national market can be considered as a set of socio-economic relations in the sphere of exchange, through which the sale of goods and services, the circulation of capital, the sale and purchase of labor power on a countrywide scale are carried out.
Main economic entities national market there will be the state, households and firms (enterprises) The state provides the population and firms with public goods, purchases goods and services, and also pays wages to civil servants. Firms produce products and services, earn money for ϶ᴛᴏ, and demand labor and other factors of production. Households offer labor and financial resources, receive remuneration for them, and demand the products of firms.
The national market functions as a market for goods and paid services, money market and valuable papers, labor market. In each of these markets, aggregate demand and aggregate supply interact with each other, and an equilibrium is established between them.
Aggregate demand(AD) - ϶ᴛᴏ demand for the total volume of goods and services that can be supplied at a given price level. It is worth noting that it has two forms: natural-material and value. In the structure of aggregate demand, we can distinguish: consumption (C) - demand for consumer goods and services; investment (I) - demand for investment goods; government purchases (G) - demand for goods and services from the state; net exports (Xn) - the difference between the demand of foreigners for domestic goods (exports) and domestic demand for foreign goods (imports)
Aggregate demand is equal to the total demand for final products: C + I + G + Xn. It is important to note that some components of aggregate demand are relatively stable and change slowly, such as consumer spending. Others are more dynamic, such as investment spending, and their changes cause fluctuations in economic activity.
Aggregate demand curve(AD) shows the quantity of goods and services that consumers are willing to purchase at each possible price level. It is worth noting that it gives such combinations of output and the general price level in the economy that the commodity and money markets are in equilibrium. Movement along the AD curve demonstrates a change in aggregate demand depending on the dynamics of the general price level and is directly dependent on money supply and velocity of circulation of money and in reverse - from the price level.
Aggregate demand, being inversely related to price, is reduced under the influence of a number of factors. They include the following:
The effect of the interest rate level, i.e. loan usage rates. An increase in the price level forces both consumers and producers to borrow money. This circumstance raises the interest rate. Therefore, buyers are postponing their purchases, and entrepreneurs are reducing investments. As a result, aggregate demand decreases.
Wealth effect, or effect of cash balances. Rising prices reduce the real purchasing power of accumulated financial assets with a fixed cost (bonds, fixed-term accounts), which makes their owners poorer and encourages spending cuts.
Effect imported goods. Rising domestic prices with stable import prices shift part of the demand from domestic goods to imported goods and reduce exports, which reduces aggregate demand in the economy.
Non-price factors affecting aggregate demand include everything that affects consumer spending, firm investment spending, government spending, net exports: consumer welfare, consumer expectations, taxes, interest rates, subsidies, and soft loans investors, etc.
From the equation of the quantity theory of money it follows that aggregate demand is affected by the value of the money supply (M) and the velocity of money (V), therefore AD = f(M, V). The impact of the above non-price factors on aggregate demand can ultimately be reduced to changes in the money supply and the velocity of money. A change in non-price factors is demonstrated by a shift in the AD curve to the right or left.
Aggregate supply(AS) - ϶ᴛᴏ the total amount of final goods and services produced in the economy (in value terms) This concept is often used as a synonym for gross national or domestic product.
Aggregate supply curve(AS) shows what real amount of national production (total output) can be offered to the market by entrepreneurs at different values of the general price level in the economy.
The aggregate supply curve (AS) conditionally consists of three parts:
Aggregate supply depends on the price level. Higher prices stimulate the production of goods and their supply. Lower prices, on the contrary, reduce the production and supply of goods.
Non-price factors also influence aggregate supply. If price factors show movement along the aggregate supply curve AS, then non-price factors shift the curve to the right when costs decrease and to the left when they increase. Non-price factors include those that can change costs: resource prices (land, labor, capital); growth in labor productivity; legal regulation, taxes, subsidies.
In the long run, the AS curve will be vertical at the level of output at full employment of factors, and in relatively short periods of time, the AS curve will be horizontal (with fixed prices and nominal wages)
The balance of supply and demand in national economy is reached at the point of intersection of the aggregate demand curves AD and aggregate supply AS.
On the horizontal (Keynesian) stretch, an increase in aggregate demand will lead to an increase in employment and an increase in the volume of the national product without increasing prices. On the upside, an increase in aggregate demand will lead to an increase in the production of the national product and an increase in prices, as employment grows and idle capacities begin to be used. An increase in demand in the classical (vertical) segment will only affect the price level, raising them, since here the production capacity and labor force are fully used. At the same time, if the demand on the classical segment decreases, the initial equilibrium will not be restored. This is due to the inadequate response of prices to changes in demand: a decrease in demand to the initial level is not accompanied by the same decrease in prices. It is worth noting that they remain for more high level than before. The reasons for this trend are the policy of monopoly firms that do not reduce prices and prices, as well as maintaining the same level of wages, which is a significant part of the costs of firms. (Wages cannot automatically fall because of collective bargaining agreements, traditionally for several years.) This phenomenon is called the ratchet effect. Just as a ratchet only rotates a wheel forward, macroeconomic equilibrium is constantly restored at a higher price level.
It should not be forgotten that it will be important to say that sometimes sharp changes in aggregate supply and demand - shocks - lead to a deviation in output and employment from the potential level. Shocks on the demand side can arise, for example, due to a sharp change in the supply of money or the velocity of its circulation, sharp fluctuations in investment demand, etc. Using the AD-AS model, it is possible to assess the impact of shocks on the economy, as well as the consequences of the stabilization policy of the state aimed at mitigating the fluctuations caused by shocks and restoring the equilibrium output and employment at the same level.
