Stagflation - Background
Stagflation is the term used to describe the unusual economic phenomenon of rising inflation combined with rising unemployment, accompanied by an economic recession or stagnant growth. Stagflation came to be recognized as a very serious macroeconomic problem in the 1970s, when it afflicted many countries in the developed and developing world. It is unusual because inflation is often wage driven, and wage inflation is usually caused by falling unemployment.
A good example of a period of stagflation and the government's response occurred following the resignation of US President Richard Nixon. Price controls had been in effect for a number of years, but were released due to the range of dislocations that they had caused. The country was in a state of political shock, the economy was stagnant and inflation persisted. The oil crisis had caused such inflationary and recessionary effects that inflation had grown from 2.7% p.a. to 8.2%p.a. (average compound rate) respectively, in the decade up to, and decade after, 1973. In the same periods, unemployment had jumped from 4.6% to 7.4% of the labour force.
Model Portfolio Choice & Stagflation
Prior to the above scenario from the 1970s, the prevailing Keynesian school of macroeconomics assumed that inflation and stagnation were unlikely to occur together. Until that time macroeconomists believed that stagnation could be cured by expansionary monetary or fiscal policies, while inflation could be cured by contractionary monetary or fiscal policies. When both stagnation and inflation occurred at the same time and persisted, this called into question existing macroeconomic theories and also posed a dilemma for the standard policy remedies that had been used to stabilize the economy in the past. This was because any remedy for one part of the problem was seen as adding fuel to the other element.
In economic modelling, stagflation is expected to arise from either a supply shock (such as prices of imported raw materials or oil rocketing), or from inappropriate interest rate / money-supply policies by the central bank. As model PC doesn't have an open economy with imports, we must shock the model by reference to central bank actions on interest rates.
In model PC, households wish to hold a certain portion of their wealth in the form of bills, and the remainder in the form of money. Keynes explained that the portion of wealth held as money was attributable (in part) to the liquidity preference (and was related to the amount of disposable income because of the transactions demand for money to which this gives rise). However as there are only two stocks of wealth, and total wealth is a function of disposable income and propensity to consume, then the amount of cash money held is directly determined by the amount of bills held; and that amount is related to the interest rate. In other words, the amount of liquidity is negatively related to the interest rate.
Hence, shocking the system by decreasing interest rates would have the effect of increasing liquidity, by decreasing the demand for bills. This might be expected to create the inflationary pressures required for stagflation, but under model PC, as consumption is said to be pre-determined by propensity to consume out of disposable income and past wealth, the effect of increased interest rates on households activity will therefore only affect portfolio choice and not consumption? To counter this argument, surely increased liquidity must make transactions more frequent?
Furthermore, in model PC, interest is an income of households, so lower rates therefore lead to lower (disposable) income, and this reduces consumption. This has the effect of reducing consumption by a multiple of the interest rate reduction as we move towards the steady state. (see Figure 4.4 p113 ME G&L for inverse scenario). This shock can therefore simulate the stagnation/recession element of stagflation in model PC, but because of the pre-presumption that consumption is a function of propensity to consume and is not affected by interest rates, this does not stoke inflation.
The solution to simulate inflation with stagnation in model PC would therefore require the interest rate reduction and some other 'outside' agent, such as increased commodity demand. We conclude that stagflation can be simulated more easily using more complex models with more variables and exogenous factors, such as models OPEN, OPENEX, etc.
The U.S. stagflation cycle of the 1970s was generally credited as being defeated by policies effected by then Federal Reserve chairman, Paul Volcker, who sharply increased interest rates to reduce money supply from 1979-1983 in what was called a "disinflationary scenario." Starting in 1983, fiscal stimulus and money supply growth combined to create a sharp economic recovery which is in line with standard macro-economic models; however, there was a five-to-six-year jump in unemployment during the Volcker disinflation.
It appears that Volcker trusted unemployment to self-correct and return to its natural rate within a reasonable period, which it ultimately did.
Cititations:
An Encyclopedia of Economics, Snowdon B. & Vane H.R., 2002 Edition
The World Economy, a Millennial Perspective, Maddison A., Paris: OECD 2001
Government Money with Portfolio Choice, Chapter 4 Monetary Economics, Godley W. & Lavoie, M.
www.wikipedia.org (Stagflation, Phillips Curve,
Thursday, May 22, 2008
Monday, March 3, 2008
Blogwork 4 - PC & Keynes
Q1 - Summary of Chapter 4, pages 99-107 (Government Money with Portfolio Choice)
Model SIM in the previous chapter considered household wealth, at the period-end, as a single line-item; in other words, households did not have any choice to make with regard to how they chose to save/hold un-consumed disposable income. Model Portfolio Choice (Model PC) recognises that households can make choices as to how they hold their wealth. In this model, the choices available are Money (Liquidity) and Treasury Bills. This model differs from the SIM model in recognising this choice and is expanded to consider the factors determining the choice and the implications (for wealth, GDP, Government, etc) of the choice made.
The theory underlying this model is that the choice which the household makes as to how much wealth it chooses to put into T-Bills is a two-step decision. In the first step, the household pre-determines how much of (net) income it will save. (The remainder is disposed of, or consumed). The second step is the decision as to how much of the savings will be allocated to interest-bearing Bills. As (in this model)there are only two assets to which residual wealth can be allocated, the decision as to how much is left in Money is derived from this decision (Wealth = Money + Bills; => Money = Wealth - Bills). The latter decision is the Portfolio Choice decision.
In arriving at the allocation decision (how much of wealth to allocate to each of Money & Bills), there are two predominant theories argued. One is that the proportion of wealth allocated to Money (& to Bills) is linked to the flow of money (income); and the other, that the proportion is related to total wealth.
The theories are not necessarily at conflict. The share of wealth which households allocate to Money is found to be negatively related to the interest rate. The share is also positively related to disposabel income, because of the "transactions demand" for Money to which this gives rise.
The rate of interest is fixed for the period because the rate payable on a Bill is determined at issue of the bill, and for the purposes of the model the period of the Bill to maturity is always assumed to equal the period itself. Therefore the rate of the bill is fixed for the period, and this rate is a policy-decision rate. The Government decides on the monetary policy needs of the economy, and sets a rate (r = mean-r) accordingly. If this rate was allowed to fluctuate during a period then the model would not hold for the period and in effect each period of differing rate would in effect be a different period for modelling purposes.
