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Egwald Economics: Macroeconomics

by

Elmer G. Wiens

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Macroeconomics Theory, Testing, and Applications

AD-AS Model of the Closed Canadian Economy  |  Comparative Statics of the AD-AS Model of the Closed Canadian Economy

Comparative Statics Of

The Classical & Keynesian AD-AS Model

production functions | labour market equilibrium | aggregate supply

consumers | producers | money demand | government

product market equilibrium | money market equilibrium | aggregate demand

economy equilibrium

Closed Canadian Economy Version

Shifting the Economy's Equilibrium.

On this dynamic webpage, you can adjust the Classical & Keynesian AD-AS models' parameters and see how the values of the equilibrium macroeconomics variables and aggregates change. By changing the parameters of the labour market and the aggregate production function, you can shift the economy's aggregate supply schedule. Moreover, by changing the parameters of the product and money market, you can shift the parameters of the economy's aggregate demand schedule. The intersection of the aggregate supply and demand schedules determines the economy's equilibrium price level, and national income & product. Feeding these equilibrium values into the equations that underlie their schedules determines the level of employment, the money wage rate, the economy's wage bill, the interest rate, the demand for money, consumer expenditures, investment in capital by firms, and government revenues.

System 1 (in blue): the parameters of the macroeconomics functions reflect the average values of the macroeconomics aggregates of the Canadian economy during the years of 2001 - 2003. Government expenditures g = 210 billion dollars,and the money supply ms = 200 billion dollars. The level of employment of N = 26 billion hours per year for the wage sector of the economy is an approximation, as is the corresponding average money wage rate of W = 23.65 dollars per hour. The index of prices for products (price level, GDP deflator) is set at P = 1 (the base year for the system 1 models).

Notes: 1. The values of all macroeconomics aggregates, other than N, W, and P, are expressed in billions of dollars.

          2. With the System 1 model, the Classical and Keynesian models obtain the same results, a consequence of the harmony between the long-run and short-run economies.

System 2 (in red): you set the parameters of the macroeconomics functions to whatever values you want, within limits. Try to replicate the macroeconomics aggregates for some year. Initially, I set government expenditures g = 200, and the money supply ms = 220. These changes will shift the IS and LM curves, respectively, along with the aggregate demand schedule. To shift the aggregate supply schedule, I changed the labour supply schedule by flattening its slope, perhaps the result of an increase in the number of workers offering their services to firms.


Set the parameters for the aggregate production function, the labour market, consumers, producers, and the government to the values you want.

THEN CLICK THE SUBMIT PARAMETERS BUTTON BELOW!


The Aggregate Production Function.

System 1: ys =

51.37

  +  

45 * N

  -  

0.25 * N2

  -  

0.004117 * N3

System 2: ys =

  +  

* N

  -  

* N2

  -  

* N3

Range

48 - 55

 

40 - 48

 

.22 - .28

 

0.00411 - 0.00412

Classical (Long-Run) Economy.

Aggregate Production Function - Classical Economy

Keynesian (Short-Run) Economy.

Aggregate Production Function - Keynesian Economy


The Labour Market.

The Economy's Demand for Labour.

From the aggregate production functions the demand for labour functions are:

System 1:

wd = 45 - 0.5 * N - 0.01235 * N2

System 2:

wd = 45 - 0.5 * N - 0.01235 * N2

The Economy's Supply of Labour.

System 1: ws =

0

  +  

0.5 * N

  +  

0.01575 * N2

System 2: ws =

  +  

* N

  +  

* N2

  -  

Range

0 - 5

 

.3 - .7

 

.015 - .016

Classical Labour Market.

In the Classical (long-run) labour market, both the demand for labour and supply of labour functions shift proportionally to a change in the level of prices.

System 1:

P = 1

Wd = P * (45 - 0.5 * N - 0.01235 * N2)

Ws = P * (0 - 0.5 * N - 0.01575 * N2)

System 2:

P = 0.98

Wd = P * (45 - 0.5 * N - 0.01235 * N2)

Ws = P * (0 - 0.3 * N - 0.01575 * N2)

Classical Labour Market

Keynesian Labour Market.

In the Keynesian labour market, only the demand for labour function shifts proportionally to a change in the level of prices.

System 1:

P = 1

Wd = P * (45 - 0.5 * N - 0.01235 * N2)

Ws =      0 - 0.5 * N - 0.01575 * N2

System 2:

P = 0.99

Wd = P * (45 - 0.5 * N - 0.01235 * N2)

Ws =      0 - 0.3 * N - 0.01575 * N2)

Keynesian Labour Market


Aggregate Supply.

Classical Aggregate Supply.

Keynesian Aggregate Supply

Keynesian Aggregate Supply.

Keynesian Aggregate Supply


Consumers (Individuals).

The Consumer Expenditure Function.

Consumer expenditure is a function of disposable income, yd, and the rate of interest, r. The determination of disposable income does not specify the source of income. Consumption as function of wage income could differ from consumption as a function of income such as interest and dividend payments, and appreciation of the value of shares in companies. A more complete model would tie the labour market, bond market, and stock market to the consumption decisions of individuals.

System 1: c =

100

  +  

0.7 * yd

  -  

20 * r

  +  

0.5 * r2

System 2: c =

  +  

* yd

  -  

* r

  +  

* r2

Range

80 - 120

 

.65 - .72

 

18 - 22

 

0.4 - 0.6

Classical Economy.

Classical Economy - Consumer Expenditures as a function of y

Classical Economy - Consumer Expenditures as a function of r

Keynesian Economy.

Keynesian Economy - Consumer Expenditures as a function of y

Keynesian Economy - Consumer Expenditures as a function of r


Producers (Firms).

The Private Firms' Investment Function.