Optimization of macroeconomic proportions is achieved through the mechanism of supply and demand. Based on the interaction of firms and households in the market of goods and services, a proportion is formed between consumption and savings.
Aggregate consumption(C) represents the individual and joint use of consumer goods, aimed at satisfying the material and spiritual needs of people. Consumption of the population is one of the main components that determine the development of the economy. Consumer spending accounts for 2/3 to 3/4 of the gross domestic product. It is worth noting that they form consumer behavior, which will be a kind of indicator of the cyclical development of the economy.
Cumulative Savings(S) - ϶ᴛᴏ deferred consumption or that part of income that is not currently consumed. It is worth noting that it is equal to the difference between income and current consumption. Saving is a ϶ᴛᴏ process, which is associated with the provision of production and consumer needs in the future. Therefore, saving is an economic process associated with investment: a part of income that remains unused at the cost of current production and consumer needs, accumulates. Savings are made by both firms and households. Firms save to invest - to expand production and increase profits. Households save for a number of reasons, among them: motives for securing old age and passing on wealth to children, saving money to buy land, real estate, and expensive durables. Government savings - ϶ᴛᴏ positive difference between income and expenditure state budget or a positive budget balance. National saving is the part of the national income after deducting its consumed part or total amount private and public savings.
Studies have found that consumption and saving move in the same direction as income. Changes in consumption and savings as income rises are characterized by the concepts of "average propensity to consume and save" and "marginal propensity to consume and save."
Average propensity to consume(ARC) shows the ratio of consumption to income.
Average propensity to save(APS) characterizes the ratio of savings to income.
marginal propensity to consume(MPC) expresses the ratio of any change in consumption to the change in income that caused it. Incidentally, this model shows us which part additional income goes to increase consumption.
marginal propensity to save(MPS) is the ratio of any change in savings to the change in income that caused it. The sum of the marginal propensity to consume and the marginal propensity to save is 1. Therefore, MPS = 1 - MPS and MPS = 1 - MPS.
As income rises, so does consumption and savings. At ϶ᴛᴏm, in conditions of stable economic growth, MPS tends to decrease, and MPS tends to increase. Under conditions of inflation, however, a different process is observed - MPS acquires a tendency to increase, and MPS - to decrease.
Consumption and savings can be affected by: tax increases, increases in deductions for social insurance, rush demand, growth in supply in the market, growth in income.
Under investments(I) commonly understood as the use of savings to create new productive capacity and capital assets. When determining the content of investments, economic and financial aspects are usually distinguished.
The economic content of investments finds expression in the use of savings for the creation, expansion and technical re-equipment of fixed capital, as well as for changes in working capital associated with this. Based on the economic content of investments, it is possible to determine their directions: the construction of new industrial buildings and structures; purchase of new equipment, machinery and technology; additional purchases of raw materials and materials; construction of housing and social facilities. According to these areas, there are types of investments: production investments; investment in inventory; investment in housing construction.
financial investments- ϶ᴛᴏ investments in shares, bonds, bills and other securities and financial instruments. It is worth noting that they form additional sources of expansion of real investment.
Saving and investment affect the volume of effective demand in exactly opposite directions: saving reduces demand, while investment increases it.
The increase in investment leads to an increase in GNP and contributes to the achievement of full employment due to a certain effect, which is demonstrated in economic theory called the multiplier effect. The multiplier represents a numerical coefficient that shows the increase in income growth over investment growth. The multiplier effect in market economy essentially consists in the fact that an increase in investment leads to an increase in the gross national product, and by an amount greater than the initial increase in investment.
Basic concepts of the topic
National market. aggregate demand. The effect of the interest rate. wealth effect. The effect of imported goods. Ratchet effect. Aggregate offer. Aggregate consumption. marginal propensity to consume. Aggregate savings. marginal propensity to save. Investments. Planned expenses. Real costs. Marginal propensity to import. Keynes Cross. General macroeconomic equilibrium. Classical model of macroeconomic equilibrium. Keynesian model of macroeconomic equilibrium.
test questions
See also Macroeconomic Equilibrium in Commodity and Money Markets: TS-LM Model
Goals:
1. consider the relationship between macroeconomic equilibrium and full employment of resources;
2. form students' worldview on economic issues in general;
3. arouse interest in the subject and in this topic in particular.
Keywords : consumption, savings, planned spending, multiplier, recessionary gap, inflationary gap
Questions:
1. Equilibrium of aggregate supply and demand and full employment of resources. Components of aggregate demand and the level of planned expenditures. consumption and savings. Investments.
2. Actual and planned expenses. Keynes Cross. Mechanism for achieving the equilibrium volume of production.
3. Fluctuations in the equilibrium level of output around the economic potential. Autonomous spending multiplier.
Question number 1. Equilibrium of aggregate supply and demand and full employment of resources. Components of aggregate demand and the level of planned expenditures. consumption and savings. Investments
In the world economic literature, two main directions of the mechanism for regulating national production in market conditions can be distinguished. First - classical direction of automatic self-regulation of the market system. Its representatives are D.Ricardo, D.St. Mill, F. Edgeworth, A. Marshall and A. Pigou. Second- Keynesian, proceeding from the need for mandatory state intervention in market system especially in depression.