If r was not fixed for the period, changes in r would result in changes in the value of notes held by the household. This would cause a further variable of capital gains arising upon each interest rate change. Therefore for the purposes of simplifying the model, for the period, interest rates are held fixed to avoid this additional factor and so avoid complicating the model.
Question 2
1) Liquidity-preference is a potentiality or functional tendency, which fixes the quantity of money which the public will hold when the rate of interest is given; so that if r is the rate of interest, M the quantity of money and L the function of liquidity-preference, we have M = L(r)
The three divisions of liquidity-preference defined as depending on
(i) the transactions-motive
(ii) the precautionary-motive
(iii) the speculative-motive
The propensity to consume decides how much of your Money will be spend and how much will be reserved (saved). Schedule of the amounts of resources valued in terms of money or wage units which individuals will wish to retain in the form of money.
If the interest rates decrease an increase in the quantity of money should occur, (Keynes) but that is not always true, If liquidity preference of the public is increasing faster than the increase in the quantity of money.
2) PC model encompasses Keynes 3 ideas of the liquidity preference.
Precautionary motive
Transactions motive
Speculative motive
The PC model distinguishes between disposable income and consumption. This idea is also inherent in Keynes wirttings.
PC decision has 2 steps
Savings are decided on
How the savings will be allocated
In both models the rate of interest is the equilibrium in the desire to hold wealth in cash form an the availability of cash.
In the pc model the quantity of money held depends on the rates of interest that can be obtained on other assets.
Model SIM in the previous chapter considered household wealth, at the period-end, as a single line-item; in other words, households did not have any choice to make with regard to how they chose to save/hold un-consumed disposable income. Model Portfolio Choice (Model PC) recognises that households can make choices as to how they hold their wealth. In this model, the choices available are Money (Liquidity) and Treasury Bills. This model differs from the SIM model in recognising this choice and is expanded to consider the factors determining the choice and the implications (for wealth, GDP, Government, etc) of the choice made.
The theory underlying this model is that the choice which the household makes as to how much wealth it chooses to put into T-Bills is a two-step decision. In the first step, the household pre-determines how much of (net) income it will save. (The remainder is disposed of, or consumed). The second step is the decision as to how much of the savings will be allocated to interest-bearing Bills. As (in this model)there are only two assets to which residual wealth can be allocated, the decision as to how much is left in Money is derived from this decision (Wealth = Money + Bills; => Money = Wealth - Bills). The latter decision is the Portfolio Choice decision.
In arriving at the allocation decision (how much of wealth to allocate to each of Money & Bills), there are two predominant theories argued. One is that the proportion of wealth allocated to Money (& to Bills) is linked to the flow of money (income); and the other, that the proportion is related to total wealth.
The theories are not necessarily at conflict. The share of wealth which households allocate to Money is found to be negatively related to the interest rate. The share is also positively related to disposabel income, because of the "transactions demand" for Money to which this gives rise.
The rate of interest is fixed for the period because the rate payable on a Bill is determined at issue of the bill, and for the purposes of the model the period of the Bill to maturity is always assumed to equal the period itself. Therefore the rate of the bill is fixed for the period, and this rate is a policy-decision rate. The Government decides on the monetary policy needs of the economy, and sets a rate (r = mean-r) accordingly. If this rate was allowed to fluctuate during a period then the model would not hold for the period and in effect each period of differing rate would in effect be a different period for modelling purposes.
If r was not fixed for the period, changes in r would result in changes in the value of notes held by the household. This would cause a further variable of capital gains arising upon each interest rate change. Therefore for the purposes of simplifying the model, for the period, interest rates are held fixed to avoid this additional factor and so avoid complicating the model.
Question 2
1) Liquidity-preference is a potentiality or functional tendency, which fixes the quantity of money which the public will hold when the rate of interest is given; so that if r is the rate of interest, M the quantity of money and L the function of liquidity-preference, we have M = L(r)
The three divisions of liquidity-preference defined as depending on
(i) the transactions-motive
(ii) the precautionary-motive
(iii) the speculative-motive
The propensity to consume decides how much of your Money will be spend and how much will be reserved (saved). Schedule of the amounts of resources valued in terms of money or wage units which individuals will wish to retain in the form of money.
If the interest rates decrease an increase in the quantity of money should occur, (Keynes) but that is not always true, If liquidity preference of the public is increasing faster than the increase in the quantity of money.
2) PC model encompasses Keynes 3 ideas of the liquidity preference.
Precautionary motive
Transactions motive
Speculative motive
The PC model distinguishes between disposable income and consumption. This idea is also inherent in Keynes wirttings.
PC decision has 2 steps
Savings are decided on
How the savings will be allocated
In both models the rate of interest is the equilibrium in the desire to hold wealth in cash form an the availability of cash.
In the pc model the quantity of money held depends on the rates of interest that can be obtained on other assets.
Monday, February 25, 2008
Blogwork 3 SIMEX, ISLM and SIM
Question 1
a) In SIMEX model Money obtains an extremely important function which is, to act as a buffer whenever expectations turn out to be incorrect. Model SIM had the strong assumption that consumers have perfect foresight with regard to their income. Also for SIM model, Money is the form in which wealth is held (equilibrium).
b) The stability of the model is not threatened by the mistaken expectations. As we reach the same answer in a different way. In the case of mistaken expectations the convergence is much slower than in the perfect foresight case, as it takes many more periods to approach to the steady state.
c)
Question 2
SIM Model and ISLM model share the basic principle in consumption function which is essential to an equilibrium model, so it is possible to replicate the ISLM model from the SIM model.
The consumption function in the SIM model is developed as follows. Household consumption is supposed to determined by two sources of wealth: ⑴ current disposable income(YD); ⑵ accumulated wealth from past time (Hh−1). For each part of wealth, households have different propensity to consume them (α1 & α2). So the consumption for household in SIM model is:
Cd =α1 × Y D +α2×Hh−1
Then the cash held by households(ΔHh) = Hh-Hh−1= Y D- Cd.
