Unemployment is the result of a short-lived adjustment period in which wages and prices decline or people choose not to work, according to the classical view.
His book challenged classical economists by turning Say's Law upside down and establishing macroeconomics as a separate field of economics.
The chapter on GDP states that consumption is the largest single spend for goods and aggregate expenditures.
The amount can be drawn down from savings accounts, personal stocks, and bonds.
Savings can be in a variety of forms, such as funds in a passbook.
Holding all other factors constant, the more wealth households accumulate, the more they spend at any current level of disposable income, causing the consumption function to shift upward.
The nation's consumption function can be changed by changes in prices of assets and wealth.
Families spend less at any level of disposable income when the value of their fi nancial wealth falls.
Keynes says that changes in the private sector components of aggregate expenditures are the major cause of the business cycle.
Imagine a consulting firm buying a new computer program for $1,000 that will be obsolete in a year, and using a micro example to illustrate the investment decision-making process.
The fi rm's investment demand curve can be seen in the changes in the interest rate.
Government spending and tax policies, world events, population growth, and stock market conditions are some of the factors that make forecasting diffi cult.
Less costly ways of production includerobots, personal computers, fax machines, cellular phones, the Internet, and similar new inventions.
The outlook for sales growth is positive, as the plants may be operating at a high rate of capacity utilization.
The debate over whether the 1929 stock market crash was caused by cago, who was attending the meet ate aftermath, or just a symptom, has continued.
The moment the plane hit, the forecast became obso tacks.
Americans feel poorer because of their income because of the plunge in private investment on September 17, 2001.
Everyone discussed in more detail in the Average gradually rose toward its fears of a steep downhill ride on the You're The Economist.
Adding aggregate spending components and explaining macro equilibrium will be added to the Keynesian Cross model in the next chapter.
It is impossible to continue the depression because it is easier to identify the break-even or eliminate shortages.
If you become wealthier, you will spend your entire income, a higher marginal propensity to save and conse and perhaps even dis save, just to afford necessities.
An increase in business taxes is shown in Exhibit 12.
During the Great Depression, there were powerful ideas offered by the link nomic theory.
Keynesian theory states that during the Great Depression, plants had enough capacity to absorb a huge increase in aggregate spending of $1.
Keynesian economics ignores price level changes cure for an economy in deep recession, instead focusing on how full-employment out ment policies that expand aggregate demand, raise put can be achieved by changes in aggregate national output, create jobs, and restore full expenditures.
Like investment and government spending, exports and imports can be treated as independent expenditures unaffected by a nation's domestic level of real GDP.
Firms respond to the happy state of affairs by hiring more workers, expanding output and generating more income.
The model doesn't show that empty shelves and warehouses cause the economy to create jobs and reduce the unemployment rate.
Businesses will reduce employment and production will fall until the economy reaches $5 trillion.
The crux of Keynesian macroeconomic policy depends on a change in aggregate expenditures, which is multiplied or amplifi ed by rounds of spending.
The graphical presentation of the spending multiplier process should make the basic mechanics clear to you, but we need to be more specifi c and derive a formula.
The spending multiplier effect is based on an infinite geometric series.
The good news is that macroeconomic policy can change the economy's performance by a relatively small change in expenditures.
The level of investment should be assumed to be rounds of the spending multiplier effect.
In this chapter, you will use aggregate demand ment rate soared and remained high during the and supply analysis to study the business cycle.
The basic tools for organizing on the classical model that rejects the federal's thinking about the macro economy are provided by the opposition view today.
The impact on total dollars from their wallet and checking accounts in order to purchase goods and spending services.
Household borrowing is discouraged due to rising interest rates.
Higher interest rates translate into a lower GDP if the price level increases.
A leftward shift in the aggregate demand curve may be caused by a decrease in government spending.
The aggregate supply curve shows the total dollar amount of goods and services produced in an economy at various price levels.