Classical economists proceeded from the flexibility of prices, wages, interest rates, i.e. from the fact that wages and prices can move freely up and down, reflecting the balance between supply and demand. In their opinion, the aggregate supply of AS has the form of a vertical straight line, reflecting the potential output of GNP. A decrease in price entails a decrease in wages, and therefore full employment is maintained. There is no reduction in real GNP. Here, all products will be sold at different prices. In other words, a decrease in aggregate demand does not lead to a decrease in GNP and employment, but only to a decrease in prices. Thus, the classical theory holds that economic policy governments can only affect the price level, not output and employment. Therefore, its intervention in the regulation of the volume of production and employment is undesirable.
Classicism dominated economics until the 1930s, when the English economist D. M. Keynes published his work “The General Theory of Employment, Interest and Money”. In it, he criticized the main provisions of the classical theory, which, from his point of view, very often came into conflict with real life. Firstly, Keynes argued that the economy does not develop so smoothly, but wage and prices are not as flexible as presented in neoclassical models. Secondly, the underlying relationship between investment, savings, and the interest rate was questioned. As a result, Keynes considered it impossible to achieve equilibrium automatically without government intervention. Keynes did not believe in the possibility of achieving the level of full employment by cutting wages. He believed that, despite unemployment, wages would not fall and the labor market would remain in a non-equilibrium state. Due to the existence of wage floors, there will always be a certain percentage of unemployed, and to eliminate such unemployment it is necessary to expand aggregate demand, which will cause an increase in the demand for labor.
Keynes had serious doubts about the possibility of applying flexible prices. He argued that price cuts did not automatically bring the economy out of recession and that the level of interest rates was not determined at the point of intersection of the savings and investment curves, but depended on the demand and supply of cash. In other words, consumers decide to save part of their income from its amount and the amount that determines the amount of consumption. No matter how flexible the interest rate is, it is not able to stop the decline in aggregate demand. Therefore, equilibrium can be achieved with part-time employment.
In constructing the aggregate supply curve, Keynes proceeded from the assumption of the invariance of the level of wages. Since its value is unchanged, entrepreneurs cannot reduce production costs. So, in this situation, price reduction is unlikely to happen.
Optimization of macroeconomic proportions is achieved through the mechanism of supply and demand. Consider the problem of matching supply and demand in relation to the owners of capital and labor.
Firms whose management acts as representatives of capital produce products, earn money for it and demand labor. Workers offer their labor power, receive remuneration for this, and present a demand for manufactured products. Based on the interaction of firms and households in the market of goods and services, the proportion of dividing GNP into consumption and savings is formed.
Consumption is the individual and joint use of consumer goods, aimed at meeting the material and spiritual needs of people. In value form, this is the amount of money that is spent by the population on the purchase of material goods and services. Thus, everything that is not related to savings, does not go in the form of tax, is not in foreign accounts - this is consumption. People tend to put off consuming today in the hope that consuming in the future will bring them more utility than they do in the present. The family is the primary cell of consumption. It forms the volume and structure of consumption. The family economy is characterized by a common consumer budget, housing and accumulated property.
Population consumption- one of the main components that determine the state of the economy.
The simplest consumption function has the form
C \u003d a + b (Y-T),
where FROM- consumer spending;
a - autonomous consumption, the value of which does not depend on the size of current disposable income; b - marginal propensity to consume; Y - income;
T - tax deductions;
(Y-T) - disposable income (income after taxes). In macroeconomic models, this indicator is often referred to as Yd or D.I.
marginal propensity to consume- MPC)- the share of the increase in spending on consumer goods and services in any change in disposable income.
where MRS- marginal propensity to consume;
Growth in consumer spending;
Average propensity to consume- ARS) is the share of disposable income that households spend on consumer goods and services.
where ARS- average propensity to consume; C - the amount of consumer spending; Yd- amount of disposable income.
Saving is deferred consumption, or that part of income that is not currently consumed. They are equal to the difference between income and current consumption. Saving is a process that is associated with the provision of future production and consumer needs.
Therefore, saving is an economic process associated with investment; the part of the income that remains unused at the cost of current production and consumer needs is accumulated. Savings are made by both firms and households. Firms save to invest - to expand production and increase profits. Households save for a variety of reasons, including: motives for securing old age and passing on wealth to children, saving money to buy land, real estate, and expensive durables. Saving and investment are carried out independently of each other, by different economic entities and for different reasons.
The simplest savings function looks like:
S = -a + (1-b)(Y-T),
where S- the amount of savings in the private sector;
a- autonomous consumption; (1-b)- marginal propensity to save;
Y - income;
T-tax deductions.
marginal propensity to save- MPS) is the share of the increase in savings in any change in disposable income.
where MPS- marginal propensity to save;
Growth in savings;
Growth in disposable income.
Average propensity to save-APS) is the share of disposable income that households save.
where APS- average propensity to save;
S is the amount of savings;
Yd- amount of disposable income.
Household personal consumption FROM forms the most important component of effective demand. But if we remember that saving S is the excess of income over consumer spending, it becomes clear that in analyzing the factors that determine consumption, we are simultaneously considering the factors on which saving depends.
