John Maynard Keynes The General Theory A workout with the basic macroeconomic magnitudes in a

1. John Maynard Keynes The General Theory A workout with the basic macroeconomic magnitudes in a mixed economy

2. A MACROECONOMIC IDENTITY Y = C + S + T INCOME IS THE SUM OF: THE PART YOU SPEND, THE PART YOU DON’T SPEND, THE PART YOU NEVER SAW (because the government took it as taxes).

3. MACROECONOMIC EQUILIBRIUM INCOME = EXPENDITURES Y = E Y = C + I + G C + S + T = C + I + G S + T = I + G Note that I is “given”; G and T are policy variables; and C (and therefore S) depend directly on Y.

4. E C+I+G C+I C Y S, I S+T S I+G I Y

5. E C+I+G C+I C Y S, I S+T S I+G I Y

6. E C+I+G Y S, I S+T I+G Y

7. IS NORWAY IN EQUILIBRIUM? Y = 180 C = 120 S = 60 T = 0 I = 36 G = 24

8. IS NORWAY IN EQUILIBRIUM? Y = 180 C = 120 S = 60 T = 0 I = 36 G = 24

9. IS NORWAY IN EQUILIBRIUM? Y = 180 C = 120 S = 60 T = 0 I = 36 G = 24

10. IS NORWAY IN EQUILIBRIUM? Y = 180 = 120 + 36 + 24? C = 120 S = 60 T = 0 I = 36 G = 24

11. NORWAY IS IN EQUILIBRIUM. Y = 180 = 180 = E C = 120 S = 60 T = 0 I = 36 G = 24 People are producing and consuming 120. They’re producing but not consuming another 60. They save the 60, which is borrowed partly by the private sector (36) and partly by the government (24). These borrowers then take command over the unconsumed 60.