When the consumption function is applied to the wealth function, we can conclude that:-
ΔHh =(1-α1) × Y D-α2×Hh−1
ΔHh =α2×(α3 × Y D-Hh−1)
In the equation above, α3= (1-α1)/ α2, is the stock-flow norm of household, then we define α3× Y D as a target level of wealth.
When it comes to a steady state, α3=1, then the target wealth is YD. The realized wealth remained lower than the target wealth. As a result, consumption is systematically below disposable income, until the new stationary state is reached, at which point Hh =α3× Y D= YD= C.
When the target is reached, no more saving will occur. But we can’t accept the version of consumption function as C=α1 × Y D. This is because if α1 is less than unity the equation implies that if ever a flow stationary state were reached, there would have to be a stock disequilibrium, with C and YD constant, the money stock and government debt must be rising for ever (by an amount equal in each period to YD-C)
Then the equation C=α0+α1× Y D (α0 is constant) represents autonomous consumption. The consumption is independent of current income. Thus the consumption function in ISLM model is replicated, the same is the ISLM model.
Resource: Godley and Lavoie, 2006
a) In SIMEX model Money obtains an extremely important function which is, to act as a buffer whenever expectations turn out to be incorrect. Model SIM had the strong assumption that consumers have perfect foresight with regard to their income. Also for SIM model, Money is the form in which wealth is held (equilibrium).
b) The stability of the model is not threatened by the mistaken expectations. As we reach the same answer in a different way. In the case of mistaken expectations the convergence is much slower than in the perfect foresight case, as it takes many more periods to approach to the steady state.
c)
Question 2
SIM Model and ISLM model share the basic principle in consumption function which is essential to an equilibrium model, so it is possible to replicate the ISLM model from the SIM model.
The consumption function in the SIM model is developed as follows. Household consumption is supposed to determined by two sources of wealth: ⑴ current disposable income(YD); ⑵ accumulated wealth from past time (Hh−1). For each part of wealth, households have different propensity to consume them (α1 & α2). So the consumption for household in SIM model is:
Cd =α1 × Y D +α2×Hh−1
Then the cash held by households(ΔHh) = Hh-Hh−1= Y D- Cd.
When the consumption function is applied to the wealth function, we can conclude that:-
ΔHh =(1-α1) × Y D-α2×Hh−1
ΔHh =α2×(α3 × Y D-Hh−1)
In the equation above, α3= (1-α1)/ α2, is the stock-flow norm of household, then we define α3× Y D as a target level of wealth.
When it comes to a steady state, α3=1, then the target wealth is YD. The realized wealth remained lower than the target wealth. As a result, consumption is systematically below disposable income, until the new stationary state is reached, at which point Hh =α3× Y D= YD= C.
When the target is reached, no more saving will occur. But we can’t accept the version of consumption function as C=α1 × Y D. This is because if α1 is less than unity the equation implies that if ever a flow stationary state were reached, there would have to be a stock disequilibrium, with C and YD constant, the money stock and government debt must be rising for ever (by an amount equal in each period to YD-C)
Then the equation C=α0+α1× Y D (α0 is constant) represents autonomous consumption. The consumption is independent of current income. Thus the consumption function in ISLM model is replicated, the same is the ISLM model.
Resource: Godley and Lavoie, 2006
Monday, February 18, 2008
Homework 2 - SIM Model
1. (Fill in the blanks)
Field 2.2 +Gs
Field 5.1 -Ts
Row 3; Sum = Blank
[Y] is not a factor in the same way as the other factors; rather it is another expression of the economic otput, which in the simple model is all paid out as wages. Hence [Y] = -W.Nd, and [Y] = (+Cs + Gd). It is not a separate line item for summation purposes.
1.1 Why must the Vertical Columns sum to zero
Each verticle column represents one element of the economy; Households, Production (Businesses) and Government in the simple example. Each individual column reflects that component's interactions with the other parts of the economy. Each column has a 'balance sheet' element, labeled as "change in money stock". This is akin to a balancing figure.
Economic Intuition Example - Taking the example of the Households column, Income is derived from Wages (+W.Ns). Expenditures arise from Consumption (-Cd) and Taxes paid (-Ts). If Incomes exceed expenditures, the net position of the household is that money is invested in increasing the money stock (savings). Money stock will be increased by the excess of income over expenditure, so the entry on field 6.1 will be -Savings for the period. Like a balance sheet or a double-entry system, the +'s must equal the -'s, so the net total must always equal zero.
1.2 Why must the horizontal rows sum to zero
The horizontal rows demonstrate how one expenditure (say Wages for Businesses/ Production) is an income in another column (Households). Again, using simple double-entry principal for each item, the sum of each row must be nil.
Economic Intuition Example- The economic effect of taxes:- an increase in taxes increases the income of the government, and decreases income (or increases expenditures) of the households, by the same figure.
2. Explanation for each row
2.1 Consumption
Consumption from the household's point of view is the expenditure incurred during the period, and this amount is an income from the businesses point of view. Consumption will be related to household income by the factor of the propensity to consume, plus to the savings at the start of the period by the propensity to spend from savings.
2.2 Government Expenditure
Government expenditure is another income source from the point of view of the production element of the economy. Expenditure by Government on infrastructure & services moves money from the exchequer to businesses.
2.3 Output
Output reflects the value added by the producing element of the economy.
2.4 Factor Income
Factor Income is income from the point of view of the household, and is an expenditure (wages) on the books of the production element. An increase in business output can benefit the household from increased wage income.
2.5 Taxes
Taxes are deductions from wages earned and are the source of income for the government. An increase in taxes reduces the income available for the household to use/consume, and would thereby reduce consumption and/or savings.
2.6 Change in Money Stock
An increase in savings is a use of income by the household and (absent changes to income or taxes) will result in a reduction in consumption. Increased savings can be infleunced by factors such as increased interest rates, fear of shocks to employment or to asset values, or other factors.
Further Reading: From http://www.univ-paris13.fr/CEPN/m_w4_22.pdf
4.2 The matrices of Model PC
Model PC introduces government bills and interest payments into Model SIM. It also takes a major step in the direction of realism by introducing a central bank. Bills (B) are short-term government securities which pay interest at a rate r. These bills are often called Treasury bills, since they are usually issued by the Treasury Department of central governments. It is assumed that each bill has a price of one unit, and that its price does not change during the duration of its life.1 As a result, we need not worry about possible capital gains that could arise from price changes in financial assets.