Describing the ratio between the volume of national income and consumption expenditures, D. Keynes noted that the level of consumption depends on the level of income. “The psychology of society is such,” wrote Keynes, “that with the growth of the aggregate real income aggregate consumption also increases, but not to the same extent as income grows ”(Keynes J. General Theory of Employment, Interest and Money. M .: Progress, 1978. P. 80). In a formalized form, consumption can be expressed by the following function:
However, income is the main determinant of not only consumption but also savings:
Studies have found that consumption moves in the same direction as income. However, consumption depends not only on income, but also on the so-called marginal propensity to consume (MPC).
It is easy to see that if C+S=Y(i.e. total income breaks down into consumption and savings), then . Then the sum of the marginal propensity to consume and the marginal propensity to save is 1:
MPC + MPS = 1;
Investments (capital investments) on a national scale determine the process of expanded reproduction. Construction of new enterprises, construction residential buildings, laying roads, and hence the creation of new jobs, depend on the process of investment, or capital formation.
The source of investment is savings. But the problem is that savings are carried out by some economic agents, while investments can be carried out by completely different economic entities.
The savings of the general population are a source of investment. But these persons do not carry out capital formation associated with a real increase in capital goods. Of course, the savings of various operating firms are also a source of investment. Here "savers" and "investor" coincide. However, the role of savings of employees who are not entrepreneurs at the same time is very significant, and the discrepancy between the processes of saving and investing, due to these reasons, can lead the economy to a state that deviates from equilibrium.
What factors affect investment? Let's note the most important of them. Firstly, the investment process depends on the expected rate of return, or profitability, of the proposed investment. If this profitability, according to the investor, is too low, then investments will be made.
Secondly, when making a decision, the investor always takes into account alternative investment opportunities, and the interest rate level will be decisive here. An investor can invest in the construction of a new plant or factory, or he can place his financial resources in a bank. If the rate of interest is higher than the expected rate of return, then investments will not be made, and vice versa, if the rate of interest is lower than the expected rate of return, entrepreneurs will carry out investment projects.
Obviously, investments are a function of the rate of interest: I = f(r) and this function is decreasing:
the higher the interest rate, the lower the level of investment.
Savings is also a function (but already increasing) of the rate of interest
It should be emphasized that such functional relationships between the level of interest and the size of investments and savings were described in the works of theorists of the classical school. In the Keynesian concept, investments, like the classics, have a function of the rate of interest, but savings, according to J. Keynes, is a function of income: S = S (Y). At this point, J. Keynes disagrees with A. Marshall, who connected the amount of savings with the value of the interest rate.
So, investment is a function of interest rate, and saving is a function of income. Thus, the modern Keynesian concept emphasizes that the dynamics of investment and savings is determined by various factors.
Investments depend on the level of taxation and the general tax climate in a given country. Excessively high levels of taxation do not encourage investment, although the question of what tax rates to consider high or low can hardly be resolved unambiguously.
The investment process reacts to the rate of inflationary depreciation of money. In conditions of galloping inflation, when costing presents significant uncertainty, the processes of real capital formation become unattractive, preference will rather be given to speculative operations.
The simplest offline investment function looks like:
i= e - dR,
where I are autonomous from total income investment costs;
e- autonomous investments determined by external economic factors (mineral reserves, etc.);
R- real interest rate;
d- empirical coefficient of investment sensitivity to interest rate dynamics.
marginal propensity to invest- the share of the increase in investment costs in any change in income:
where - change in the amount of investment;
Change in income.
Question 2. Actual and planned costs. Keynes Cross. Mechanism for achieving equilibrium output
Actual investment include as planned, so and unplanned investments. The latter represent unforeseen changes in investment in inventories (Inventory). These unplanned investments function as a leveling mechanism that balances actual savings and investment and establishes macroeconomic equilibrium.
Planned expenses represents the amount that households, firms, government and the outside world plan to spend on goods and services. Real costs differ from planned when firms are forced to make unplanned investments in inventories in the face of unexpected changes in sales levels.
Planned expenses function E = C + I + G + Xn depicted graphically as a function of consumption C - a + b (Y - T), which is "shifted" up by the amount I + G + Х p.
It is obvious that the line of planned expenses will cross the line on which the real and planned expenses are equal to each other (that is, the line Y = E), at one point BUT. The given drawing is called Keynes' cross. On the line Y = E the equality of actual investments and savings is always observed. At the point BUT, where income is equal to planned expenses, equality of planned and actual investments and savings is achieved, that is, it is established macroeconomic balance.
As a result of studying this chapter, the student should:
know
be able to
own
Another model that reflects the ratio of aggregate demand and aggregate supply is the Keynesian income-expenditure model, which is also called the Keynesian cross. It is based on the assumption of fixed prices, which is different from the AD-AS model.
Let us note the main provisions of Keynesian theory, which for several decades of the 20th century. underpinned macroeconomic policy leading countries of the world:
In the Keynesian model, aggregate demand depends on the consumption and saving functions. Unlike classical economic theory, according to which the main factor determining the dynamics of savings and investment is the interest rate, according to Keynes, both consumption and savings are income functions.
The factors that determine the dynamics of consumption and savings include:
The values of consumption and savings, provided that the state does not take special actions to change them, are relatively stable. Current consumption is less than income by the amount of savings. Therefore, in order to maintain equilibrium, it is necessary that savings have been converted into investments. It should be noted that investment activities business entities is highly variable.
We list the factors that determine the dynamics of investments:
To achieve equilibrium at full employment, according to Keynesian theory, the state must stimulate aggregate demand. Therefore, this theory is often called the theory of aggregate demand. The lack of aggregate demand is due to two main reasons.
