SelfAdjustment or Instability McGrawHill Higher ducation自调整或不稳定麦格劳山高等教育

1、chapter 10:self-adjustment or instability?mcgraw-hill/irwin copyright 2013 by the mcgraw-hill companies, inc. all rights reserved.13e10-2the debate john maynard keynes challenged the classical assertion that the economy would self-adjust to full employment. keynes said that there would be no automat

2、ic self-adjustment; the economy could stagnate in persistent unemployment or have continuing inflation. this debate has continued since the 1930s and is ongoing. 10-3learning objectives 10-01. know the sources of circular flow leakages and injections. 10-02. know what the multiplier is and how it wo

3、rks. 10-03. know how recessionary and inflationary gdp gaps arise.10-4leakages leakage: income that is generated in production but is diverted out of the circular flow. saving (both household and business). imports. taxes (both household and business). 10-5injections injection: an addition of spendi

4、ng in the circular flow. investment spending. government spending. exports.10-6leakages and injections for macro equilibrium, leakages must equal injections. when this occurs, output supplied equals output demanded. ideally, this should occur at full-employment gdp.10-7self-adjustment? classical eco

5、nomists assumed that leakages always equaled injections. for example, they use flexible interest rates as the mechanism to ensure this. if saving (leakage) exceeds investment (injection) available funds to borrow increase and interest rates fall, which spurs more investment borrowing. if investment

6、(injection) exceeds saving (leakage) available funds to borrow decrease and interest rates rise, which inhibits investment borrowing.10-8self-adjustment? keyness response changing expectations: as saving increases, consumption decreases and gdp falls. business outlook is gloomy. business investment

7、spending would more likely fall rather than rise.10-9self-adjustment? classical economists said that any rising inventory of goods would trigger falling prices. this would lead to increased selling to reduce the undesired inventory. this increased selling would shift ad right toward the gdp needed a

8、t the full-employment level.10-10self-adjustment? keyness response changing expectations: more would be bought at lower prices, but as prices fall, profits diminish and businesses will further reduce production and eliminate investment plans. they would produce no more until the undesired inventory

9、is sold. this leads to yet more layoffs and to equilibrium at high unemployment.10-11self-adjustment? rather than adjusting back toward full employment, keynes saw the economy becoming more unstable as businesses react to declining sales, falling prices, and lowered expectations of the future.10-12t

10、he effect on household income reduced production means layoffs, and that means decreased household income. reduced income means less spending, and ad shifts further to the left away from full employment. a relatively small problem could snowball into a much larger problem.10-13the multiplier process

11、 steps in the multiplier process: 1. let investment decline. 2. this leaves unsold output. 3. production is cut back. 4. income decreases. 5. consumer spending decreases. 6. go to step 2 above. the eventual decrease in spending will be much larger than the initial decline in spending. the eventual s

12、hift of ad to the left will be much larger than the initial shift to the left.10-14the multiplier process multiplier: the multiple by which an initial change in spending will alter the total expenditure after all spending cycles. example: if mpc = 0.75, the multiplier is 1/(1-0.75) = 1/0.25 = 4. the

13、 impact of an initial spending change will be multiplied by a factor of 4. 1multiplier = 1 - mpc10-15the multiplier process the multiplier is governed by the size of the mpc. if the mpc decreases, then the multiplier gets smaller. if the mpc increases, then the multiplier gets larger.10-16keynesian

14、adjustment process producers cut output and employment when output exceeds ad at the current price level (leakages exceed injections). the resulting loss of income causes a consumer spending decline. this leads to further production cutbacks, more job loss, more lost income, and still less consumpti

15、on. ad shifts further to the left as the multiplier process goes into effect.10-17recessionary gdp gap the recessionary gdp gap equals the difference between equilibrium gdp (qe) and full-employment gdp (qf). it shows unused production capacity as the economy is underproducing.10-18the unemployment

16、- inflation trade-off the as curve slopes upward. an ad increase causes both output and prices to rise, and unemployment to fall. because of rising prices, the economy must move to point h, not point f, to close the recessionary gdp gap.10-19inflationary gdp gap the inflationary gdp gap equals the d

17、ifference between equilibrium gdp (qe) and full-employment gdp (qf). it shows the economy producing at a gdp level above full-employment gdp, with the economy subject to inflationary pressure.10-20demand-pull inflation an excessive increase in an injection or decrease in a leakage can cause the econ

18、omy to overheat. ad pushes too far to the right, generating an inflationary gdp gap. demand-pull inflation: prices rise due to excessive ad. instability could cause an inflationary spiral. 10-21the multiplier process1. let investment increase and shift ad right.2. inventory depletes (a warning sign of inflation) and prices rise.3. production is increased.4. income increases.5. consumer spending increases.6. go