This assumption will be relaxed when we introduce long-term government liabilities, i.e., when we introduce bonds in the next chapter. We can imagine that economic agents purchase government bills at that unit price, and then, one month or three months later, when the bills reach maturity, households receive back the principal plus the interest. In the real world, things usually go the other way around. The bill states that a given amount of money will be paid, say three months later: this
is the coupon rate. The price which the market determines, i.e., the price which agents are willing to pay for such a promise, implies an interest rate.
We start, as always, with a pair of matrices which describe the whole system of stocks and flows. Table 4.1 shows the new balance sheet matrix. Here we have added, in the lowest row, balance items that ensure that all columns, as well as all rows, sum to zero. Column 1 shows the assets of households: they may hold either cash money H or bills Bh. The sum of the two is private wealth (V).
The production sector has no entry in the balance sheet. This is because, as in Model SIM, we assume the existence of a pure service economy, with neither circulating nor fixed capital. As a result, the net worth of the household sector is also the net worth of the private sector.
The counterpart of the net worth of the private sector is public debt. It follows that private wealth, in Model PC, is equal to the sum of cash money and bills held by households. Also, as can be read from column 3, public debt is equal to the amount of outstanding bills B issued by government to households and the central bank combined.
Column 4.1 introduces the central bank. The central bank is sometimes amalgamated with the government sector, and indeed, this is what was done implicitly in Model SIM. Here, the central bank is considered as an institution in its own right. The central bank purchases bills from government, thereby adding to its stock of assets (Bcb). On its liability side, the central bank provides cash money to households. It is assumed that central banks have zero net worth.
Field 2.2 +Gs
Field 5.1 -Ts
Row 3; Sum = Blank
[Y] is not a factor in the same way as the other factors; rather it is another expression of the economic otput, which in the simple model is all paid out as wages. Hence [Y] = -W.Nd, and [Y] = (+Cs + Gd). It is not a separate line item for summation purposes.
1.1 Why must the Vertical Columns sum to zero
Each verticle column represents one element of the economy; Households, Production (Businesses) and Government in the simple example. Each individual column reflects that component's interactions with the other parts of the economy. Each column has a 'balance sheet' element, labeled as "change in money stock". This is akin to a balancing figure.
Economic Intuition Example - Taking the example of the Households column, Income is derived from Wages (+W.Ns). Expenditures arise from Consumption (-Cd) and Taxes paid (-Ts). If Incomes exceed expenditures, the net position of the household is that money is invested in increasing the money stock (savings). Money stock will be increased by the excess of income over expenditure, so the entry on field 6.1 will be -Savings for the period. Like a balance sheet or a double-entry system, the +'s must equal the -'s, so the net total must always equal zero.
1.2 Why must the horizontal rows sum to zero
The horizontal rows demonstrate how one expenditure (say Wages for Businesses/ Production) is an income in another column (Households). Again, using simple double-entry principal for each item, the sum of each row must be nil.
Economic Intuition Example- The economic effect of taxes:- an increase in taxes increases the income of the government, and decreases income (or increases expenditures) of the households, by the same figure.
2. Explanation for each row
2.1 Consumption
Consumption from the household's point of view is the expenditure incurred during the period, and this amount is an income from the businesses point of view. Consumption will be related to household income by the factor of the propensity to consume, plus to the savings at the start of the period by the propensity to spend from savings.
2.2 Government Expenditure
Government expenditure is another income source from the point of view of the production element of the economy. Expenditure by Government on infrastructure & services moves money from the exchequer to businesses.
2.3 Output
Output reflects the value added by the producing element of the economy.
2.4 Factor Income
Factor Income is income from the point of view of the household, and is an expenditure (wages) on the books of the production element. An increase in business output can benefit the household from increased wage income.
2.5 Taxes
Taxes are deductions from wages earned and are the source of income for the government. An increase in taxes reduces the income available for the household to use/consume, and would thereby reduce consumption and/or savings.
2.6 Change in Money Stock
An increase in savings is a use of income by the household and (absent changes to income or taxes) will result in a reduction in consumption. Increased savings can be infleunced by factors such as increased interest rates, fear of shocks to employment or to asset values, or other factors.
Further Reading: From http://www.univ-paris13.fr/CEPN/m_w4_22.pdf
4.2 The matrices of Model PC
Model PC introduces government bills and interest payments into Model SIM. It also takes a major step in the direction of realism by introducing a central bank. Bills (B) are short-term government securities which pay interest at a rate r. These bills are often called Treasury bills, since they are usually issued by the Treasury Department of central governments. It is assumed that each bill has a price of one unit, and that its price does not change during the duration of its life.1 As a result, we need not worry about possible capital gains that could arise from price changes in financial assets.
This assumption will be relaxed when we introduce long-term government liabilities, i.e., when we introduce bonds in the next chapter. We can imagine that economic agents purchase government bills at that unit price, and then, one month or three months later, when the bills reach maturity, households receive back the principal plus the interest. In the real world, things usually go the other way around. The bill states that a given amount of money will be paid, say three months later: this
is the coupon rate. The price which the market determines, i.e., the price which agents are willing to pay for such a promise, implies an interest rate.
We start, as always, with a pair of matrices which describe the whole system of stocks and flows. Table 4.1 shows the new balance sheet matrix. Here we have added, in the lowest row, balance items that ensure that all columns, as well as all rows, sum to zero. Column 1 shows the assets of households: they may hold either cash money H or bills Bh. The sum of the two is private wealth (V).
The production sector has no entry in the balance sheet. This is because, as in Model SIM, we assume the existence of a pure service economy, with neither circulating nor fixed capital. As a result, the net worth of the household sector is also the net worth of the private sector.
The counterpart of the net worth of the private sector is public debt. It follows that private wealth, in Model PC, is equal to the sum of cash money and bills held by households. Also, as can be read from column 3, public debt is equal to the amount of outstanding bills B issued by government to households and the central bank combined.