1. The operation of the basic psychological law, according to which, as income increases, people increase the share of income that goes to savings: “The psychology of society is such that with the growth of aggregate real income, aggregate consumption increases, but not to the same extent as income grows” . To describe this pattern, indicators of the average and marginal propensity to consume and save are used.
Average propensity to consume ARS = C/Y shows what proportion of income goes to consumption.
Average propensity to save APS=S/Y characterizes the share of income that is saved.
marginal propensity to consume MRS = AC/AY shows the change in the amount of consumption depending on the change in income.
marginal propensity to save MPS = AS/AY determines the change in the amount of savings depending on the change in income.
2. A low rate of return on capital due to a high level of interest (this reduces investment demand from firms).
Under these conditions, the task of the state is to compensate with the help of public spending fall in aggregate demand.
In the Keynesian revenue-expenditure model, market equilibrium is achieved when total (planned) expenditures AE(i.e. the amount that economic entities plan to spend on the purchase of goods and services) equals total income N1(national income) - the real costs that firms carry out, and N1=DI(disposable income). N1 = DI denote Y. The expenditure stream represents aggregate demand, while the income stream represents aggregate supply. To build a model, it is necessary to write down the following equalities:
From G and exp(demand from the state and the external market) at this stage of the study, we abstract.
Consequently,
We build a coordinate system (Fig. 5.1). To determine the equilibrium point, it is necessary to draw a line at an angle of 45 °. All points on this line are in equilibrium: expenses equal income (AE = Y). To find the equilibrium point we need, we need to build a consumption line.
In Keynesian theory, as discussed in the previous chapter, the main factor determining the dynamics of consumption and savings is the amount of household disposable income. The consumption function has the form
where With a- autonomous, i.e. consumption that does not depend on changes in income (let's say it will be equal to 100 units); MRS- marginal propensity to consume (take it as 0.8); Y - disposable income (income after tax deductions).
Rice. 5.1.
Let's build a line FROM. Let's take U for zero. Then FROM will equal With a(100). Let's give Y, for example, the value of 200 units. Then FROM= 100 + + 0.8x200 = 260.
At the point of intersection of the line of consumption with the line at an angle of 45°, all income is consumed. At values of consumption above this point, part of the income goes to savings. If consumption exceeds disposable income (the area to the left of the critical point), then it is carried out partly at the expense of previous savings.
Now we need to draw a savings line and find the point where investments equal savings. Building a savings line
where Sa- offline saving, S a = -C a; MPS- marginal propensity to save.
With Y = 0, this line will pass through the point (-100), since all savings will go to consumption. Where the point of intersection of the 45° line and the consumption function is projected onto the axis OH, savings are zero (S= 0).
Now you need to find the point of intersection of the savings line with the investment line.
Investments are autonomous and induced (stimulated). Autonomous investments do not depend on the level of income, they are determined by external circumstances (mineral reserves, external markets, etc.). Investments are called induced if their value increases as GDP growth, i.e. their cause is a steady increase in the demand for goods. Induced investments, superimposed on autonomous ones, strengthen the economic growth.
The investment function has the form
where e + 1(f) - investments autonomous from total income; e - autonomous investments determined by external economic factors; /(r) - real interest rate; /(Y) - induced investments.
Investment demand is quite volatile, but in our example we will assume that the investment demand is 50 units. at all income levels. By projecting the point of intersection of the line S and lines I on a line at an angle of 45 °, we will find the equilibrium point. Straight AE = FROM+ / will also pass through this point (parallel to line C).
Determining the point of general equilibrium is necessary for predicting the development of the economy. If at the moment the actual Y less than the equilibrium, which means that firms produce less than buyers are willing to buy (AD > AS), and it can be assumed that the economy will expand. If the size of the national income exceeds the equilibrium level, i.e. buyers buy less goods than firms produce (A9 AD), inventories rise, and firms reduce production.
The equilibrium level of output fluctuates in accordance with changes in the components of total expenditure (C, I, G, exp), moreover, the increase in expenses causes a multiple increase in income.
The question arises: by what amount will national income change as a result of changes in spending?
Autonomous spending multiplier is the ratio of the change in the equilibrium volume of national production to the change in any component of autonomous spending. It shows how many times the total increase (decrease) in total income exceeds the initial increase (decrease) in autonomous expenses: 
where MULT- autonomous expenses multiplier; A Y- change in the equilibrium volume of national production; AL - change in autonomous costs, independent of the dynamics of U.
Simple multiplier formula
Consider the process of multiplication on a simple example.
Example. Let us assume that the growth of autonomous investments in society amounted to 1000 units. On the one hand, there are costs. On the other hand, income. These funds materialize in the form of labor, equipment, raw materials and other goods. The owners of these factors of production will receive an income equal to 1000 units. At MRS = 0.75 they will use 750 units for consumption and 250 units for savings. 750 units also for someone they will become expenses, and for someone they will become income (Table 5.1).
Table 5.1
Multiplication process
As a result, the initial investment of 1000 units. led to an increase in national income up to 4000 units. (with a multiplier equal to 1/0.25 = 4, 1000 4 = 4000).
Thus, the action of the multiplier, which greatly increases the consequences of changes in autonomous spending, is a factor that enhances government stimulation of aggregate demand. However, it can enhance economic instability. Therefore, the task of the government is to create a system of built-in stabilizers that dampen fluctuations in business activity.
