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The Data of Macroeconomicsm
acro
Important issues in macroeconomicsImportant issues in macroeconomics
Why does the cost of living keep rising?
Why are millions of people unemployed, even when the economy is booming?
What causes recessions? Can the government do anything to combat recessions? Should it?
Macroeconomics, the study of the economy as a whole, addresses many topical issues:
Important issues in macroeconomicsImportant issues in macroeconomics
What is the government budget deficit? How does it affect the economy?
Why does the U.S. have such a huge trade deficit?
Why are so many countries poor? What policies might help them grow out of poverty?
Macroeconomics, the study of the economy as a whole, addresses many topical issues:
0
10,000
20,000
30,000
40,000
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
U.S. Real GDP per capita U.S. Real GDP per capita (2000 dollars)(2000 dollars)
Great Depression
World War II
First oil price shock
Second oil price shock
long-run upward trend…
9/11/2001
U.S. inflation rateU.S. inflation rate(% per year)(% per year)
-15
-10
-5
0
5
10
15
20
25
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
U.S. unemployment rateU.S. unemployment rate(% of labor force)(% of labor force)
0
5
10
15
20
25
30
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Why learn macroeconomics?Why learn macroeconomics?
1. The macroeconomy affects society’s well-being.
Each one-point increase in the unemployment rate is associated with:
– 920 more suicides– 650 more homicides– 4000 more people admitted to state mental
institutions– 3300 more people sent to state prisons– 37,000 more deaths– increases in domestic violence and homelessness
Each one-point increase in the unemployment rate is associated with:
– 920 more suicides– 650 more homicides– 4000 more people admitted to state mental
institutions– 3300 more people sent to state prisons– 37,000 more deaths– increases in domestic violence and homelessness
2. The macroeconomy affects your well-being.
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-1
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2
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4
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1965 1970 1975 1980 1985 1990 1995 2000 2005
-7
-5
-3
-1
1
3
5
unemployment rate inflation-adjusted mean wage (right scale)
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Why learn macroeconomics?Why learn macroeconomics?
Unemployment & inflation in election years
year U rate inflation rate elec. outcome
1976 7.7% 5.8% Carter (D)
1980 7.1% 13.5% Reagan (R)
1984 7.5% 4.3% Reagan (R)
1988 5.5% 4.1% Bush I (R)
1992 7.5% 3.0% Clinton (D)
1996 5.4% 3.3% Clinton (D)
2000 4.0% 3.4% Bush II (R)
2004 5.5% 3.3% Bush II (R)
3. The macroeconomy affects politics.
Why learn macroeconomics?Why learn macroeconomics?
A multitude of modelsA multitude of models
So we will learn different models for studying different issues (e.g., unemployment, inflation, long-run growth).
For each new model, you should keep track of – its assumptions – which variables are endogenous,
which are exogenous– the questions it can help us understand,
and those it cannot
Prices: flexible vs. stickyPrices: flexible vs. sticky
Market clearing: An assumption that prices are flexible, adjust to equate supply and demand.
In the short run, many prices are sticky – adjust sluggishly in response to changes in supply or demand. For example, – many labor contracts fix the nominal wage
for a year or longer– many magazine publishers change prices
only once every 3-4 years
Prices: flexible vs. stickyPrices: flexible vs. sticky
The economy’s behavior depends partly on whether prices are sticky or flexible:
If prices are sticky, then demand won’t always equal supply. This helps explain– unemployment (excess supply of labor)– why firms cannot always sell all the goods
they produce
Long run: prices flexible, markets clear, economy behaves very differently
Outline of this course:Outline of this course:
Introductory material (Chaps. 1 & 2) and the Classical Theory (Chaps. 3, 4, & 6) How the economy works in the long run, when prices are flexible
Business Cycle Theory (Chaps. 9-12)How the economy works in the short run, when prices are sticky
Policy debates (Chaps. 13-15)Should the government try to smooth business cycle fluctuations? Is the government’s debt a problem?
Growth Theory (Chaps. 7 & 8)The standard of living and its growth rate over the very long run
Metaphors for the EconomyMetaphors for the Economy
Human Body Machine
The Data of Macroeconomicsm
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Do you remember…Do you remember…
…the meaning and measurement of the most important macroeconomic statistics?