Column 4.1 introduces the central bank. The central bank is sometimes amalgamated with the government sector, and indeed, this is what was done implicitly in Model SIM. Here, the central bank is considered as an institution in its own right. The central bank purchases bills from government, thereby adding to its stock of assets (Bcb). On its liability side, the central bank provides cash money to households. It is assumed that central banks have zero net worth.
Monday, February 11, 2008
Exercise 3 - Steady state
What do you think will happen to the steady state value(s) of output when θ changes? Why does this happen?
Y = G / θ
where:
Y = National Income in nominal terms;
G = Pure Government Expenditures in nominal terms; and
θ = Personal Income Tax Rate
When θ goes up, Y goes down. If the countries’ economy has overheated this could be a way of lowering that heat. The greater the tax rates, the less that will be spent.
Government could lower θ to reactivate economy, but only to a certain extent. Government cannot lower θ by too much because the quality and quantity of the goods and services that are paid for by those taxes would go down as well.
Y = G / θ
where:
Y = National Income in nominal terms;
G = Pure Government Expenditures in nominal terms; and
θ = Personal Income Tax Rate
When θ goes up, Y goes down. If the countries’ economy has overheated this could be a way of lowering that heat. The greater the tax rates, the less that will be spent.
Government could lower θ to reactivate economy, but only to a certain extent. Government cannot lower θ by too much because the quality and quantity of the goods and services that are paid for by those taxes would go down as well.
Homework Assignment 1
Aggregate Demand [1]
The total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally there is a negative relationship between aggregate demand and the price level. Also known as "total spending".
Aggregate demand is the demand for the gross domestic product (GDP) of a country, and is represented by this formula: Aggregate Demand (AD) = C + I + G (X-M) C = Consumers' expenditures on goods and services. I = Investment spending by companies on capital goods. G = Government expenditures on publicly provided goods and services. X = Exports of goods and services. M = Imports of goods and services.
Numerical example.
Supposing a country has the following data
50 = C = Consumers' expenditures on goods and services.
60= I = Investment spending by companies on capital goods.
80 = G = Government expenditures on publicly provided goods and services.
20 = X = Exports of goods and services.
10 = M = Imports of goods and services.
AD = C + I + G (X-M) : AD = 50 + 60 + 80 (20 – 10)
Animal Spirits [2]
The term “Animal Spirits” is closely associated with John Maynard Keynes who used it in his 1936 book, The General Theory of Employment Interest and Money to capture the idea that aggregate economic activity might be driven in part by waves of optimism or pessimism: (although Robin Mathews 1984, points out that Keynes would have been aware of its use by David Hume 1739, Part iv, Section vii).
"Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
(The General Theory of Employment Interest and Money, 161-162)
The idea that waves of spontaneous optimism might drive business cycles was not new to Keynes and can be traced at least as far back as Henry Thornton who attributed a central role in his theory of credit to “… that confidence which subsists among commercial men in respect to their mercantile affairs…” (Thornton 1802, p. 75).
Practical Example; What we sometimes now term as 'entrepreneurship' has existed for millennia; from traders on the silk road to the Merchant of Venice, from the developers of the US Railroads to Michael Dell....... all driven by Animal Spirits.
Bank Run[3]
A situation in which numerous bank customers try to withdraw their bank deposits simultaneously and the bank's reserves are not sufficient to cover the withdrawals.
Bank runs are a result of panic.
Numerical example.
Recent event in financial services industry would be Northern Rock. On 13 September 2007, Northern Rock asked the Bank of England, as lender of last resort in the United Kingdom, for a liquidity support facility due to problems in raising funds in the money market to replace maturing money market borrowings.[22] The problems arose from difficulties banks faced over the Summer 2007 in raising funds in the money markets, caused by the subprime crisis in the United States. The bank's assets were always sufficient to cover its liabilities, but it had a liquidity problem because institutional lenders became nervous about lending to mortgage banks following the US sub-prime crisis. Bank of England figures suggest that Northern Rock borrowed £3bn from the Bank of England in the first few days of this crisis. (^ £3bn Lent to Northern Rock, Financial Times, 22 September 2007
Bond [4]
A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.
The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually). The main categories of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simply "Treasuries". Two features of a bond - credit quality and duration - are the principal determinants of a bond's interest rate. Bond maturities range from a 90-day Treasury bill to a 30-year government bond. Corporate and municipals are typically in the three to 10-year range.
Numerical Example
US Treasury Bonds
Maturity Yield
3 Month 2.13
6 Month 2.03
2 Year 1.92
3 Year 1.92
5 Year 2.68
10 Year 3.64
30 Year 4.42
Capital Account [5]
The net result of public and private international investments flowing in and out of a country.
The net results includes foreign direct investment, plus changes in holdings of stocks, bonds, loans, bank accounts, and currencies.
Increase in Foregin ownership of domestic assets – Increase of domestic ownership of foreign assets = foreign Direct Investment + Portfolio Investments + Other Investments.
Numerical example.
Supposing a country has the following data
∆ 30 = Increase in Foregin ownership of domestic assets
-∆ 20 = Increase of domestic ownership of foreign assets
10 = foreign Direct Investment
+5 = Portfolio Investments
+2 = Other Investments.
CA = 17
Debt to GDP ratio [6]
A measure of a country's federal debt in relation to its gross domestic product (GDP). By comparing what a country owes and what it produces, the debt-to-GDP ratio indicates the country's ability to pay back its debt. The ratio is a coverage ratio on a national level
This measure gives an idea of the ability of a country to make future payments on its debt. If a country were unable to pay its debt, it would default, which could cause a panic in the domestic and international markets. The higher the debt-to-GDP ratio, the less likely the country will pay its debt back, and the higher its risk of default.
Numerical Example
Supposing a country has the following data
$100 = Countrys’ federal Debt
$80 = GDP
Ratio = 1.25x
Effective Demand [7]
The effective demand principle states that “in a market economy – and, therefore a monetary economy, where money attend all functions (medium of exchange, unit of account and store of value), in every transaction of buying and selling there is only one autonomous decision: the spending one. In result, every spending determines an income of the same extent. By aggregation, the totality of spending in any given period is always equal and determines the totality of income”
(ref 8) 1) In a given situation of technique, resources and costs, income (both money-income and real income) depends on the volume of employment N.