Keynes argued in the book that during a depression or recession, prices and wages can affect unemployment.
Government should intervene and actively manage aggregate demand to avoid a depression.
Businesses are prevented from lowering wage rates by union contracts.
Exhibit 5 shows why classical economists believe a market economy can self-correct without government intervention.
Business temporarily cut back on production and reduced the price level from 300 to 200 because of unsold inventories.
The surplus condition in the factor markets means that some workers who are willing to work are laid off and replaced by others who are willing to work less.
There is no upward or downward pressure for the macroeconomic equilibrium to change because the GDP value is bought and sold at 200.
The economy shown in Exhibit 7 has a negative GDP gap of $8 trillion.
Businesses don't underestimate the real GDP demanded at the price level.
In this case, management will lay off workers, cut back on production, and reduce prices if there are too many unsold goods on the shelves.
In the Keynesian range, substantial production capacity can be put to work at existing prices.
Wage demands are more diffi cult to reject when the economy is doing well.
Inflation is caused by increases in aggregate demand rather than real GDP when the economy reaches full employment.
Resource prices, technological change, taxes, subsidies, and regulations are some of the nonprice-level factors affecting aggregate supply.
Businesses seek to increase production at any price level with lower labor costs.
Maybe there is war in the Persian Gulf or the Organization of Petroleum Exporting Countries disrupting supplies of oil and higher energy.
Businesses decrease their output at any price level in response to higher production costs.
Changes in the supply of money in the economy can affect the aggregate demand curve and macroeconomic performance.
Exhibit 12(a) shows how a leftward shift in the supply curve can cause problems.
The reason for the oil embargo was due to the U.S. support of Israel in its war with the Arabs.
Aggregate demand and a rise in the general supply analysis can be used to explain demand pull.
In 1965, when the unemployment rate was close to the natural rate of un from an excess of employment, real government spending went up without a tax increase.
Keynes increased its endowment tenfold and used the aggregate educated atCambridge andEton over the data.
A rightward shift of the aggregate demand curve can cause GDP and employment to rise.
Each dollar buys only the effect of the quantity of goods and services at the full-employment GDP when the aggregate supply curve is vertical.
Once the economy reaches full-employment, the real GDP demanded at the prevailing output in the classical range is increased.
The theory that the economy will automatically increase in price and decrease in adjust to achieve full employment was popular prior to the Great Depression.
This occurs because fi rms increase work hours and train and hire homemakers, retirees, and unemployed workers who were not profi table at or below full-employment real GDP.
The upward-sloping shape of the short-run aggregate supply curve is the result of fixed nominal wages and salaries.
In the short term, workers' nominal incomes remain the same with contracts negotiated based on an expected price level of 200.
Greater quantities of plants, production lines, computers, and other forms of capital increase potential real GDP.
Exhibit A-5 uses basic aggregate demand and supply analysis to explain a hypothetical price level between 2005 and 2015.
The amount of your paycheck can be affected by tax policies and real GDP output.
President George W. Bush signed into law tax cuts in order to help the economy during the recession.
There are three basic types of discretionary fi scal policies listed in Exhibit 1 and the corresponding ways in which the government can influence them.
The nation's spending, employment, and table show that the government can increase aggregate demand by price level.
One approach the president and Congress can follow is provided by classical theory.
If members of Congress are willing to increase government spending to boost employment now, that will be a good thing.
The administration believes that this measure will provide a 2,400 billion boost to GDP this year because consumers will spend their extra cash on HD TVs and other items.
The government should cut taxes to increase aggregate demand and restore full employment.
Exhibit 5 shows that a tax reduction adds less to aggregate demand than an increase in government spending.
Mark Zandi, chief economist for Moody's Economy.com, gave estimates for the one-year multiplier effect for several fi scal policy options.
Keynesian expansionary fi scal policy, born of the Great Depression, has been presented as the cure for an economic downturn.