As shown above, equality between aggregate demand and aggregate supply requires that savings and investments be equal: I=S. Since investment is a function of interest and saving is a function of income, the problem of finding their equality is very difficult.
The lack of balance between planned investment and savings can lead to two negative effects on the functioning of the economy:
An inflationary gap is a situation in the economy in which planned spending (E on the vertical axis) exceed the potential level of total output, or the planned investment exceeds the savings (/>5) corresponding to a situation of full employment, i.e. the supply of savings by the household sector lags behind the investment needs of firms (Figure 5.2).
Rice. 5.2.
In this situation, the population will direct most of its income for consumption, demand in the markets for goods and services will increase, which will increase the rate of price growth, i.e. will cause inflation. Thus, the economy will not be able to independently come to a state of equilibrium corresponding to the point Y 0 , and the inflationary gap will increase due to the multiplier effect.
To overcome the inflationary gap, it is necessary to contain aggregate demand and shift the equilibrium to the point E ( . The decrease in equilibrium total income should be
A recessionary (deflationary) gap is a situation in the economy in which planned spending is less than the potential level of aggregate output or planned investment is less than savings (/S), corresponding to a situation of full employment, i.e. the supply of savings by the household sector outstrips the investment demand of firms.
In a recessionary gap, the population will save most of the income, demand in the markets for goods and services will decrease, which will cause overproduction and lower prices, as well as a subsequent decline in production and layoffs of workers. The decline in employment and income in the economy will continue until the multiplier effect ends. Thus, the recessionary gap will gradually decrease, the economy will independently come to a state of equilibrium corresponding to the point E b however, this will be accompanied by a decline in production and unemployment.
In order to overcome the effects of the recessionary gap and ensure full employment of resources, it is necessary to stimulate aggregate demand (aggregate spending) to a point so that the equilibrium shifts to the point E 2 . The increment in equilibrium income will be equal to
To eliminate or reduce the recessionary gap, Keynes proposed:
To eliminate or reduce the inflationary gap by reducing the components of planned total spending (aggregate demand), Keynes proposed to increase taxes and reduce government spending.
It should be noted that the principle of multiplication has a two-way effect. The increase in savings by the population in conditions of part-time employment and insufficient demand gives rise to the "paradox of thrift" - it reduces savings and investment in society as a whole. Even a small reduction in investment has an inverse multiplier effect - a multiple decrease in national income is that an increase in savings at the macro level (increasing MPS) can hamper economic growth. Indeed, the Keynesian cross shows that an increase in savings and, accordingly, a reduction in consumer spending reduces the equilibrium level of GDP. The mechanism of this phenomenon is simple: a reduction in consumption will cause overstocking of warehouses with unsold goods, a reduction in the income of entrepreneurs will lead to a curtailment of investment and a reduction in production.
However, the growth of savings can also play a positive role in the economy, but only if the money market quickly and sufficiently fully turns them into investments - then there will be no general reduction in total spending, and the structure of the economy will change in the direction of increasing the rate of accumulation, which can lead to faster economic growth.
You already know the conditions of macroeconomic equilibrium. The purpose of this lecture is a more in-depth analysis of the interaction between the real sector of the economy (commodity markets) and the money market. We will consider the commodity market more broadly than usual, and we understand by it not only the markets for consumer goods and services, but also the market for investment goods. There are no fundamental differences in the functioning of these markets. The differences are due only to the demand for them: the demand for consumer goods depends mainly on income, and the demand for investment goods depends on the interest rate. The difference of this kind is superficial, representatives of the Keynesian direction propose to unite the markets of all goods into one market.
We will consider the mechanism of purchase and sale of short-term credit instruments as a money market.
The purpose of this lecture is to give an idea of the functioning of each of these markets and, more importantly, to identify the relationship between them. Previously, when considering the model AD- AS this relationship was assumed, since changes in the prices of goods and services are directly related to the demand for money. In this lecture, the commodity and money markets will appear as sectors of a single macroeconomic system.
Model IS- LM determines the equilibrium values of the interest rate i and income level Y depending on the conditions prevailing in the commodity and monetary sectors of the economy.
The main questions of the lecture:
Commodity market and the curve IS
Money market and curve LM
Condition of joint equilibrium of commodity and money markets
Interaction of commodity and money markets during changes in monetary and fiscal policy
Model IS- LM was first proposed in 1937 by an English economist John Hicks(1904-1989) as an interpretation of the macroeconomic concept of J. Keynes and therefore is a specification of the model AD- AS. Received the name "Hicks Cross". It became widespread after the publication of A. Hansen's book "Monetary Theory and Fiscal Policy" in 1949, after which it was also called Hicks-Hansen model.
Let us first turn to commodity market. As already discussed in lecture 3 "Consumption, savings, investment in the national economy", that the curve IS reflects the ratio of the interest rate i and the level of national income Y, which ensures equilibrium in the commodity market. The condition for such an equilibrium is the equality of volumes of aggregate demand and aggregate supply.
At the same time, demand (in the absence of a state and abroad) acts as the sum of demand for consumer and investment goods. Considering that investment is a negative function of the interest rate, and consumption is a positive function of real income, we write the equation of aggregate demand:
AD=C (Y) +I (i).
The aggregate supply equation is:
AS+C (Y) +
It follows that the equilibrium state in the commodity market can take place only if the following equality is observed:
I (i) =S (Y).