– Gross Domestic Product (GDP)
– The Consumer Price Index (CPI)
– The unemployment rate
Gross Domestic Product: Gross Domestic Product: Expenditure and IncomeExpenditure and Income
Two definitions:
– Total expenditure on domestically-produced final goods and services.
– Total income earned by domestically-located factors of production.
Expenditure equals income because every dollar spent by a buyer becomes income to the seller.
Expenditure equals income because every dollar spent by a buyer becomes income to the seller.
The Circular FlowThe Circular Flow
Households Firms
Goods
Labor
Expenditure ($)
Income ($)
The expenditure components of GDPThe expenditure components of GDP
consumption
investment
government spending
net exports
Consumption (C)Consumption (C)
– durable goods last a long time ex: cars, home appliances
– nondurable goodslast a short time ex: food, clothing
– serviceswork done for consumers ex: dry cleaning, air travel.
definition: The value of all goods and services bought by households. Includes:
U.S. consumption, 2007 (Q3)U.S. consumption, 2007 (Q3)
41.9
20.4
7.7
70.0%
5,857.8
2,846.3
1,081.6
$9,785.7
Services
Nondurables
Durables
Consumption
% of GDP$ billions
Investment (I)Investment (I)
Definition 1: Spending on [the factor of production] capital.Definition 2: Spending on goods bought for future use
Includes:– business fixed investment
Spending on plant and equipment that firms will use to produce other goods & services.
– residential fixed investmentSpending on housing units by consumers and landlords.
– inventory investmentThe change in the value of all firms’ inventories.
U.S. investment, 2007 (Q3)U.S. investment, 2007 (Q3)
0.3
4.5
10.7
15.5%
35.4
627.3
1,500.2
$2,162.9
Inventory
Residential
Business fixed
Investment
% of GDP$ billions
Investment vs. CapitalInvestment vs. Capital
Note: Investment is spending on new capital.
Example (assumes no depreciation): – 1/1/2007:
economy has $31,818b worth of capital
– during 2007:investment = $2,163b
– 1/1/2008: economy will have $33,981b worth of capital
Government spending (G)Government spending (G)
G includes all government spending on goods and services..
G excludes transfer payments (e.g., unemployment insurance payments), because they do not represent spending on goods and services.
U.S. government spending, 2007 (Q3)U.S. government spending, 2007 (Q3)
Federal
19.5%$2,716.5Govt spending
State & local
Defense
7.1
12.4
4.8
2.3
990.3
1,762.2
673.5
316.8Non-defense
% of GDP$ billions
Net exports, 2007 (Q3)Net exports, 2007 (Q3)
$ billions % of GDP
Net Exports - $694.7 - 5.0%
Exports 1,685.7 12.0
Imports 2,380.4 17.0
NX = EX – IMNX = EX – IM
An important identityAn important identity
Y = C + I + G + NX
aggregate expenditurevalue of
total output
A question for you:A question for you:
Suppose a firm
produces $10 million worth of final goods
but only sells $9 million worth.
Does this violate the expenditure = output identity?
Why output = expenditureWhy output = expenditure
Unsold output goes into inventory, and is counted as “inventory investment”……whether or not the inventory buildup was intentional.
In effect, we are assuming that firms purchase their unsold output.
GDP: GDP: An important and versatile conceptAn important and versatile concept
We have now seen that GDP measures
– total income
– total output
– total expenditure
GNP vs. GDPGNP vs. GDP
Gross National Product (GNP): Total income earned by the nation’s factors of production, regardless of where located.
Gross Domestic Product (GDP):Total income earned by domestically-located factors of production, regardless of nationality.
Discussion question:Discussion question:
In your country, which would you want
to be bigger, GDP, or GNP?
Why?
(GNP – GDP) as a percentage of GDP (GNP – GDP) as a percentage of GDP selected countries, 2002selected countries, 2002
U.S.A. 1.0% Angola -13.6 Brazil -4.0 Canada -1.9 Hong Kong 2.2 Kazakhstan -4.2 Kuwait 9.5 Mexico -1.9 Philippines 6.7 U.K. 1.6
U.S.A. 1.0% Angola -13.6 Brazil -4.0 Canada -1.9 Hong Kong 2.2 Kazakhstan -4.2 Kuwait 9.5 Mexico -1.9 Philippines 6.7 U.K. 1.6
Real vs. nominal GDPReal vs. nominal GDP
GDP is the value of all final goods and services produced.
nominal GDP measures these values using current prices.
real GDP measure these values using the prices of a base year.