(2) The relationship between the community's income and what it can be expected to spend on consumption, designated by D1, will depend on the psychological characteristic of the community, which we shall call its propensity to consume. That is to say, consumption will depend on the level of aggregate income and, therefore, on the level of employment N, except when there is some change in the propensity to consume. [p.29]
(3) The amount of labour N which the entrepreneurs decide to employ depends on the sum (D) of two quantities, namely D1, the amount which the community is expected to spend on consumption, and D2, the amount which it is expected to devote to new investment. D is what we have called above the effective demand. D1 + D2 = D = f(N),
Numerical Example
Supposing.
D1 : Consumption = 20
D2 : Investment = 30
20 + 30 = 50
Deflation [8]
Deflation means a decrease in the general price level over a period of time. The general price level comprises the price of wages, consumption goods and services. Deflation is often caused by a decrease in the money supply. When the monetary authority and the banks constrict the money supply, deflation is expected to happen. Deflation is considered a problem in a modern economy because of the potential of a deflation spiral and its association with the depression.
The total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally there is a negative relationship between aggregate demand and the price level. Also known as "total spending".
Aggregate demand is the demand for the gross domestic product (GDP) of a country, and is represented by this formula: Aggregate Demand (AD) = C + I + G (X-M) C = Consumers' expenditures on goods and services. I = Investment spending by companies on capital goods. G = Government expenditures on publicly provided goods and services. X = Exports of goods and services. M = Imports of goods and services.
Numerical example.
Supposing a country has the following data
50 = C = Consumers' expenditures on goods and services.
60= I = Investment spending by companies on capital goods.
80 = G = Government expenditures on publicly provided goods and services.
20 = X = Exports of goods and services.
10 = M = Imports of goods and services.
AD = C + I + G (X-M) : AD = 50 + 60 + 80 (20 – 10)
Animal Spirits [2]
The term “Animal Spirits” is closely associated with John Maynard Keynes who used it in his 1936 book, The General Theory of Employment Interest and Money to capture the idea that aggregate economic activity might be driven in part by waves of optimism or pessimism: (although Robin Mathews 1984, points out that Keynes would have been aware of its use by David Hume 1739, Part iv, Section vii).
"Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
(The General Theory of Employment Interest and Money, 161-162)
The idea that waves of spontaneous optimism might drive business cycles was not new to Keynes and can be traced at least as far back as Henry Thornton who attributed a central role in his theory of credit to “… that confidence which subsists among commercial men in respect to their mercantile affairs…” (Thornton 1802, p. 75).
Practical Example; What we sometimes now term as 'entrepreneurship' has existed for millennia; from traders on the silk road to the Merchant of Venice, from the developers of the US Railroads to Michael Dell....... all driven by Animal Spirits.
Bank Run[3]
A situation in which numerous bank customers try to withdraw their bank deposits simultaneously and the bank's reserves are not sufficient to cover the withdrawals.
Bank runs are a result of panic.
Numerical example.
Recent event in financial services industry would be Northern Rock. On 13 September 2007, Northern Rock asked the Bank of England, as lender of last resort in the United Kingdom, for a liquidity support facility due to problems in raising funds in the money market to replace maturing money market borrowings.[22] The problems arose from difficulties banks faced over the Summer 2007 in raising funds in the money markets, caused by the subprime crisis in the United States. The bank's assets were always sufficient to cover its liabilities, but it had a liquidity problem because institutional lenders became nervous about lending to mortgage banks following the US sub-prime crisis. Bank of England figures suggest that Northern Rock borrowed £3bn from the Bank of England in the first few days of this crisis. (^ £3bn Lent to Northern Rock, Financial Times, 22 September 2007
Bond [4]
A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.
The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually). The main categories of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simply "Treasuries". Two features of a bond - credit quality and duration - are the principal determinants of a bond's interest rate. Bond maturities range from a 90-day Treasury bill to a 30-year government bond. Corporate and municipals are typically in the three to 10-year range.
Numerical Example
US Treasury Bonds
Maturity Yield
3 Month 2.13
6 Month 2.03
2 Year 1.92
3 Year 1.92
5 Year 2.68
10 Year 3.64
30 Year 4.42
Capital Account [5]
The net result of public and private international investments flowing in and out of a country.
The net results includes foreign direct investment, plus changes in holdings of stocks, bonds, loans, bank accounts, and currencies.
Increase in Foregin ownership of domestic assets – Increase of domestic ownership of foreign assets = foreign Direct Investment + Portfolio Investments + Other Investments.
Numerical example.
Supposing a country has the following data
∆ 30 = Increase in Foregin ownership of domestic assets
-∆ 20 = Increase of domestic ownership of foreign assets
10 = foreign Direct Investment
+5 = Portfolio Investments
+2 = Other Investments.
CA = 17
Debt to GDP ratio [6]
A measure of a country's federal debt in relation to its gross domestic product (GDP). By comparing what a country owes and what it produces, the debt-to-GDP ratio indicates the country's ability to pay back its debt. The ratio is a coverage ratio on a national level
This measure gives an idea of the ability of a country to make future payments on its debt. If a country were unable to pay its debt, it would default, which could cause a panic in the domestic and international markets. The higher the debt-to-GDP ratio, the less likely the country will pay its debt back, and the higher its risk of default.
Numerical Example
Supposing a country has the following data
$100 = Countrys’ federal Debt
$80 = GDP
Ratio = 1.25x
Effective Demand [7]
The effective demand principle states that “in a market economy – and, therefore a monetary economy, where money attend all functions (medium of exchange, unit of account and store of value), in every transaction of buying and selling there is only one autonomous decision: the spending one. In result, every spending determines an income of the same extent. By aggregation, the totality of spending in any given period is always equal and determines the totality of income”
(ref 8) 1) In a given situation of technique, resources and costs, income (both money-income and real income) depends on the volume of employment N.
(2) The relationship between the community's income and what it can be expected to spend on consumption, designated by D1, will depend on the psychological characteristic of the community, which we shall call its propensity to consume. That is to say, consumption will depend on the level of aggregate income and, therefore, on the level of employment N, except when there is some change in the propensity to consume. [p.29]
(3) The amount of labour N which the entrepreneurs decide to employ depends on the sum (D) of two quantities, namely D1, the amount which the community is expected to spend on consumption, and D2, the amount which it is expected to devote to new investment. D is what we have called above the effective demand. D1 + D2 = D = f(N),
Numerical Example
Supposing.