If in the classical model the equilibrium between investment and savings has a unique solution, then in the Kensian model a plurality of equilibrium states in commodity markets is allowed: the curve IS, which is a set of a set of equilibrium points corresponding to each pair of interest rate values i and national income Y, acts as a commodity market equilibrium curve. All curve points IS are the equilibrium points of savings and investments for different values of the interest rate and national income.
So the curve IS reflects a non-functional relationship between interest rate and income, but the set of equilibrium situations in the commodity market, which are obtained as a result of the projection of the savings function and the investment function.
Curve IS It has negative slope, since a decrease in the interest rate increases the volume of investment, and, consequently, aggregate demand, thereby increasing the equilibrium value of income.
Curve shift IS occurs when factors other than the interest rate change:
Consumer spending;
State procurements;
net taxes;
Change in investment volumes at the existing interest rate.
Let's show it on the graph. Let us assume that as a result of purposeful actions of the state, the volume of public spending increases ( G 1 >G 0). This will lead to an increase in the equilibrium output and income ( Y 1 >Y 0). At the same interest rate, the equilibrium amount of income will be greater than before. Curve IS 0 will move to the right, to the position IS 1 (Fig. 11.1).
Rice. 11.1. Curve shift IS when government spending changes
A similar effect will be observed when the investment plans of entrepreneurs change, which will lead to a shift in the investment demand curve I d, and, consequently, to a shift in the line of total expenditures, after which the curve will also shift IS. (Fig. 11.2).
Rice. 11.2. Curve shift IS when demand changes
The main goal of analyzing the economy using the IS-LM model is to combine the commodity and money markets into a single system. As a result, the market interest rate turns into an internal (endogenous) variable, and its equilibrium value reflects the dynamics economic processes occurring not only in the money market, but also in the commodity market.
Model IS-LM(investment-savings, liquidity preference-money) - a model of commodity-money equilibrium, which makes it possible to identify economic factors that determine the function of aggregate demand. The model makes it possible to find such combinations of the market interest rate R and income Y that simultaneously achieve equilibrium in the commodity and money markets.
Investment-saving (IS) curve is the equilibrium curve in the commodity market. It reflects the relationship between aggregate demand Q D and the interest rate i, while other indicators remain constant. An increase in the interest rate, affecting consumption and investment, leads to a decrease in aggregate demand. If we represent this graphically, we get a decreasing IS curve.
Each interest rate i corresponds to the equilibrium level of aggregate demand Q D with fixed values of all other variables. For example, if we take the rate i 0 , the aggregate demand will be equal to . If the interest rate falls to level i 1 , aggregate demand increases to . All other variables determine the position of the IS curve. Thus, for any given level of the interest rate, an increase in government spending leads to an increase in aggregate demand. This means the IS curve shifts to the right. An increase in expected disposable income also causes an increase in aggregate demand at a given level of interest rate and therefore shifts the IS curve to the right. Conversely, an increase in taxes or a fall in expected disposable income leads to a decrease in aggregate demand at a given interest rate, causing the IS curve to shift to the left.
Liquidity-Money Preference Curve (LM) shows the relationship between aggregate demand and interest rates under conditions of equilibrium in the money market. The LM graph has a positive slope.
Why is the LM curve rising? An increase in the interest rate reduces the demand for money, while an increase in Q D leads to an increase in demand. Consequently, the demand for money can only be equal to a given supply of money, provided that any increase in the rate of interest, which tends to lower the demand for money, is offset by an increase in aggregate demand, correspondingly increasing this demand.
To illustrate this, consider an outgoing equilibrium point in the money market, say point A with the interest rate level i 0 and output . If interest rates increase from i 0 to i 1 , then the demand for money decreases. The only way to maintain equilibrium in the money market at a higher level of interest i 1 is to achieve a level Q D greater than . With a larger Q D, the negative effect of the interest rate is offset by the positive effect of output on money demand. Thus, both A and B are equilibrium points in the money market.
Equilibrium in the money market- the situation in the money market, when the number of offered Money and the amount of money that the population and entrepreneurs want to have on hand are equal. Equilibrium in the money market is the result of the interaction of supply and demand for money.
Money Demand Curve reflects the relationship between the total amount of money that the population and firms want to have on hand at the moment, and the interest rate on ordinary non-monetary assets.
Money supply curve reflects the dependence of the money supply on the interest rate.
Equilibrium in the money market is formed under the influence of Central Bank. In the event that the Central Bank, by controlling the supply of money, intends to maintain it at a fixed level regardless of changes in the interest rate, the supply curve will have a vertical line. A graphic representation of this situation is shown in the figure.
Equilibrium in the money market in the figure is shown by the point of intersection of the supply and demand curves, and it is reached at the point A(r 0 , M 0). When the interest rate drops to r 1, the yield on bonds decreases and the need for money increases. In such a situation, economic entities will sell bonds, which will cause a decrease in demand and the market price of bonds. Sales revenue will increase. As a result of these transactions, there will be a movement of funds and gradually the balance in the money market will be restored.
With a change in the level of income (for example, an increase), the demand for money rises, and then the demand curve for money will shift to the right. In this case, the interest rate rises.
Reducing the money supply central bank will result in a shift in the money supply curve to the left and an increase in the interest rate. Establishing and maintaining equilibrium in the money market is possible only under conditions of a developed securities market and stable behavioral relationships inherent in economic entities with relative changes in certain variables (for example, interest rates).