Practice problem, part 1Practice problem, part 1
Compute nominal GDP in each year.
Compute real GDP in each year using 2006 as the base year.
2006 2007 2008
P Q P Q P Q
good A
$30 900 $31 1,000 $361,05
0
good B
$100 192 $102 200 $100 205
Answers to practice problem, part 1Answers to practice problem, part 1
nominal GDP multiply Ps & Qs from same
year
2006: $46,200 = $30 900 + $100 192
2007: $51,400
2008: $58,300
real GDP multiply each year’s Qs by 2006 Ps
2006: $46,200
2007: $50,000
2008: $52,000 = $30 1050 + $100 205
Real GDP controls for inflationReal GDP controls for inflation
Changes in nominal GDP can be due to:
– changes in prices. – changes in quantities of output
produced.
Changes in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-year prices.
U.S. Nominal and Real GDP, U.S. Nominal and Real GDP, 1950–20061950–2006
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4,000
6,000
8,000
10,000
12,000
14,000
1950 1960 1970 1980 1990 2000
(bill
ions)
Nominal GDP
Real GDP(in 2000 dollars)
GDP DeflatorGDP Deflator
The inflation rate is the percentage increase in the overall level of prices.
One measure of the price level is the GDP deflator, defined as
Nominal GDP
GDP deflator = 100Real GDP
Practice problem, part 2Practice problem, part 2
Use your previous answers to compute the GDP deflator in each year.
Use GDP deflator to compute the inflation rate from 2006 to 2007, and from 2007 to 2008.
Nom. GDP
Real GDPGDP
deflatorInflation
rate
2006 $46,200 $46,200 n.a.
2007 51,400 50,000
2008 58,300 52,000
Answers to practice problem, part 2Answers to practice problem, part 2
Nominal GDP
Real GDPGDP
deflatorInflation
rate
2006 $46,200 $46,200 100.0 n.a.
2007 51,400 50,000 102.8 2.8%
2008 58,300 52,000 112.1 9.1%
Consumer Price Index (CPI)Consumer Price Index (CPI)
A measure of the overall level of prices
Published by the Bureau of Labor Statistics (BLS)
Uses: – tracks changes in the typical household’s
cost of living
– adjusts many contracts for inflation (“COLAs”)
– allows comparisons of dollar amounts over time
How the BLS constructs the CPIHow the BLS constructs the CPI
1. Survey consumers to determine composition of the typical consumer’s “basket” of goods.
2. Every month, collect data on prices of all items in the basket; compute cost of basket
3. CPI in any month equals
Cost of basket in that month
Cost of basket in base period100
Exercise: Exercise: Compute the CPICompute the CPI
Basket contains 20 pizzas and 10 compact discs.
prices:
pizza CDs
2004 $10 $15
2005 $11 $15
2006 $12 $16
2007 $13 $15
For each year, compute the cost of the basket the CPI (use 2004 as
the base year) the inflation rate from
the preceding year
Cost of Inflationbasket CPI rate
2004 $350 100.0 n.a.
2005 370 105.7 5.7%
2006 400 114.3 8.1%
2007 410 117.1 2.5%
Answers:Answers:
The composition of the CPI’s “basket”The composition of the CPI’s “basket”
15.1%
42.4%
3.8%
17.4%6.2%
5.6%
3.0%
3.1%
3.5%
Food and bev.
Housing
Apparel
Transportation
Medical care
Recreation
Education
Communication
Other goodsand services
Reasons why Reasons why the CPI may overstate inflationthe CPI may overstate inflation
Substitution bias: The CPI uses fixed weights, so it cannot reflect consumers’ ability to substitute toward goods whose relative prices have fallen.
Introduction of new goods: The introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI, because the CPI uses fixed weights.
Unmeasured changes in quality: Quality improvements increase the value of the dollar, but are often not fully measured.
The size of the CPI’s biasThe size of the CPI’s bias
In 1995, a Senate-appointed panel of experts estimated that the CPI overstates inflation by about 1.1% per year.
Now, the CPI’s bias is probably under 1% per year.
CPI vs. GDP DeflatorCPI vs. GDP Deflator
prices of capital goods– included in GDP deflator (if produced domestically)– excluded from CPI
prices of imported consumer goods– included in CPI– excluded from GDP deflator
the basket of goods– CPI: fixed– GDP deflator: changes every year
Two measures of inflation in the U.S.Two measures of inflation in the U.S.