If Congress and the president decided to use fiscal policy to reduce the CPI from 220 to 215, they would fear the wrath of voters.
Although a fall in consumption, investment, or net exports might do the job, Congress and the president prefer cutting government spending.
Government spending for unemployment compensation, welfare, and other transfer payments decreases when the economy expands.
Government expenditures fall to $1 trillion because fewer people are collecting transfer payments.
When the economy expands, the fall in government spending for transfer payments and the rise in taxes result in a budget surplus.
As the budget surplus grows, people send more money to Washington, which affects the growth of real GDP.
When the economy contracts, the rise in government spending for transfer payments and the fall in the level of taxes yield a budget.
People receive more money from Washington as the budget grows, which slows the decrease in real GDP.
When real GDP is above 14 trillion, a federal budget surplus increases automatically.
The focus so far has been on fi scal policy that affects the macro economy solely through the impact of government spending and taxation on aggregate demand.
The U.S. economy in the 1970s had high unemployment and high government policies.
Increasing the ability of the U.S. economy to generate long-term advances in the stan aggregate supply aroused concern.
The supply-siders have a better theoretical case than the demand-siders when unemployment is a concern.
For supply-side economics to be effective, the government must implement policies that increase the total output that fi rms produce at each price level.
The Reagan administration wanted to increase the aggregate supply of goods and services at any price level by reducing tax rates on wages and profi ts.
Businesses have an extra incentive to invest and produce more at each price level, so the aggregate supply curve would shift rightward.
The Keynesian increase in the aggregate demand curve and a higher price level will occur if there is no reduction in government spending.
Lower tax rates would shift the aggregate demand curve to the right, expanding the economy and creating more jobs.
The theory behind fiscal was presented by Steve Forbes in the previ Republican presidential nomination.
President Bill Clinton said cutting taxes was not a good idea because it was placed in perspective.
The trend in federal taxes and expenditures should be the first thing you check for if you want to ensure the integrity of Social Security.
During World War II, total government expenditures skyrocketed as a per centage of GDP, but then took a sharp plunge, but not to previous peacetime levels.
The federal government spent the same amount of money on debt as it did on international affairs, veterans' benefi ts, and agriculture.
The Swedes, French, Italians, Germans, Canadians, Spanish, and British pay more in taxes than Americans.
It would be foolish to ask families receiving food stamps to pay all the taxes they need to.
The personal exemption and standard deduction are adjusted each year so that taxpayers don't end up in higher tax brackets.
The Jones family will spend less of their income on food, clothing, and other purchases because of a sales tax.
Ms. Rich can still live a comfortable life after paying her taxes.
Congress had the power to impose taxes on income when the states ratifi ed the Sixteenth Amendment to the Constitution in 1913.
The law doubled the personal exemption allowed for taxpayers and their dependents, removing millions of households from the tax rolls.
Buchanan and other public choice theorists raise the issue of how well a democratic society can make economic decisions.
The basic principle of public choice theory is that politicians follow their own self-interest and try to maximize their reelection chances rather than promoting the best interests of society.
Like theVAT that is popular in Europe, loopholes would be found in many other countries.
Taxpayers would save if VAT was based on a percentage and not the betax system.
The problem of federal government income people getting the ment is already collecting the biggest tax break in the country.
The pursuit of selfinterest is the motivation for consumers and producers.
Individuals within any government agency or institution will act in the same way as their private-sector counterparts, giving priority to improving their own earnings, working conditions, and status, rather than being altruistic.
Spending programs are popular because it is easy to organize special-interest constituencies and lobby politicians to spread the cost.
The small cost of each pet program per taxpayer means there is little reward for a single voter to learn the details of the many special-interest legislation proposals.
Politicians tend to favor immediate benefi ts, with future generations paying most of the costs.
The activity of a profi t-maximizing fi rm follows has increased since the end of World War II.
Abraham Lincoln's 1864 Annual Message to Congress was more about paying off the national debt than it was about the Civil War.
