foreign capital budget deficit exports prm h/b consumption trsy fxmcrm the complete “money”...
TRANSCRIPT
Foreign Capital
Budget Deficit
Exports
PrM
H/B
Consumption
TRSYFxM CrM
THE COMPLETE “MONEY” MODEL
The FEDCash
Change of Money Demand
Rest of the World
Banks & Credit
Fiscal Policy
Money
The Inner Loop
Investment GovernmentPurchases
Imports Saving(net) Taxes
Income
Spending
LaM
wagesProfit,
interest, rent
Change of Money Supply
ABBREVIATIONS
E I
PrM
H/B
X
C
Y
TRSY
T
G
FxM CrM
F S
K BB/Def
The FEDCash
ΔMDΔMS
We will often omit the Labor Market
THE COMPLETE CIRCULAR FLOW
The BASIC MODELY = IncomeCd = Domestic ConsumptionS = SavingI = InvestmentX = Spending
The TREASURYG = Gov’t PurchasesT = Net TaxesBB = the budget balance = T – GDef = the Deficit = G – TTP = Transfer Payments
The FOREIGN SECTORF = ImportsE = ExportsK = Foreign Capital Flows
MONEYΔMD = changes of Money Demand
to/from CASHΔMS = changes of Money Supply
to/from the FED
Y = Cd + F + S + TX = Cd + E + I + GS + K + ΔMS = I + Def + ΔMDT + Def = G (T = Tgross – TP)F = E + K
The “PLACES”H/B = Households and BusinessesPrM = The Product MarketLaM = the Labor MarketCrM = the Credit MarketFxM = the Foreign Exchange MarketTRSY = the government TreasuryCASH = the public demand for moneyFED = the Federal Reserve
E I
PrM
H/B
X
C
Y
TRSY
T
G
FxM CrM
F S
THE CLOSED MODEL ignores the money variables
K BB/Def
Sometimes we will
ignore ΔMD and/or ΔMS
I
PrM
H/B
X
C
Y
TRSY
T
G
CrM
S
THE TREASURY MODEL
BB/Def
Often we will ignore the rest of the world
The FED
ΔMS
Cash
ΔMD
E I
PrM
H/B
X
C
Y
FxM CrM
F S
THE FOREIGN MODEL
K
Sometimes we will ignore
Fiscal Policy to concentrate on foreign trade
The FED
ΔMS
Cash
ΔMD
I
PrM
H/B
X
C
Y
CrM
S
THE BASIC MODEL
No Treasury or Foreign Sector
The FED
ΔMS
Cash
ΔMD
THE CLOSED MODEL – an important conclusion, Part I
E IPrM
H/B
X
C
Y
TRSY
T
G
FxM CrM
F S
K BB/Def
If we start with a given amount of income (Y), we can picture that money flowing through the economy to where it ends up as spending (X).
The rule for this model is: “All the money going into any box will equal the money going out of that box.”
Question: “Is it possible that X is ever different from Y?”
Answer: “X must always be the same as Y in the CLOSED MODEL”
This should sound curious. We have a model that says that total spending (that is, GDP) never changes, when it obviously does in fact change. The model is, nevertheless surprisingly useful particularly as the LONG RUN MODEL.
THE CLOSED MODEL – an important conclusion, Part I
E IPrM
H/B
X
C
Y
TRSY
T
G
FxM CrM
F S
K BB/Def
“X must always be the same as Y in the CLOSED MODEL”
This is so because the money that leaves Households and Businesses as Income must all go “somewhere.” That money must eventually wind up being spent, since there is nowhere else for it to go.
THE CLOSED MODEL – an important conclusion, Part II
E IPrM
H/B
X
C
Y
TRSY
T
G
FxM CrM
F S
K BB/Def
When we add either of two items to the diagram we get a new conclusion.
FED
ΔMS
Cash
ΔMD With either ΔMD or ΔMS in the model it is now possible for X and Y to be different
BIG CONCLUSION: In order for GDP (spending) to rise or fall there must be a change in either the money supply or money demand.
This is because money going to and from Cash or the Fed is going and coming from “nowhere.” The money more or less appears and disappears from the economy.
PrM
H/B
X
Cd
Y
The OPEN Model – the Short Run picture
Once we see that X and Y can be different we can build a simpler model. This is particularly useful for the Keynesian, short-run view of the economy. We will divide the economic flows into three parts.
1. Domestic Consumption: this is the part of income that immediately becomes spending.
2. Leakages: these are the parts of income that are not immediately returned to the product market as spending.
Leakages = Imports, Saving and Taxes
3. Injections: these are the parts of total spending other than domestic consumption: the parts of spending that do not immediately arise out of current income.
Injections = Exports, Investment and Government Purchases
The OPEN Model – the Short Run picture
In the Open Model the Leakages seem to go “nowhere.”The Injections seem to come from “nowhere.”
It can be useful to think of it that way. It is also good to remember that the complete model does contain two “nowheres.” They are …
1. Cash – changes of money demand and2. the Fed – changes of the money supply
The Three Models
PrM
H/B
X
Cd
Y
The OPEN Model the Short Run
The MONEY Modelthe versatile one. This one can do what either of the others can
E I
PrM
H/B
X
C
Y
TRSY
T
G
FxM CrM
F S
K BB
FED
ΔMS
Cash
ΔMD
E IPrM
H/B
X
C
Y
TRSY
T
G
FxM CrM
F S
K BB
The CLOSED Modelthe Long Run
Injections = E + I + G
Leakages = F + S + T