-3%
0%
3%
6%
9%
12%
15%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
GDP deflator CPI
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Labor Market DataLabor Market Data
Household survey (60,000 HH)
Employer survey (160,000 B+GA)
Categories of the populationCategories of the population
employed working at a paid job
unemployed not employed but looking for a job
labor force the amount of labor available for producing goods and services; all employed plus unemployed persons
not in the labor force not employed, not looking for work
Two important labor force conceptsTwo important labor force concepts
unemployment rate percentage of the labor force that is unemployed
labor force participation rate the fraction of the adult population that “participates” in the labor force
Exercise: Exercise: Compute labor force statisticsCompute labor force statistics
U.S. adult population by group, December 2007
Number employed = 146.2 millionNumber unemployed = 7.7
millionAdult population = 233.2 million
Use the above data to calculate– the labor force– the number of people not in the labor force– the labor force participation rate– the unemployment rate
Answers:Answers:
data: E = 146.2, U = 7.7, POP = 233.2
labor forceL = E +U = 146.2 + 7.7 = 153.9
not in labor forceNILF = POP – L = 233.2 – 153.9 = 79.3
unemployment rateU/L x 100% = (7.7/153.9) x 100% = 5.0%
labor force participation rateL/POP x 100% = (153.9/233.2) x 100% = 66.0%
Two measures of employment growthTwo measures of employment growth
-4%
-2%
0%
2%
4%
6%
8%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Establishment survey Household survey
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A Long Run Model:
Where Income Comes From
and Where it Goes
mac
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Outline of modelOutline of model
A closed economy, market-clearing model
Supply side– factor markets (supply, demand, price)– determination of output/income
Demand side– determinants of C, I, and G
Equilibrium– goods market– loanable funds market
The production functionThe production function
denoted Y = F (K, L)– shows how much output (Y ) the
economy can produce from K units of capital and L units of labor
reflects the economy’s level of technology
exhibits constant returns to scale
Returns to scaleReturns to scale
Initially Y1 = F (K1 , L1 )
Scale all inputs by the same factor z:
K2 = zK1 and L2 = zL1
(e.g., if z = 1.25, then all inputs are increased by 25%)
What happens to output, Y2 = F (K2, L2 )?
If constant returns to scale, Y2 = zY1
If increasing returns to scale, Y2 > zY1
If decreasing returns to scale, Y2 < zY1
Returns to scale: Example 1Returns to scale: Example 1
( , )F K L KL
( , ) ( )( )F zK zL zK zL
z KL 2
z KL 2
z KL
( , )z F K L constant returns to scale for any z > 0
Returns to scale: Example 2Returns to scale: Example 2
( , )F K L K L
( , )F zK zL zK zL
z K z L
( , )z F K Ldecreasing
returns to scale for any z > 1
z K L
Returns to scale: Example 3Returns to scale: Example 3
( , )F K L K L 2 2
( , ) ( ) ( )F zK zL zK zL 2 2
( , )z F K L 2 increasing returns to scale for any
z > 1
z K L 2 2 2
NOW YOU TRY: NOW YOU TRY:
Returns to ScaleReturns to Scale
( , )F K L K L
( , )K
F K LL
2
Determine whether each of these production functions has constant, decreasing, or increasing returns to scale:
(a)
(b)
NOW YOU TRY: NOW YOU TRY:
Answers, part (a)Answers, part (a)
( , )K
F K LL
2
( )( , )
zKF zK zL
zL
2 z K
zL
2 2 Kz
L
2
( , )z F K L
constant returns to scale for any z > 0
Assumptions of the modelAssumptions of the model
1. Technology is fixed.
2. The economy’s supplies of capital and labor are fixed at
and K K L L
Determining GDPDetermining GDP
Output is determined by the fixed factor supplies and the fixed state of technology:
, ( )Y F K L
The distribution of national incomeThe distribution of national income
determined by factor prices, the prices per unit firms pay for the factors of production
– wage = price of L
– rental rate = price of K
NotationNotation
W = nominal wage
R = nominal rental rate
P = price of output
W /P = real wage (measured in units of output)
R /P = real rental rate
W = nominal wage
R = nominal rental rate
P = price of output
W /P = real wage (measured in units of output)
R /P = real rental rate
How factor prices are determinedHow factor prices are determined
Factor prices are determined by supply and demand in factor markets.