D1 : Consumption = 20
D2 : Investment = 30
20 + 30 = 50
Deflation [8]
Deflation means a decrease in the general price level over a period of time. The general price level comprises the price of wages, consumption goods and services. Deflation is often caused by a decrease in the money supply. When the monetary authority and the banks constrict the money supply, deflation is expected to happen. Deflation is considered a problem in a modern economy because of the potential of a deflation spiral and its association with the depression.
Practical example; Japan suffered from deflation in the 1990's; this was perhaps a consequence of the inflation of the late 1980's, which led to an over-heated economy which ultimately "blew-up". The Japanese ecenomy has still not recovered fully from this cycle.
Consumption Function [9]
According to the theory developed by Keynes, the consumption function calculates the amount of total consumption in an economy which consists of two parts: (1) autonomous consumption that is not influenced by current income; (2) induced consumption that is influenced by the economy’s income level. The simple consumption function is expressed as the linear function:
C=C0+C1*Yd
Where C means the total consumption, C0 means the autonomous consumption (C0> 0), C1 means the marginal propensity to consume (0 < name="OLE_LINK1">Consumer Price Index [10]
A consumer price index (CPI) is an index number measuring the average price of consumer goods and services purchased by households. There are two important factors referring calculating the CPI: price data and weighting data. The price data are collected for a sample of goods and services from a sample of sales outlets in a sample of locations for a sample of times. The weighting data are estimates of the shares of the different types of expenditure as fractions of the total expenditure covered by the index. CPI is usually computed monthly as a weighted average of sub-indices for different components of consumer expenditure, such as food, housing, clothing, each of which is in turn a weighted average of sub-sub-indices.
Numerical Example; take the example of Shanghai city, which is one of the biggest cities in China. The monthly CPIs of Shanghai in the year 2007 are shown in the following chart. The benchmark is the monthly CPI in the same month last year (assume as 100). We can conclude that the average price of consumer goods and services purchased by households has been keeping going up, especially in the late 2007.
January
100.9
February
101.3
March
102.2
April
102.0
May
101.8
June
102.7
July
102.7
August
103.9
September
104.5
October
105.1
Investment Function [11]
The investment function is a summary of the variables that influence the levels of aggregate investments. There are three main factors in deciding the total amount of investment. The function can be formalized as follows:
I=I(r,ΔY, q)
Where r is the real interest rate, Y is the GDP and q is Tobin's q. ΔY and q are positively related to the level of the investment while r is related to the investment in a negative way.
Numerical Example; The investment function will increase as the real interest rate reduces, and vice-versa. Therefore to promote investment and thereby hopefully stave off a recession, the US Federal Reserve has recently reduced the interest rate by a total of 1.25% in two cuts designed to increase the Investment Function.
Fiscal Expansion [12]
Fiscal policy is the use of the government budget to affect an economy. When a country is experiencing a depression, fiscal expansion is a popular tool used by government to fight against the depression. The fiscal expansion will change the aggregate demand for goods and services through one of two channels. First, if the government increases purchases but keeps taxes the same, it increases demand directly. Second, if the government cuts taxes or increases transfer payments, people's disposable income rises, and they will spend more on consumption. This rise in consumption will, in turn, raise aggregate demand. The simultaneous use of cutting taxes and increasing government purchasing will stimulate the aggregate demand into a higher level.
Practical Example; it is considered that the fiscal policies of the Irish Governments of the early 1990s were an important contributor to the development of the Irish Economy into the so-called Celtic Tiger era. Lower income tax rates combined with increased Governmental expenditures gave the economy a kick-start that it needed. Former Finance Minister, now an EU commissioner, Mr. Charley McCreevy, was considered a strong advocate of Fiscal Expansionary Policies.
GDP Deflator [13]
GDP deflator is a measure of the change in prices of all new, domestically produced, final goods and services in an economy. GDP stands for gross domestic product, the total value of all final goods and services produced within that economy during a specified period. In most system of national accounts the GDP deflator measures the difference between the real GDP and the nominal GDP. The formula used to calculate the GDP deflator is as follows:
GDP deflator = Nominal GDP/Real GDP x 100
Dividing the nominal GDP by the GDP deflator and multiplying it by 100 would then give the figure for real GDP, hence deflating the nominal GDP into a real measure.
Numerical Example:
If Nominal GDP for a period is 110, and Real GDP is 105, then the GDP Deflator is 104.76
Imports [14]
An import is any good or commodity, brought into one country from another country in a legitimate fashion, typically for use in trade. Import goods or services are provided to domestic consumers by foreign producers. Import of commercial quantities of goods normally requires involvement of the Customs authorities in both the country of import and the country of export.
Example: Ireland imports many industrial and consumer goods such as cars, machinery, white goods, raw materials/natural resources, etc.
Monetary Contraction [15]
Contractionary monetary policy is monetary policy that seeks to reduce the size of the money supply. In most nations, monetary policy is controlled by either a central bank or a finance ministry. Monetary Contraction is the result of (successful) market operations effected by the central bank (“bankers bank” or “lender of last resort”). Contractionary policy can be implemented by reducing the size of the monetary base. This directly reduces the total amount of money circulating in the economy. A central bank can use open market operations to reduce the monetary base. The central bank would typically sell bonds in exchange for hard currency. When the central bank collects this hard currency payment, it removes that amount of currency from the economy, thus contracting the monetary base. Contractionary policy can also be implemented by requiring banks to hold a higher proportion of their total assets in reserve; by calling in loans to banks (or by reducing the value/volume of such loans); or by raising the base interest rate and/or the discount (bank-to-bank) rate.
Example; The Chinese Fiscal Authorities have in 2006/2007 become more concerned with inflationary pressures and overheating of the financial markets in Shanghai & Shenzen. They therefore orchestrated a monetary contraction policy of repeated rate increases and increased bank reserve requirements, to cool the economy. Chinese banks are now required to have Tier 1 capital of approx 13% of lending; this should assist towards monetary contraction, although continued strong growth in trade surpluses will negate the central bank's efforts.
