Economics 302 Intermediate Macroeconomic Theory and Policy

(Fall 2010)

Instructor: Prof. Menzie Chinn

Lecture 4 Monday September 20 Monday, 20, 2010

Outline
Overview/Recap Definitions M lti li Multipliers What about taxes, transfers? Imports, Exports

Overview
We want to build up a general model where supply and demand determine output and (over time) price level output, level. To begin with, we simplify by: - Holding H ldi th the price i l level l constant t t( (so demand completely determines output) - Ignore the financial side of the economy

Recap: the Keynesian Model

Definitions
Parameters: relate the behavior of two variables Endogenous variables: variables determined within the system of equations Exogenous E variables: i bl variables i bl determined outside the system of equations ti Autonomous spending: a0 , IN0 , GO0 , g0

Fiscal Policy (Lump Sum Tax Cut)

Multipliers
Y0 = [a0 bTA0 + IN 0 + GO0 + g 0 ] Y = [a bTA + IN + GO + g ] Y = GO Y = (bTA)
==> Y / GO = ==>Y / TA = b

Multipliers (II)
A Y = t + [ A0 ]t t t
1 (b) = (1) t 1 b(1 t ) + m
2

Y = [ A0 ]t = b( 2 )[ A0 ]t t
Y = b( 2 )[ A0 ] t

Fiscal Policy Policy, Tax Rate Cut

(corrected 9/15)

Estimates of Multipliers

Import Function
A more realistic net exports function imports?
16,000 14,000 12,000 10 000 10,000 8,000 6,000 4 000 4,000 75 80 85 90 95 00 05 10 GDP (Ch.2005$) [left axis] Imports (Ch.2005$) [right axis]

X = g 0 mY
2,400 2,000 1,600 1 200 1,200 800 400 0

Source: BEA, 10Q2 BEA 2nd release

Export Function?
120 110 100 90 80 70 60 50 40 30 75 80 85 90 95 00 05 10 Rest-of-World GDP Index [left axis] 2,000 1 800 1,800 1,600 1 400 1,400 1,200 1,000 1 000 Exports (Ch.2005$) 800 [right axis] 600 400 200

Source: BEA, 10Q2 GDP 2nd release; Federal Reserve Board; Economist

Parameter E ti t for Estimates f the Multiplier p

b(1-t) = 0.73 m = 0.23

1 1 b(1 t ) + m 1 = 1 0.73 + 0.23 =2