Recall: Supply of each factor is fixed.
What about demand?
Demand for laborDemand for labor
Assume markets are competitive: each firm takes W, R, and P as given.
Basic idea:A firm hires each unit of labor if the cost does not exceed the benefit.– cost = real wage– benefit = marginal product of labor
Marginal product of labor (Marginal product of labor (MPLMPL ))
definition:The extra output the firm can produce using an additional unit of labor (holding other inputs fixed):
MPL = F (K, L +1) – F (K, L)
NOW YOU TRY: NOW YOU TRY:
Compute & graph MPLCompute & graph MPL
a.Determine MPL at each value of L.
b.Graph the production function.
c. Graph the MPL curve with MPL on the vertical axis and L on the horizontal axis.
L Y MPL
0 0 n.a.
1 10 ?
2 19 ?
3 27 8
4 34 ?
5 40 ?
6 45 ?
7 49 ?
8 52 ?
9 54 ?
10 55 ?
NOW YOU TRY: NOW YOU TRY:
AnswersAnswers
Youtput
MPL and the production function MPL and the production function
Llabor
F K L( , )
1
MPL
1
MPL
1MPL As more labor
is added, MPL
Slope of the production function equals MPL
Diminishing marginal returnsDiminishing marginal returns
As a factor input is increased, its marginal product falls (ceteris paribus).
Intuition:Suppose L while holding K fixed fewer machines per worker lower worker productivity
NOW YOU TRY: NOW YOU TRY:
Identifying Diminishing Marginal ReturnsIdentifying Diminishing Marginal Returns
Which of these production functions have diminishing marginal returns to labor?
a) 2 15F K L K L ( , )
F K L KL( , )b)
c) 2 15F K L K L ( , )
NOW YOU TRY: NOW YOU TRY:
MPL and labor demandMPL and labor demand
Suppose W/P = 6.
If L = 3, should firm hire more or less labor? Why?
If L = 7, should firm hire more or less labor? Why?
L Y MPL
0 0 n.a.
1 10 10
2 19 9
3 27 8
4 34 7
5 40 6
6 45 5
7 49 4
8 52 3
9 54 2
10 55 1
MPLMPL and the demand for labor and the demand for labor
Each firm hires labor up to the point where MPL = W/P.
Each firm hires labor up to the point where MPL = W/P.
Units of output
Units of labor, L
MPL, Labor demand
Real wage
Quantity of labor demanded
The equilibrium real wageThe equilibrium real wage
The real wage adjusts to equate labor demand with supply.
The real wage adjusts to equate labor demand with supply.
Units of output
Units of labor, L
MPL, Labor demand
equilibrium real wage
Labor supply
L
Determining the rental rateDetermining the rental rate
We have just seen that MPL = W/P.
The same logic shows that MPK = R/P :– diminishing returns to capital: MPK as K
– The MPK curve is the firm’s demand
curve for renting capital.
– Firms maximize profits by choosing K such that MPK = R/P .
The equilibrium real rental rateThe equilibrium real rental rate
The real rental rate adjusts to equate demand for capital with supply.
The real rental rate adjusts to equate demand for capital with supply.
Units of output
Units of capital, K
MPK, demand for capital
equilibrium R/P
Supply of capital
K
The Neoclassical Theory of DistributionThe Neoclassical Theory of Distribution
states that each factor input is paid its marginal product
a good starting point for thinking about income distribution
How income is distributed to L and KHow income is distributed to L and K
total labor income = ________ = _________
If production function has constant returns to scale, then
total capital income = _______ = __________
Y MPL L MPK K
laborincome
capitalincome
nationalincome
The ratio of labor income to total income The ratio of labor income to total income in the U.S., in the U.S., 1960-20071960-2007
Labor’s share of
total income
Labor’s share of income is approximately constant over time.
(Thus, capital’s share is, too.)
Labor’s share of income is approximately constant over time.
(Thus, capital’s share is, too.)
The Cobb-Douglas Production FunctionThe Cobb-Douglas Production Function
The Cobb-Douglas production function has constant factor shares:
= capital’s share of total income:capital income = MPK x K = Ylabor income = MPL x L = (1 – )Y
The Cobb-Douglas production function is:
where A represents the level of technology.
