Egwald Economics: Macroeconomics

by

Elmer G. Wiens

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Macroeconomics Theory, Testing, and Applications

Comparative Statics Of

The Classical & Keynesian AD-AS Model

 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. Reset the parameters for the aggregate production function, the labour market, consumers, producers, and the government THEN CLICK THE SUBMIT PARAMETERS BUTTON BELOW! A NEW WEBPAGE WILL DISPLAY WITH THE MARKET EQUILIBRIUM VALUES. RETURN TO THIS WEBPAGE TO CHANGE THE VALUES OF THE MODELS PARAMETERS.

The Aggregate Production Function.

 System 1: ys = 51.37 + 45 * N - 0.25 * N2 - 0.004117 * N3 System 2: ys = 51.37 + 45 * N - 0.25 * N2 - 0.004117 * N3 Range 48 - 55 40 - 48 .22 - .28 0.00411 - 0.00412

Classical (Long-Run) Economy.

 Keynesian (Short-Run) 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 = 0 + 0.3 * N + 0.01575 * 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)

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)

 Aggregate Supply. Classical 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 = 100 + 0.7 * yd - 20 * r + 0.4 * r2 Range 80 - 120 .65 - .72 18 - 22 0.4 - 0.6

Classical Economy.

 Keynesian Economy.

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 = 100 + 0.2 * y - 40 * r + 1.5 * r2 Range 80 - 120 .15 - .22 38 - 42 1.3 - 1.7

Classical Economy.

 Keynesian Economy.

Consumers and Producers.

The Money Demand Function.

 System 1: md = 75 + 0.23 * y - 35 * r + 1.5 * r2 System 2: md = 75 + 0.23 * y - 35 * r + 1.5 * r2 Range 70 - 85 .21 - .25 32 - 38 1.3 - 1.7

Classical Economy.

 Keynesian Economy.

The Government.

Revenues and the Tax Function.

 System 1: t = -   25 + 0.22 * y System 2: t = -   25 + 0.22 * y Range 20 - 30 .19 - .25

Classical Economy.

 Keynesian Economy.

 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 = 200 [170-250] billion dollars.
 Money Supply. System 1: money supply ms = 200 billion dollars. System 2: money supply ms = 220 [160-240] billion dollars.

 SATISFIED WITH THE PARAMETERS AS SET ABOVE? CLICK THE SUBMIT PARAMETERS BUTTON BELOW! A NEW WEBPAGE WILL DISPLAY WITH THE MARKET EQUILIBRIUM VALUES. RETURN TO THIS WEBPAGE TO CHANGE THE VALUES OF THE ABOVE PARAMETERS. Hold down the "Ctrl" key and click "Submit Parameters" simultaneously to pop a separate browser window.

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.