12. E C+I+G Y S, I S+T I+G Y

13. IS NORWAY IN EQUILIBRIUM? Y = 180 C = 120 S = 60 T = 0 I = 36 G = 24

14. IS NORWAY IN EQUILIBRIUM? Y = 180 C = 120 S = 60 T = 0 I = 36 G = 24

15. IS NORWAY IN EQUILIBRIUM? Y = 180 C = 120 S = 60 S + T = 60 T = 0 I = 36 G = 24

16. IS NORWAY IN EQUILIBRIUM? Y = 180 C = 120 S = 60 S + T = 60 T = 0 I = 36 G = 24

17. IS NORWAY IN EQUILIBRIUM? Y = 180 C = 120 S = 60 S + T = 60 T = 0 I = 36 I + G = 60 G = 24

18. NORWAY IS IN EQUILIBRIUM Y = 180 C = 120 S = 60 S + T = 60 T = 0 I = 36 I + G = 60 G = 24

19. E C+I+G Y S, I S+T I+G Y

20. IS EASWAY IN EQUILIBRIUM? Y = 120 C = 84 S = 30 T = 6 I = 17 G =10

21. IS EASWAY IN EQUILIBRIUM? Y = 120 C = 84 S = 30 T = 6 I = 17 G =10

22. IS EASWAY IN EQUILIBRIUM? Y = 120 C = 84 S = 30 T = 6 I = 17 G =10

23. IS EASWAY IN EQUILIBRIUM? Y = 120 = 84 + 17 + 10? C = 84 S = 30 T = 6 I = 17 G =10

24. EASWAY ISN’T IN EQUILIBRIUM. Y = 120 > 111 = E C = 84 S = 30 T = 6 I = 17 G =10

25. EXCESS INVENTORIES E C+I+G Y S, I S+T I+G Y

26. IS SOUWAY IN EQUILIBRIUM? Y = C = 150 S = 45 T = 3 I = 24 G =30

27. IS SOUWAY IN EQUILIBRIUM? Y = C = 150 S = 45 T = 3 I = 24 G =30

28. IS SOUWAY IN EQUILIBRIUM? Y = 198 C = 150 S = 45 T = 3 I = 24 G =30

29. IS SOUWAY IN EQUILIBRIUM? Y = 198 C = 150 S = 45 T = 3 I = 24 G =30

30. IS SOUWAY IN EQUILIBRIUM? Y = 198 = 150 + 24 + 30? C = 150 S = 45 T = 3 I = 24 G =30

31. SOUWAY ISN’T IN EQUILIBRIUM. Y = 198 < 204 = E C = 150 S = 45 T = 3 I = 24 G =30

32. E C+I+G DEFICIENCY OF INVENTORIES Y S, I S+T I+G Y

33. IS WESWAY IN EQUILIBRIUM? Y = C = S = 46 T = 20 I = 38 G =28

34. IS WESWAY IN EQUILIBRIUM? Y = C = S = 46 T = 20 I = 38 G =28

35. IS WESWAY IN EQUILIBRIUM? Y = C + 46 + 20 C = S = 46 T = 20 I = 38 G =28

36. IS WESWAY IN EQUILIBRIUM? Y = C + 46 + 20 C = S = 46 T = 20 I = 38 G =28

37. IS WESWAY IN EQUILIBRIUM? Y = C+46+20=C+38+28? C = S = 46 T = 20 I = 38 G =28

38. WESWAY IS IN EQUILIBRIUM Y = C + 66 = C + 66 = E C = S = 46 T = 20 I = 38 G =28

39. IS WESWAY IN EQUILIBRIUM? Y = C = S = 46 T = 20 I = 38 G =28

40. IS WESWAY IN EQUILIBRIUM? Y = C = S = 46 T = 20 I = 38 G =28

41. IS WESWAY IN EQUILIBRIUM? Y = C = S = 46 S + T = 66 T = 20 I = 38 G =28

42. IS WESWAY IN EQUILIBRIUM? Y = C = S = 46 S + T = 66 T = 20 I = 38 G =28

43. IS WESWAY IN EQUILIBRIUM? Y = C = S = 46 S + T = 66 T = 20 I = 38 I + G = 66 G =28

44. WESWAY IS IN EQUILIBRIUM. Y = C = S = 46 S + T = 66 T = 20 I = 38 I + G = 66 G =28

45. E C+I+G Y S, I S+T I+G Y

46. MACROECONOMIC EQUILIBRIUM INCOME = EXPENDITURES Y = E Y = C + I + G C + S + T = C + I + G S + T = I + G

47. John Maynard Keynes The General Theory Can you write the equation describing consumption behavior if you know two point on that equation?

48. In 2000 Prophetess Mary earned a fairly good income, partly by making predictions about the outcome of the Bush-Gore race for the presidency. She earned about $15,000 that year, out of which she spent about $12,500. She knew that in 2001, with no election to stimulate her business, her income might fall to $10,000, out of which she would spend $9,500. On the basis of these data (and assuming no taxes), calculate Prophetess Mary’s marginal propensity to consume. Unfortunately, Prophetess Mary’s Bush-Gore predictions turned out to be exactly wrong (Poor Mary; Poor Gore!), and her business dried up completely. Her income dropped (temporarily) to zero in 2001. How much do you think she spent on consumption goods while making no income at all?

49. 9. During this election year, Prophetess Mary is earning a fairly good income, partly by making predictions about the outcome of the Bush-Gore race for the presidency. She will earn about $15,000 this year, out of which she’ll spend about $12,500. Next year, with no election to stimulate her business, her income may fall to $10,000, out of which she may spend $9,500. On the basis of these data (and assuming no taxes), we can calculate that Prophetess Mary’s marginal propensity to consume (MPC) is A. 0.85. B. 0.75. C. 0.80. D. 0.60.

50. C C = a+bY 12,500 3,000 9,500 5,000 10,000 15,000 Y MPC = b = slope = 3,000 / 5,000 = 0.60