In 2009, federal government borrowing to revenues flowed into the U.S. Treasury from import cover its budget deficits had accumulated a tariffs and the sale of public land.
The public in the late 1990s and early 2000s watched the federal budget sway between defi cits and surpluses, like a high-wire performer swinging one way and then another.
When the government spends more than it collects in taxes, a federal budget defi cit occurs.
The budget battle on Capitol Hill involves political decisions on how much the government will spend and where the money will come from.
The budget process is complicated by world events, special-interest groups, volatile public opinion, and political ambitions.
Congress passes a budget resolution that sets targets for spending, taxes, and the defi cit.
After receiving advice from the president, the OMB compiles all the proposals into a budget recommendation.
Nine months before the new fi scal year begins, the president submits his proposed budget to Congress.
Congressional committees and subcommittees prepare spending and tax law bills while Congress and the president debate.
A budget defi cit occurs when federal expenditures exceed tax revenues.
The Social Security trust fund is used to lend money to the federal government for spending.
The spending caps combined with tax increases and a growing high-employment economy made the federal budget surpluses in the late 1990s.
The automatic stabilizers explained in the previous chapter that during a recession government expenditures rise for transfer payments when people lose jobs and tax revenues decline from individuals and companies making less money.
Federal government spending increased relative to tax collections as a result of the Wall Street bail out.
The rise in the defi cit to 5 percent of GDP was caused by the combination of a recession, a military spending build up, and a cut in income taxes.
Since World War II, the federal defi cit has been at a record high of 9.9% of GDP.
The surplus should be saved, spent, and projected by the Reserve Chairman Alan Greenspan to be devoted to tax cuts.
Greenspan suggested that the Senate Budget Committee increase or decrease the infrastructure, research and development if they were to testify before a tax cut.
The government shut down for three days during the Columbus Day weekend in 1990 after Congress rejected President George H. W. Bush's spending plan.
In response, Greece cut civil service salaries, froze pensions, and enacted new taxes on a long list of items.
The national debt is rising at a rapid rate because of the amount of federal defi cits in the United States.
The debt increases rapidly during downturns like the 1930s, 1974-1975, 1981-1982, 1990-1991, 2001 and 2007 because of lower tax collections and more spending for unemployment compensation and welfare.
After 1980, the federal debt as a percentage of GDP increased, and has risen to a historic high of 83 percent, which is back to its 1951 level.
The national debt as a percentage of GDP is lower today than it was at the end of World War II.
The U.S. Treasury has the authority to collect taxes, print money, or refi nance its obligations at the maturity date of a government security.
Suppose the government doesn't raise taxes or cause debt if it just prints money.
When a $1 million government bond comes due, the U.S. Treasury can roll over the debt.
The fear is that interest payments to the national debt will eat into the federal government's budget pie.
Future generations will pay more of their tax dollars to the government's creditor and have less to spend on public programs.
The "we owe it to ourselves" argument is weakened if foreign governments, banks, corporations, and individual investors hold part of the national debt.
If the U.S. Treasury relied on domestic savings to purchase federal government securities, the interest rates would be higher.
The aggregate demand curve shifts rightward when the interest rate is lower.
Exhibit 2 of Chapter 2 shows how people were forced to trade off consumer goods production for Copyright 2010 Cengage Learning.
People were forced to give up their private consumption of houses, cars, refrigerators, and so on because of the huge amount of resources diverted to World War II.
If the federal government spends deficits financed by and borrows rather than collecting taxes, it will use the money to fund new health care programs.
Future generations will have a smaller productive capacity if federal borrowing crowds out private investment.
State and local governments run budget surpluses when the cost of long- lasting assets is not so large.
The capital budget believes the public's $5,000 to take a zero is real growth in the national debt.
Private businesses and state and local govern rules argue that the controversial ex apartment is the reason for changing the accounting move out of your rented apartment.
The aggregate demand curve can be shifted by increasing spending or cutting expectations.