The location (parameters) of the firms' investment demand function depends on the firms' prospects for profits from additional capital. To the extent that events affecting the labour market and the economy's aggregate production function influence the firms' expectations of future profits, these events will also affect the parameters of the private firms' investment function.

System 1: i =

100

  +  

0.2 * y

  -  

40 * r

  +  

1.5 * r2

System 2: i =

  +  

* y

  -  

* r

  +  

* r2

Range

80 - 120

 

.15 - .22

 

38 - 42

 

1.3 - 1.7

Classical Economy.

Classical Economy - Producer Investment as a function of y

Classical Economy - Producer Investment as a function of r

Keynesian Economy.

Keynesian Economy - Producer Investment as a function of y

Keynesian Economy - Producer Investment as a function of r


Consumers and Producers.

The Money Demand Function.

System 1: md =

75

  +  

0.23 * y

  -  

35 * r

  +  

1.5 * r2

System 2: md =

  +  

* y

  -  

* r

  +  

* r2

Range

70 - 85

 

.21 - .25

 

32 - 38

 

1.3 - 1.7

Classical Economy.

Classical Economy - Money Demand as a function of y

Classical Economy - Money Demand as a function of r

Keynesian Economy.

Keynesian Economy - Money Demand as a function of y

Keynesian Economy - Money Demand as a function of r


The Government.

Revenues and the Tax Function.

System 1: t =

-   25

  +  

0.22 * y

System 2: t =

-  

  +  

* y

Range

20 - 30

 

.19 - .25

 

Classical Economy.

Classical Economy - Government Revenues

Keynesian Economy.

Keynesian Economy - Government Revenues


Classical & Keynesian Disposable Income

Disposable national income, yd equals national income less taxes:

System 1:

yd = y - (-25 + 0.22*y) = 25 + 0.78*y

System 2:

yd = y - (-25 + 0.22*y) = 25 + 0.78*y


Expenditures.

System 1: government expenditures g = 210 billion dollars.

System 2: government expenditures g = [170-250] billion dollars.

Money Supply.

System 1: money supply ms = 200 billion dollars.

System 2: money supply ms = [160-240] billion dollars.



The Product (Commodity) Market Equilibrium.

The Classical Product Market Equilbium.

The Classical Product Market


The Keynesian Product Market Equilibrium.

The Keynesian Product Market


The IS Curve.

The c + i + g curve as a function of r and y is:

System 1: c + i + g = 427.5 + 0.746*y - 60*r + 2*r2

System 2: c + i + g = 417.5 + 0.746*y - 60*r + 1.9*r2

The Classical & Keynesian IS Curve.

System 1: y = 1683.07 - 236.22 * r + 7.87 * r2

System 2: y = 1643.7 - 236.22 * r + 7.48 * r2

The IS Curve


The Money Market Equilibrium.

Classical Money Market Equilibrium.

The Classical Money Market

The Classical LM(P) Curve.

The LM(P) curve, y as a function of the rate of interest r, is:

System 1: y = 543.48 + 152.17 * r - 6.52 * r2

System 2: y = 648.55 + 152.17 * r - 6.52 * r2

The Classical LM(P) Curve

The Classical IS-LM(P) Demand Equilibrium.

The Classical IS-LM(P) Demand Equilibrium


Keynesian Money Market Equilibrium.

The Keynesian Money Market

The Keynesian LM(P) Curve.

The LM(P) curve, y as a function of the rate of interest r, is:

System 1: y = 543.48 + 152.17 * r - 6.52 * r2

System 2: y = 644.28 + 152.17 * r - 6.52 * r2

The Keynesian LM(P) Curve


The Keynesian IS-LM(P) Demand Equilibrium.

The Keynesian IS-LM(P) Demand Equilibrium


Aggregate Demand.

Classical & Keynesian Economy.

Aggregate Demand


Economy Equilibrium: Aggregate Demand and Supply.

Classical Economy Equilibrium.

Keynesian Economy Equilibrium

Keynesian Economy Equilibrium.

Keynesian Economy Equilibrium


Economy Equilibrium Macroeconomic Variables and Aggregates

 

System 1

System 2

  

Classical

Keynesian

National Income / Output: y

980.02

1030

1027.33

Level of Employment: N

26

28.24

28.11

Level of Prices: P

1

0.98

0.99

Money Wage Rate: W

23.65

21.03

21.18

Wage Bill: WB

614.9

593.9

595.5

Rate of Interest: r

3.35

2.86

2.87

Disposable National Income: yd

789.42

828.4

826.31

Consumer Expenditures: c

591.21

626.02

624.31

Firm Investments: i

178.84

203.98

203.01

Government Expenditures: g

210

200

200

Government Revenue: t

190.6

201.6

201.01

Money Supply: ms

200

220

220

Consumer Savings: s = yd - c

198.21

202.38

202


Works Cited and Consulted

  • Akerlof, George A. "The Missing Motivation in Macroeconomics." Presidential Address, AEA, January, 2007.
  • Branson, William H. and James M. Litvack. Macroeconomics. New York: Harper, 1976.
  • Crouch, Robert L. Macroeconomics. New York: Harcourt, 1972.
  • Darby, Michael. Macroeconomics. New York: McGraw-Hill, 1976.
  • Dornbusch, Rudiger. Open Economy Macroeconomics. New York: Basic, 1980.
  • Dornbusch, Rudiger, Stanley Fischer, and Gordon Sparks. Macroeconomics, 1st. Canadian Edition. Toronto: McGraw-Hill, 1982.
  • Laidler, David E. W. The Demand For Money: Theories and Evidence. Scranton, Penn.: International Textbook, 1969.
  • Parkin, Michael, and Robin Bade. Macroeconomics. 4th ed. Toronto: Addison Wesley, 2000.
 
   

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