- •Consumption function
- •But in our analysis we shall include Government and Foreign components (g;t;m;X)
- •Withdrawals and Injections
- •1) Withdrawals function
- •2) Injections and their determinants
- •Determination of National Income
- •Factors of δ ,Conditions of Equilibrium
- •2) Multiplier Effect
- •2 Main practical conclusions from mult. Theory:
- •Keynesian analysis of the inflation & trade cycles
- •1. Inflation
- •2. Keynes explained business fluctuations by instability of investment
- •3. Mechanism of the Trade cycles
- •1. Terminology
- •2. Budget philosophies & growing national debt
- •1. Does national debt figures reflect the real burden for a country?
- •2. Can growing national debt leave to gnt bankruptcy?
- •Fiscal policy
- •1. Automatic/”built-in” stabilizers
- •Stabilizing effect of gnt transfer payments
- •2. Discretionary fiscal policy
- •3. Effectiveness of fiscal policy
Keynesian analysis of the inflation & trade cycles
Inflation in the Keynesian Model.
Keynesian explanation of business fluctuations. Accelerator effect.
Mechanism of the trade cycles.
1. Inflation
Full employment level of Y (Yf) – the level of nat income at which there is no deficiency of demand (no disequilibrium unemployment, all resources are employed fully).
The difference between full and equilibrium level of Y determines deflationary or inflationary gap in economy.
Deflationary gap (recessionary) |
Inflationary gap |
Assume Yf >Ye ® deflationary gap will occur. The size of this gap is illustrated by !AB!=!CD!. AB, CD < YeYf (another illustration of multiplier if J rise by CD, than Y rise by YeYf) multiplier=(Yf-Ye)/(C-D). Deflationary gap – excess of national output (Y) over total expenditure & W>J at full employment level of national income (Yf). Defl gap means deficiency of demand, excess prod-n capacity (overproduction). Gnt may close deflationary gap & reach Yf by stimulating AD: fiscal policy of increasing Gnt exp-re & ¯T and monetary policy of amount of $ in the economy &/or ¯r |
Assume Yf<Ye. Inflationary gap – excess of total expenditure over Y & J>W at Yf. Infl gap means demand-pull inflation in economy (economy seeks for Ye but can reach it). Fiscal policy: ¯GntE/Tax; monetary policy: ¯amount of $/r. Gnt may close inflationary gap & eliminate demand-pull inflation by decrease in total exp-re or W/ ¯J or combination. |
2. Keynes explained business fluctuations by instability of investment
Business fluctuation- instability of AD & (more exactly) by inst of one of the components – I.
AD= C+I (instable)+Xn+G
Instability of investment is caused by instable rate of Δ in Y & AD
Total investment includes (Keynes): It= Ir + Ii
Ir - replacement investment (inv-t to replace equipment) planned as a rule & doesn’t depend on Y
Ii – induced investment (inv-t to meet extra consumed D) depends on Y & AD
How changes in D & output influence changes in I:
A small in output sharp in I
Even small in output (D) causes accelerated in I
Accelerator effect
- the level of I depends on the rate of Δs in Y & therefore has a tendency to fluctuate.
When C&Y , there’ll have to be new invto increase prod-n cap-ty. Better- I’ll fall back to more Ir unless there’s a futher rise in D&CIi depends on changes in income (Y)
Ii = *ΔYacc effect (the level of induced I as a proportion of a rise in Y); where is accelerator coefficient and depends on marginal capacity/ output ratio.
=Δk/ΔY – marginal capital output ratio
the more extra capital required to produce extra Y the higher accelerator coefficient a, the higher the size of fluctuations in the economy.
Accel effect may be called the payments for prosperity.
Bus fluct is caused by tech progr.
Accelerator effect may be diminished by:
Capital & goods stocks: stocks the ¯influences in D, accel effect
Forward planning: plans for 1,5… years – if It (incl Ii) is planned it can’t react on Δ in D
Forecasts: future demand – spend if D fall back
Machines: as a rule suddenly wear out
To invest more