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Introduction to the Keynesian Model
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En provenance du cours de University of California, Irvine
The Power of Macroeconomics: Economic Principles in the Real World
1350 notes
University of California, Irvine
1350 notes
À partir de la leçon
The Keynesian Model and Fiscal Policy
Rencontrer les enseignants
Dr. Peter NavarroProfessor
Paul Merage School of Business
Welcome to the power of macroeconomics.
The purpose of this lesson is to illustrate the basic Keynesian model
arguably one of the most important models in macroeconomic history.
In this lecture we will also introduce you to one
of the most important tools in macroeconomics, that of fiscal policy.
>> In macroeconomics the basic Keynesian model
goes by many names.
Some economists refer to it as the multiplier model.
While others call it the aggregate production aggregate expenditures model.
Throughout this lecture, we will use these names interchangeably, as we show you how
the development and application of the basic
Keynesian model gave birth to fiscal policy.
Fiscal policy involves the
use of Government expenditures or tax changes to stimulate or contract an
economy. The basic Keynesian Model provides a very
straight-forward approach to using fiscal policy to close a recessionary gap.
At least in theory, this model may be used to
calculate very precisely how much government expenditures must be increased.
Or alternatively,
how much taxes must be cut to stimulate an economy back to full employment.
Note however, that while we shall present this
model in the very mechanical way that it was
taught at universities in the 1960s, macroeconomics is
hardly as simple as the Keynesian model would suggest.
Harsh reality, that economists learned in the 1970s with the emergence of a
virulent stagflation.
We'll talk much more about stagflation and the complexities of macroeconomics later.
For now, let's try to master the simple
Keynesian model and the use of fiscal policy.
If you were to sit down tonight and read John Maynard
Keynes's famous little book, the General Theory of Employment, Interest and Money.
You would find
little in that book resembling today's basic textbook Keynesian model.
How Keynes's arcane prose was transformed into an easily-understood algebraic
and graphical model is a story in and of itself.
Involving two key figures, professors Alvin Hansen and Paul Samuelson.
Alvin Hansen was a textbook writer and classical economist
who, in the mid nineteen thirties left the
University of Wisconsin to take a post at Harvard.
As the story goes, somewhere on the train between
Madison and Cambridge, Hansen converted to the Keynesian faith.
At Harvard, Hansen led a seminar that became
an important cauldron of ideas for the Keynesian doctrine.
And Hansen also took regular trips to Washington D.C.
to spread the Keynesian gospel to the nations policymakers.
Perhaps most importantly, Hansen wrote A Guide to Keynes,
which became the bible for economic students in the 1950s.
While Hansen's star pupil, Paul Samuelson began writing what would
become the definitive macroeconomic textbook for more than three decades.
Out of these writings has emerged
the basic Keynesian model.
The most important assumption underlying this model is that prices are fixed.
Keynes himself didn't believe this believe this, of course.
But Keynes did believe that when an economy is
in the recessionary range, prices and wages were sufficiently inflexible.
So that income would adjust much faster than prices.
Therefore, for simplicity,
price changes could be assumed away.
The beauty of this fixed price assumption is that it allowed
Hansen and Samuelson to develop
a Keynesian aggregate production-aggregate expenditures model.
Readily distinguishable from the aggregate supply-aggregate demand
model that we developed in the last lecture.
This figure illustrates the Keynesian model.
The vertical axis measures total spending or aggregate expenditures.
The horizontal axis measures real GDP or output.
And there is a 45 degree line that measures aggregate production.
In addition there is an aggregate expenditures curb that is
calculated by totaling consumption plus investment plus government spending plus
net exports. Note that equilibrium in this model will
occur where the aggregate expenditure and aggregate production curves cross.
Note also, that this equilibrium doesn't necessarily have to
occur at the economy's full potential output, Q sub P.
For example, if equilibrium occurs at, say, Q sub R, actual output
is below potential output Q sub P. And the economy is experiencing a
recessionary gap. If however the economy is at Q sub
I actual out put exceeds potential out put and there is an inflationary gap.
One useful way of thinking about these recessionary and inflationary
gaps is through the concept of leakages versus injections.
Let's do this now within the context of our now familiar circular flow diagram.
Recall that in this diagram the flow of income moves from right
to left at the top of the figure and represents aggregate supply.
Now a leakage, is income not directly spent on
domestic output but rather is diverted from the circular flow.
And one important leakage we discussed within the context of
Say's law occurs when consumers save a portion of their income.
But remember, that this savings leakage
might be offset by an investment injection.
Where an injection is an addition of income to the circular flow.
This figure lists the various leakages and injections in the macro economy.
The broader point here is that any particular macroeconomic equilibrium
will depend on the balance between these injections and leakages.
Of those listed in the figure,
consumer savings and business investment are the primary sources
of imbalances in a totally private and closed economy.
But in an economy with a government sector, taxes represent
an important leakage while government spending is a crucial injection.
Same time, in an open economy where trading occurs, import leakages and
export injections are likewise very important in determining actual output.
Here then is an updated version of our circular flow diagram that allows
for both trade and a government sector. Take a few minutes to study it.
As you do so remember that our next task is to
understand how each of the components of the Keynsian model are constructed.
And then learn how fiscal policy can be
used to close a recessionary or inflationary gap.
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