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Principles of Macroeconomics Unit 5

This is an outline of the concepts discussed in the Principles of Macroeconomics text at www.inflateyourmind.com
by

John Bouman

on 13 August 2014

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Transcript of Principles of Macroeconomics Unit 5

Keynes vs the Classical Economists
John Maynard Keynes (1883 - 1946)
Keynes: the economy
is like an elevator
Spending
Production
Employment
Incomes
Spending
Production
Employment
Incomes
Keynes:
government spending
and/or money supply
Incomes
Employment
Production
Spending
Incomes
etc.
taxes
Government spends $100
$100 construction workers' incomes
$80 construction workers' spending
$80 electronics makers' incomes
$64 electronics makers' spending
$64 airline workers' incomes
$51.20 airline workers' spending
$51.20 movie makers' incomes
$40.96 movie makers' spending
Total spending and income
increase in the entire economy:
$100 + $80 +$64 + $51.20 + ... = $500
etc.
$500 = 5 x $100
Total increase in spending (GDP) in
the economy
=
the mul
t
iplier
x
Change in government spending
-$400 = -4 x $100
Change in spending (GDP) in entire economy
=
Tax multiplier
x
Change in taxes
If the government were to increase
taxes
by $100:
or
Keynes: Aggregate Demand
GDP
Keynes: Aggregate Demand
GDP
and prices
The Keynesian Theory
The Classical Economic Theory
Adam Smith (1723 - 1790)
Milton Friedman (1912 - 2006)
Friedrich Hayek (1899 - 1992)
Ludwig Von Mises (1881 - 1973)
Classical economists:
the economy is like a boat
Production, employment,
and spending
Prices
wages
interest rates
Quantity demanded
of products
Hiring
Borrowing
Production, employment,
and spending
Gov't spending
Money supply
Debt
Inflation
Long term
problems

Create a positive
production climate

Reasonably low taxes
(create incentive to work and innovate)

Reasonable
regulations

Encourage savings
Government's main role
is to provide
essential services
(defense, legal system,
infrastructure,
police, fire protection)

Classicists: Aggregate Supply
GDP
Prices
Recessionary gap = difference in
what GDP is now versus what
GDP is at full employment.
If the recessionary gap is $200 and the multiplier is 4, then government spending must increase by $50 (or taxes must decrease by $66.67)
Long term
problems

Tax multiplier = 1 - regular multiplier
Full transcript