There spending for highways, dams, universities is a large amount of external national debt that is offset by the decline in transfers purchasing power to foreigners.
Suppose you are the economic policy adviser to the president and you are asked what should be done to eliminate the federal government during the Great Depression.
The horizontal segment of the aggregate supply curve shows that GDP can only increase by affecting the economy's price level.
The following chapter compares different macroeconomic theories and concludes with a discussion of monetary policy in the Great Depression and the current financial crisis.
Imagine if you learned how variations in the stock of money in the along the beach affect total spending, unemployment, and find a beautiful bamboo hut for sale.
Farmer Brown is trying to find Mr. Jones so he can trade for wheat.
If this planet is fortunate enough to have economists, they would explain that anything, regardless of its value, can serve as money.
This explains why precious metals, unit of skins, wampum, and cigarettes have all been used as money.
More and more people are avoiding using checks, paper currency, and coins by using various Internetbased and other systems to transfer funds.
On the small island of Yap, life is easy, but Stone disks may change ownership during the currency is hard as a rock.
Each has a hole in the canoes that they use to bring the huge stones over the sea in the center so they can be slipped onto the trunk of a fallen ancient times tree.
They in grocery stores and gas stations, but reliance on are in short supply, pose formidable stone money.
Counterfeiters were able to win their battle with the U.S. Secret Service thanks to advances in computer graphics, scanning, and color copying.
An item's ability to serve as money does not depend on its own market value or the backing of precious metal.
The money defi nition measures purchasing power immediately available to the public without borrowing.
The terms prevent a president from stacking the system of the United the board with members who favor the incumbent party's political interests.
The buying and selling of U.S. is directed by the president of the New York Federal Reserve Bank and seven other members of the Board of committee.
The Fed has three policy tools that it can use to change the stock of money in the banking system.
Changes in the money supply can affect total spending, GDP, employment, and the price level.
Most tourists don't go to view a Federal Reserve bank's vault, but I strongly recommend this tour.
Commercial banks and other fi nancial institutions can pay unrestricted interest on checking accounts.
Major corporations can offer traditional banking services, and federal credit unions can make residential real estate loans.
Before this act, S&Ls paid a slightly higher interest rate on passbook savings deposits than commercial banks.
The measure lifted Depressionera barriers and allowed banks, securities, and insurance companies to sell each other's products.
It is estimated that Lincoln's relatives earned millions of dollars when regulaKeating hired a staff to carry out his wishes.
Keating took Lincoln prison for swindling small inves reforms of deposit insurance out of sound home mortgage loans tors.
With a 10-year state prison example, the limit on insured hotels is $500,000 per room sentence.
Keating was ordered by the judge to pay $122.4 million in reduced or eliminated.
The savings and loan crises of the 1980s and early 1990s were one of the worst in the United States.
Money market mutual fund shares are less secure than converting an asset directly into currency.
The ability of banks to amplify checkable depos chapter is only partly true because it involves generating a spiral of new loans and money which is used for new spending in the economy.
The goldsmiths were very conservative and issued receipts equal to the amount of gold in their vaults.
The T-account of Typical Bank in Balance Sheet 1 only lists major categories and doesn't include details.
Brad Rich, one of Best National Bank's depositors, takes $100,000 in cash from under his mattress and deposits it into his checking account.
The incentive for the bank offi cials to not let $90,000 from a new deposit sit in excess reserves is provided by the profi t motive.
Suppose, then, thatConnie Jones walks in with a big smile, asking for a $90,000 loan to purchase equipment for her health spa.
Best National Bank's liabilities are reduced by $90,000 as shown in Balance Sheet 4.
Better Health Spa made a $90,000 donation to the Yazoo National.
An initial deposit of $100,000 in Best National Bank can create a $900,000 increase in the money supply.
Many people lose confi dence in the banking system when there is a fi nancial crisis.