Nominal GDP [16]
A gross domestic product (GDP) figure that has not been adjusted for inflation. It is also known as "current dollar GDP". It can be misleading when inflation is not accounted for in the GDP figure because the GDP will appear higher than it actually is. The same concept that applies to return on investment (ROI) applies here.
Numerical Example: If you have a 9% ROI and inflation for the year has been 4%, your real rate of return would be 5%. Similarly, if the nominal GDP figure has shot up 8% but inflation has been 5%, the real GDP has only increased 3%.
Propensity to Consume [17]
Propensity to Consume is is the percentage of income spent. To find the percentage of income spent, one needs to divide consumption by income, or C / Y, where C is the amount consumed, and Y is the income. In an economy in which each individual consumer saves lots of money (where Average Propensity to Consume (APC) is low), there is a tendency of people losing their jobs because demand for goods and services will be low. Thus saving as a leakage is an advantage from the savers' point of view, while for the economy as a whole it is a considerable disadvantage. Sometimes, disposable income is used as the denominator instead, so the above formula is restated as C / Y-T, where C is the amount spent, Y is pre-tax income, and T is taxes.
The inverse is the propensity to save. These terms are cornerstones of Keynesian theory, most commonly expressed as APC (as above) and MPC (Marginal Propensity to Consume). MPC refers to the increase in personal consumer spending (consumption) that occurs with an increase in disposable income.
Numerical Example: If you earn an additional €100 per month (or benefit from a similar level of tax cut), and you then decide to spend €60 of this increase in net pay, your Marginal Propensity to Consume is said to be 0.6 (or 60%).
Short Run [18]
In economics, the concept of the short-run refers to the decision-making time frame of a firm in which at least one factor of production is fixed. Costs which are fixed in the short-run have no impact on a firms decisions. For example a firm can raise output by increasing the amount of labour through overtime.
A generic firm can make three changes in the short-run:
Increase production; Decrease production ; Shut down
In the short-run, a profit maximizing firm will:
Increase production if marginal cost is less than price;
Decrease production if marginal cost is greater than price;
Continue producing if average variable cost is less than price, even if average total cost is greater than price;
Shut down if average variable cost is greater than price. Thus, the average variable cost is the largest loss a firm can incur in the short-run.
Numerical Example: If you own a copper mine and you have contracted with a third party to provide mining equipment and transport vehicles for a certain period (say, one year), then for your business, one year is the short run (presuming that you cannot sub-contract those facilities to another buyer during this period). In deciding whether to continue mining when the price of copper drops, it is the variable costs of production for that period that are to be considered. The Short Run period to be considered is the period of one year during which some costs of production are fixed.
Real Exchange Rate [19]
The weighted average of a country's currency relative to an index or basket of other major currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one country's currency, with each other country within the index. This exchange rate is used to determine an individual country's currency value relative to the other major currencies in the index, as adjusted for the effects of inflation.
The nominal exchange rate e is the price in domestic currency of one unit of a foreign currency.
The real exchange rate (RER) is defined as RER = e (P / P *) , where P is the domestic price level and P * the foreign price level. P and P * must have the same arbitrary value in some chosen base year. Hence in the base year, RER = e.
The RER is only a theoretical ideal. In practice, there are many foreign currencies and price level values to take into consideration. Correspondingly, the model calculations become increasingly more complex. Furthermore, the model is based on purchasing power parity (PPP), which implies a constant RER. The empirical determination of a constant RER value could never be realised, due to limitations on data collection. PPP would imply that the RER is the rate at which an organization can trade goods and services of one economy (e.g. country) for those of another. PPP appears to hold only in the long term (3–5 years) when prices eventually correct towards parity.
Numerical Example; if the price of an item (say a bicycle) increases by 5% in Hong Kong, and the Euro simultaneously appreciates 5% against the HKD, then the price of the bike remains constant for someone in Germany. The people in HK, however, still have to deal with the 5% increase in domestic prices. PPP would suggest that the residents of Hong Kong & Germany, respectively, should pay the same amount for the bicycle, so that PPP will cause the actual exchange rate to revert to the Real Rate of Exchange.
Trade Surplus [20]
The difference between a country's imports and its exports is known as its “Balance of Trade”. A country has a trade surplus if it exports more than it imports; the opposite scenario is a trade deficit. Balance of trade is the largest component of a country's balance of payments. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy.
Practical Example; up to the mid-1980's, the USA had a trade surplus with the rest of the world. It's success in exporting manufacturing technologies and making Foreign Direct Investment in lower-cost locations, together with an increasing dependence on foreign-produced oil, has reversed this position such that a trade defecit of up to approx $60Bn per month now occurs. Consequently OPEC countries, China, Japan, Germany, Brazil, Venezuala, Ireland, Korea, and numerous others now have net trade surpluses with the US and the world.
[1] Investopedia.com
[2] http://farmer.sscnet.ucla.edu/NewWeb/JournalArticles/ANIMAL%20SPIRITS.pdf
[3] Investopedia.com
[4] Investopedia.com
[5] Investopedia.com
[6] Investopedia.com
[7]http://www.ie.ufrj.br/revista/pdfs/demanda_efetiva_investimento_e_dinamica_a_atualidade_de_kalecki.pdf ; Retrieved from "http://en.wikipedia.org/wiki/Effective_demand" http://cepa.newschool.edu/het/texts/keynes/chap03.htm#text243
[8] From Wikipedia.com
[9] From Wikipedia.com
[10] From Wikipedia.com
[11] From Wikipedia.com
[12] From Wikipedia.com
[13] From Wikipedia.com
[14] From Wikipedia.com
[15] From Wikipedia.com http://en.wikipedia.org/wiki/Contractionary_monetary_policy#Monetary_Policy_and_Inflation [16] http://www.investopedia.com/ - http://www.investopedia.com/terms/n/nominalgdp.asp [17] http://en.wikipedia.org/wiki/Average_propensity_to_consume & http://www.investopedia.com/terms/m/marginalpropensitytoconsume.asp
[18] http://en.wikipedia.org/wiki/Short-run
[19] http://www.investopedia.com/terms/r/reer.asp & http://en.wikipedia.org/wiki/Real_exchange_rate
[20] http://www.investopedia.com/terms/b/bot.asp
Monday, February 4, 2008
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