1Y AK L
Each factor’s marginal product is proportional to its average product:
1 1 YMPK AK L
K
(1 )(1 )
YMPL AK L
L
The Cobb-Douglas Production FunctionThe Cobb-Douglas Production Function
Labor productivity and wagesLabor productivity and wages
Theory: wages depend on labor productivity
U.S. data:
periodproductivity growth
real wage growth
1959-2007
2.1% 2.0%
1959-1973
2.8% 2.8%
1973-1995
1.4% 1.2%
1995-2007
2.5% 2.4%
Outline of modelOutline of model
A closed economy, market-clearing model
Supply side factor markets (supply, demand, price) determination of output/income
Demand side determinants of C, I, and G
Equilibrium goods market loanable funds market
DONE
DONE
Next
Demand for goods & servicesDemand for goods & services
Components of aggregate demand:
C =
I =
G =
(closed economy: no NX )
Consumption, Consumption, CC
def: ________________ is total income minus total taxes: Y – T.
Consumption function: C = C (Y – T )Shows that (Y – T ) C
def: ___________________________ is the increase in C caused by a one-unit increase in disposable income.
The consumption functionThe consumption function
C
Y – T
Investment, Investment, II
The investment function is I = I (r ), where r denotes the __________________,
the nominal interest rate corrected for inflation.
The real interest rate is– ________________________________ – ________________________________.
So, r I
The investment functionThe investment function
r
I
Government spending, Government spending, GG
G = govt spending on goods and services.
G excludes _______________________ (e.g., social security benefits, unemployment insurance
benefits).
Assume government spending and total taxes are exogenous: and G G T T
The market for goods & servicesThe market for goods & services
Aggregate demand:
Aggregate supply:
Equilibrium:
The ___________________ adjusts to equate demand with supply.
The loanable funds marketThe loanable funds market
A simple supply-demand model of the financial system.
One asset: “loanable funds”– demand for funds:
_________________– supply of funds:
_________________– “price” of funds:
__________________
Demand for funds: InvestmentDemand for funds: Investment
The demand for loanable funds…
– _____________________________:Firms borrow to finance spending on plant & equipment, new office buildings, etc. Consumers borrow to buy new houses.
– _____________________________, the “price” of loanable funds (cost of borrowing).
Loanable funds demand curveLoanable funds demand curve
r
I
The investment curve is also the demand curve for loanable funds.
The investment curve is also the demand curve for loanable funds.
Supply of funds: SavingSupply of funds: Saving
The supply of loanable funds comes from saving:
– ________________________________
– ________________________________
Types of savingTypes of saving
private saving =
public saving =
national saving, S =
=
=
EXERCISE: EXERCISE:
Calculate the change in savingCalculate the change in saving
Suppose MPC = 0.8 and MPL = 20.
For each of the following, compute S :
a. G = 100
b. T = 100
c. Y = 100
d. L = 10
digression: digression: Budget surpluses and deficitsBudget surpluses and deficits If T > G, budget ______ = (T – G )
= public saving.
If T < G, budget ______ = (G – T )and public saving is negative.
If T = G , “_______________,” public saving = 0.
The U.S. government finances its deficit by ________________________.
Loanable funds market equilibriumLoanable funds market equilibrium
r
S, I
The special role of The special role of rr
r adjusts to equilibrate the _______ market and the _______________ market simultaneously:
r adjusts to equilibrate the _______ market and the _______________ market simultaneously:
Mastering the loanable funds modelMastering the loanable funds model
Things that shift the saving curve:
Things that shift the investment curve
CASE STUDY: CASE STUDY:
The Reagan deficitsThe Reagan deficits
Reagan policies during early 1980s:
– ____________________________
– ____________________________
Both policies reduce national saving:
CASE STUDY: CASE STUDY:
The Reagan deficitsThe Reagan deficits
r
S, I
Are the data consistent with these results?Are the data consistent with these results?
variable 1970s 1980s
T – G –2.2 –3.9
S 19.6 17.4
r 1.1 6.3
I 19.9 19.4
T–G, S, and I are expressed as a percent of GDP
All figures are averages over the decade shown.
An increase in investment demandAn increase in investment demand
r
S, I
Saving and the interest rateSaving and the interest rate
Why might saving depend on r ?
How would the results of an increase in investment demand be different?
– Would r rise as much?
– Would the equilibrium value of I change?