AT economic analysis term investments means using savings to create new productive capacities and various types of real and financial assets. Part real investments include the cost of purchasing machinery and equipment, construction and installation work, changes in stocks. Investing in securities (stocks and bonds) is called financial or portfolio investments.
Real investments create new real assets, so they increase production capacity.
Financial investments redistribute property rights between economic entities to existing assets, as there is a purchase and sale of securities.
Investments are directly related to the commodity market, the purchase and sale of securities is carried out on stock market. Investment compared to saving affect the volume of effective demand directly opposite to each other, while saving reduces demand.
Y=C+I+G+NE
Investments are influenced by 2 factors:
the rate of return on invested capital;
bank interest rate.
The investor always compares the expected rate of return with the rate bank interest. When the rate is high, the investor will not use the loan or will think about how to invest these funds more efficiently. Because the interest rate- this is the price that the investor must pay for the money capital he uses, and he needs it in order to acquire real capital. Therefore, the expected rate of return must always be higher than the interest rate. As a result, investment is an inverse function of the interest rate.
Factors that affect the change in investment:
1. Interest rate.
2. Change in the level of GDP. An increase in GDP requires new investments, and the GDP indicator itself increases from investment investments.
3. Change in taxation is also a factor that affects investments.
4. Technological changes.
5. Expectations of entrepreneurs, which can be both positive and negative .
Any factor that causes an increase in the expected return on investment shifts the investment demand curve to the right. A decrease in expected return will act in the opposite direction, the curve will shift to the left.
The difference in the views of the classics and Keynesians lies in the fact that the classics, although the interest rate is formed in the market for borrowed funds, is under the direct influence of the production process. In the Keynesian model, the interest rate is determined solely in the money market. Keynesians pay more attention to investor expectations because investors can increase or decrease investments depending on the nature of their future expectations.
The nature of the impact of investment on the level of production, employment, national income requires division of investments by types. Part of the investment is used to replace fixed assets that are being retired, i.e. on their depreciation, the rest is net investment and they are divided into autonomous and induced investments.
Offline investment characterize the costs of the formation of new capital and they do not depend on changes in national income. These investments have an impact on the rise or fall of national income. Autonomous investment affects on technological progress, the expansion of foreign markets, population growth. Borrowed funds, including external economic loans, can be a source of autonomous investments.
If national income and aggregate demand do not change, then the induced investment cannot be made due to lack of funds. The dependence of the growth of induced investments on the growth of national income is expressed by the marginal propensity to invest. It is this dependence that gives the graph of induced investment a positive slope. Related to induced investment is the multiplier theory, which reflects the role of investment in the process of increasing the growth of national income and employment.
The investment multiplier is a coefficient that shows the dependence of a change in income on a change in autonomous investment. The multiplier is directly related to the marginal propensity to consume and inversely related to the marginal propensity to save.
Multiplier effect is that it can increase the growth of national income, and can reduce this growth. As a destabilizing factor, the multiplier will have the stronger effect, the greater the marginal propensity to save, and vice versa.
Recall the concept of the paradox of thrift, the essence of which is that the desire of people to save will outstrip the desire of the entrepreneur to invest. If a household saves more, then the entrepreneur, not being able to attract these funds as investment fund, which means that the entrepreneur will invest less, since credit system there will be fewer resources to finance the investment process.
The essence of the paradox of thrift is that the desire of households to save more will outstrip the desire of investors to invest more in the history of the economy. And the result will be the same, the production process will be reduced, the growth of national income will be reduced. This phenomenon is the result of the fact that with the growth of capital accumulation, the marginal efficiency of its functioning decreases, because. it becomes increasingly difficult to enter into highly profitable investments. The paradox of thrift is a consequence of the fact that, firstly, with the growth of capital accumulation, the marginal efficiency of its functioning decreases, because it will be increasingly difficult to find highly profitable capital investments. Second, as income increases, the share of saving increases, since saving is a function of income. As saving increases, total spending decreases, and as a result, entrepreneurs will cut production, and this will also affect employment. At the same time, the growth of savings occurs under the influence of economic growth, and economic growth is a consequence of an increase in spending in the economy. Autonomous spending under the influence of a multiplier leads to an increase in the volume of national income, which means an increase in savings. Saving serves as a source of additional induced investment, which in turn depends on the growth of national income. Both autonomous and induced investments enhance and accelerate the growth of the economy. This phenomenon is called accelerator effect. Accelerator(accelerator) is a factor indicating how many times new investment will increase in response to a change in national income. An increase in investment and income, and hence the propensity to save, means that the propensity to consume falls. Households will reduce their demand, and this in turn will affect the firm's sales of manufactured products. On the graph, the investment curve has a positive slope, because induced investment depends on income, we also take into account the savings curve. If the savings curve shifts upwards, this means an increase in savings and the formation of a new equilibrium point. A new equilibrium has arisen in which there is a reduction in production. The paradox of thrift shows that any attempt to increase savings leads to a decrease in investment and production. This is due to the fact that with a decrease in production, income decreases, and, consequently, savings decrease. Thus, a vicious circle is formed. Production will continue to decline until income falls so much that the amount of saving is equal to the amount of investment. Savings will grow when the economic situation deteriorates, and this again means a decrease in consumption, and as a result, producers' incomes decrease. If investment equals saving, then there is a relationship between the interest rate and the level of income.
