simple macro model
DESCRIPTION
Simple Macro Model. Econ 10 Holmes. Review. C. D. Consumers. Firms. I. Y (income). Y. Circular Model. S. -(S A )= C A. C. Multiplier. D A. Y. S. I A. I. New setup. This guy is tricky. If S goes up then C must go down. Sample Problem. - PowerPoint PPT PresentationTRANSCRIPT
Simple Macro Model
Econ 10
Holmes
Review
Y
IIYII
Y
CCYCC
ICD
SCY
DY
A
A
0),(
10),(
m)equilibriu(in
Circular Model
FirmsConsumers
C
I
Y (income) Y
DS
New setup
MultiplierY
C
I
S
-(SA)= CA
IA
DA
This guy is tricky. If S goes up then C must go down.
Sample Problem
Suppose MPC=.5, MPI=.25, and CA=100. Find•multiplier eq Y•total S, C, I
First compute multiplier. MPS=MPC+MPI=.5 + .25 = .75
Y D1 D20 0100 75 100
DA=25Y=100Y/ DA=4
1/(1-MPS)=1/(1-.75)=1/.25=1/(1/4)=4
Using the Chart
MultiplierY
C
I
S
-(SA)= CA
IA
DA
CA=100
100-(-100)
0
100
4
400
MPC=.5MPI=.25
400*.5200
400*(1-.5)200
400*.25100
total S=-100 + 200 = 100total C= 100 + 200 = 300total I= 0 + 100 = 100
AnotherMPSave=.2, MPI=.15. SA=-20, IA=20
MPS=.8+.15 = .95Multiplier = 1 / (1-.95) = 1 / .05 = 20
Y D1 D20 0100 95 100
100/5 = 20
.2 + .15 ? Want MPC, not MP Save...
Using the Chart
MultiplierY
C
I
S
-(SA)= CA
IA
DA
SA=-20IA=20
20-(-20)
20
40
20
800
MPC=.8MPI=.15
800*.8640
800*.2160
800*.15120
total S=-20 + 160 = 140total C= 20 + 640 = 660total I= 20 + 120 = 140
A Check
1. Total change in Y = total change in C + total change in I= 660 + 140 = 800
2. Total change in Y = total change in C + total change in S= 660 + 140 = 800
Fallacy of Composition
Suppose SA=100. MPC=.7, MPI=.2.Society is saving more. What happens in eq?
Mult = 1/(1-(.7+.2)) = 1 / .1 = 10
Using the Chart
MultiplierY
C
I
S
-(SA)= CA
IA
DA
SA=100
-100-(100)
0
-100
10
-1000
MPC=.7MPI=.2
-1000*.7-700
-1000*.3-300
-1000*.2-200
total S=100 + -300 = -200total C= -100 + -700 = -800total I= 0 + -200 = -200
So….
Society is saving more, but has repercussions that lead to a net decrease in saving.
“Paradox of Thrift”
Why? As people save money, less consumption. I spend $100 less, so the people at the grocery store get laid off, they spend less, etc….
One for the road
Suppose MPC=.7, MPI=.1. IA=-10.
Find•multiplierY•total S, C, IExplain intuitively why IA has the effect it does.