lectures in macroeconomics- charles w. upton updating the model
Post on 22-Dec-2015
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Updating the Model
Our Starting Point
SSRSLR
D
H*
w*Fortunately a couple of
simple steps will reconcile these two graphs
Updating the Model
Restating the Graph
• Po= Price Level last year (or period)
• P = Po(1+)
• Pe= Po(1+e)- e
0Yf
Updating the Model
The Y and M Curves
Y
M
Pe
re
P Because Y=P(P),
the shapes of the Y and M curves are
slightly altered.
Updating the Model
A Problem
Y
M
Pe
P
Yf
P PY<YfThe nation decides to build a monument to
Irving Fisher, financed by taxing every individual $10
Updating the Model
A Problem
Y
M
Pe
P
Yf
P PY<YfThe nation decides to build a monument to
Irving Fisher, financed by taxing every individual $10
Will this Help?
Updating the Model
The Auctioneer’s View
Y
M
Pe
P
Yf
P PThe increase in
government spending on the monument more than offsets the
reduction in consumption
because of the decrease in wealth.
Updating the Model
The Auctioneer’s View
Y
M
Pe
P
Yf
P PThe increase in
government spending on the monument more than offsets the
reduction in consumption
because of the decrease in wealth.
At any point along the Y
curve YD>YS. The
Y curve shifts up
and to the right
Updating the Model
The Auctioneer’s View
Y
M
Pe
P
Yf
P PThe reduction in
wealth also means the M curve shifts up and to the left.
Updating the Model
The Auctioneer’s View
Y
M
Pe
P
Yf
P PP up; r (?); Y upOnce
again, Irving
saves the day!
Updating the Model
Our Starting Point
SSRSLR
D
H*
w*
Beforehand, we did our analysis in
terms of this graph. Have
we left something out?
Updating the Model
Our Starting Point
SSRSLR
D
H*
w*
Beforehand, we did our analysis in
terms of this graph. Have
we left something out?
No. That is the point of the P curve, which incorporates how H increases
with P
Updating the Model
Another Objection
• Workers know the (well-deserved) monument is coming, and with it increased government purchases..
Updating the Model
Another Objection
• Workers know the (well-deserved) monument is coming, and with it increased government purchases..
Might we get a change in
expectations?
PwwR
Updating the Model
Another Objection
• Workers know the (well-deserved) monument is coming, and with it increased government purchases..
Might we get a change in
expectations?
PwwR Perhaps, but lets keep this simple.
No shift in P curve
Updating the Model
Another Objection
• Workers know the (well-deserved) monument is coming, and with it increased government purchases..
Might we get a change in
expectations?
PwwR Perhaps, but lets keep this simple.
No shift in P curve
We return to this issue later