The Fed's main function is to control and change the money supply using three policy tools or levers, according to the previous chapter.
The Fed can change the money supply by using these three tools.
You've seen how decisions of the public--including those of Brad Rich, Connie Jones, and Better Health Spa--went through the banking system and increased M1.
The 90-day U.S. Treasury bills are called T-bills.
The initial $100,000 checkable deposit and excess reserves for loans have been created by the Fed.
The public's expectations about the economy can be affected by changes in the discount rate.
The Monetary Control Act of 1980 allows the Fed to set reserve requirements for all banks and savings and loan associations.
The Fed wants to restrain the money supply so that it won't hurt the economy.
The Fed's most economists, bankers, and other powerful monetary policy sources have views with the Federal Open Market conditions.
Board members express system when the required reserve ratio is 10 percent after formation of economic staff.
Changing the required reserve ratio is considered a heavy-handed approach that is rarely used.
The Fed bought federal government securities in the fall of 1990 in order to inject new reserves into the banking system.
The Fed pays the most for the Directive to be voted on when measuring the consensus.
It reached a record low of zero with the chair voting and the rates in general are low.
The Fed responded to the 2001 recession by using open market purchases of securities to increase the money supply.
The Fed reduced its reserve requirement and expanded its scope in response to the loss of credit in the fi nancial markets.
The Fed used Depression-era emergency powers to become a "lender of last resort" source of short-term loans for a wide range of institutions other than banks.
The public's decision to hold cash and the willingness of banks to make loans affect the total expansion from an initial change in excess reserves.
When the business cycle is in an upturn, banks are willing to use their excess reserves to make loans.
In the popular version of the story, the hare is much faster, but goofs off along the way, and eventually loses to the tortoise at the fi nish line.
The impact on this bank's checkable deposits can be supported by $10 assets and liabilities.
The dealer who deposits the Fed's check in the money supply buys $500,000 in T-bills from securities of the monetary policies.
During World War II, he planned to change the demand for money so that it would cause counterfeit British currency and drop it from terest rates.
The second half of the chapter shows the opposing time when people can exchange goods and view the monetarists.
You're The Economists will allow you to analyze the Keynesian and monetar supply of money and how they interact to deter ist views applied to the current financial crisis and mine the rate of interest.
Unexpected repair expenses or lower-than- anticipated cash receipts can affect the stock of money.
The $500 billion read along the horizontal axis in Exhibit 1 is held to make purchases and handle unforeseen events.
There is no upward or downward pressure on the interest rate because people want to hold exactly the amount of money in circulation.
The Fed's expansionary monetary policy will create a $500 billion surplus of money at a 12 percent interest rate.
Investment spending, aggregate demand, and real GDP are all affected by interest rates.
Imagine a consulting firm buying a new computer program for $1,000 that will be obsolete in a year, and using a micro example to illustrate the investment decision-making process.
Keynesians believe monetary policy works only indirectly, causing changes in the interest rate before affecting aggregate demand and prices.
When Mr. Zeno puts your money in his pocket, he buys an economics book and learns how Keynes views final goods and ians and monetarists differ.
The relationship does not exist for all years, but the evidence supports the idea that higher growth in the money supply leads to increases in the rate of inflation.
Changes in the money supply directly determine economic performance instead of working through the rate of interest.
If the Fed picks a rate and sticks to it, there will be short periods of unemployment.
The evidence points to the fact that during the periods of 1960- 1981 and 1993-2000 velocity rose along a predictable or steady annual rate.
Keynesians are willing to accept policy errors in order to maintain Fed flexibility to change the money supply in order to affect interest rates, aggregate demand, and the economy.
Banks lent billions of dolhousing market bubble when he home's value with zero down, using risky stro.
"How do we know when the vision shows advertised the idea pay the bank when the payments rational exuberance has caused interest rates to rise?"
asked the home buyers.
The Fed's response to "teaser" interest rates caused a banking and debt crisis in 2001.