long Run Aggregate Supply Classical Model P1 1815 Unemployment Prices were “sticky” Did not adjust downwards
- 8. “The difficulty lies not so much in developing new ideas as in escaping from old ones.” The GeneralTheory of Employment, Interest, and Money
- 9. Price Level Real GDP orY Aggregate Demand Short Run Aggregate Supply Keynes Model P1 1815 Unemployment Use Government Spending to Increase Aggregate Demand
- 10. P3 P2 Price Level Real GDP orY Aggregate Demand Modern Keynes Model 18 Long Run Aggregate Supply Short Run Aggregate Supply 19 P1 Output Increases Prices Increases Output Decreases
- 11. P3 P2 Price Level Real GDP orY Aggregate Demand Modern Keynes Model 18 Long Run Aggregate Supply Short Run Aggregate Supply 17 P1 Output Decreases Prices Decreases Output Increases
- 12. P2 Price Level Real GDP orY Aggregate Demand Modern Keynes Model 18 Long Run Aggregate Supply Short Run Aggregate Supply 17 P1 Output Decreases Prices Increases Stagflation
- 13. AD-AS Model Aggregate Demand Long Run Aggregate Supply - Classical Keynes - Sticky Prices Short Run Aggregate Supply Change Output and Prices in Short Run Only Change Prices in Long Run
- 14. AD-AS Model If Aggregate Demand Decreases Need Government Spending Stagnation and Inflation Stagflation SRAS Decreases Hope it increases
- 15. Macroeconomics Consumption, Real GDP, and the Multiplier
- 16. Disposable Income Income after taxes Two Things Consume - Spend Save
- 19. Investment Spending on things that make things in the future
- 20. Consumption Function Relationship between income and consumption
- 21. Consumption Spending C Income Y 45º C =Y Consumption Break-Even Income Saving Earning more than you spend Dissaving Spending more than you earn $60,000 $60,000 $20,000 $30,000 Borrowing $10,000 $100,000 $80,000 Saving $20,000 Autonomous Consumption
- 22. Consumption Spending C Income Y 45º C =Y Consumption Break-Even Income Saving Earning more than you spend Autonomous Consumption Dissaving Spending more than you earn
- 23. Marginal Propensity to Consume How much are you going to spend on your next dollar?
- 24. Marginal Propensity to Save How much are you going to save on your next dollar?
- 25. Marginal Propensity to Consume + Marginal Propensity to Save = 1.0 or 100% MPC + MPS = 1.0 or 100%
- 29. Quiz If autonomous consumption is $10,000 and the MPC is .80, and income is $50,000, will you be saving, spending, or breaking even? C = autonomous consumption + (MPC xY) C = $10,000 + (.80 x $50,000) C = $10,000 + $40,000 C = $50,000 Y = $50,000 You are breaking even
- 30. Quiz If autonomous consumption is $15,000 and the MPC is .75, and income is $40,000, will you be saving, spending, or breaking even? C = autonomous consumption + (MPC xY) C = $15,000 + (.75 x $40,000) C = $15,000 + $30,000 C = $45,000 Y = $40,000 You are borrowing $5,000
- 31. Quiz If autonomous consumption is $20,000 and the MPC is .90, and income is $100,000, will you be saving, spending, or breaking even? C = autonomous consumption + (MPC xY) C = $20,000 + (.90 x $100,000) C = $20,000 + $90,000 C = $110,000 Y = $100,000 You are borrowing $10,000
- 32. Quiz If autonomous consumption is $5,000 and the MPC is .50, and income is $40,000, will you be saving, spending, or breaking even? C = autonomous consumption + (MPC xY) C = $5,000 + (.50 x $40,000) C = $5,000 + $20,000 C = $25,000 Y = $40,000 You are saving $15,000
- 33. Keynesian Multiplier MPC = 0.25 Round Increase Consumption Saving 1 $100.00 $25.00 $75.00 2 $25.00 $6.25 $18.75 3 $6.25 $1.56 $4.69 4 $1.56 $0.39 $1.17 5 $0.39 $0.10 $0.29 6 $0.10 $0.02 $0.07 7 $0.02 $0.01 $0.02 8 $0.01 $0.00 $0.00 all other rounds … … … Totals $133.33 $33.33 $100.00
- 35. Quiz If the MPC is .80 and a new investment of $1,000 is made, how much will GDP change? GDP Change = planned investment x multiplier GDP Change = $1,000 x (1 ÷ .20) GDP Change = $1,000 x 5 GDP Change = $5,000