1、slide 0,In this chapter you will learn:,what determines the economys total output/income how the prices of the factors of production are determined how total income is distributed what determines the demand for goods and services how equilibrium in the goods market is achieved,slide 1,Outline of mod
2、el,A closed economy, market-clearing model Supply side factor markets (supply, demand, price) determination of output/income Demand side determinants of C, I, and G Equilibrium goods market loanable funds market,slide 2,Factors of production,K = capital, tools, machines, and structures used in produ
3、ction L = labor, the physical and mental efforts of workers,slide 3,The production function,denoted Y = F (K, L) shows how much output (Y ) the economy can produce from K units of capital and L units of labor. reflects the economys level of technology. exhibits constant returns to scale.,slide 4,Ret
4、urns to scale: a review,Initially Y1 = F (K1 , L1 ) Scale all inputs by the same factor z: K2 = zK1 and L2 = zL1 (If z = 1.25, then all inputs are increased by 25%) What happens to output, Y2 = F (K2 , L2 ) ? If constant returns to scale, Y2 = zY1 If increasing returns to scale, Y2 zY1 If decreasing
5、 returns to scale, Y2 G , budget surplus = (T G ) = public saving When T 0 big tax cuts: T 0 According to our model, both policies reduce national saving:,slide 48,1. The Reagan deficits, cont.,I1,2. which causes the real interest rate to rise,I2,3. which reduces the level of investment.,1. The incr
6、ease in the deficit reduces saving,slide 49,Are the data consistent with these results?,variable 1970s 1980s T G 2.2 3.9 S 19.6 17.4 r 1.1 6.3 I 19.9 19.4,TG, S, and I are expressed as a percent of GDP All figures are averages over the decade shown.,slide 50,Now you try,Draw the diagram for the loan
7、able funds model. Suppose the tax laws are altered to provide more incentives for private saving. What happens to the interest rate and investment? (Assume that T doesnt change),slide 51,Mastering the loanable funds model,2. Things that shift the investment curve certain technological innovations to
8、 take advantage of the innovation, firms must buy new investment goods tax laws that affect investment investment tax credit,slide 52,An increase in investment demand,An increase in desired investment,r1,slide 53,Saving and the interest rate,Why might saving depend on r ? How would the results of an
9、 increase in investment demand be different? Would r rise as much? Would the equilibrium value of I change?,slide 54,An increase in investment demand when saving depends on the interest rate,slide 55,Chapter summary,Total output is determined by how much capital and labor the economy has the level o
10、f technology Competitive firms hire each factor until its marginal product equals its price. If the production function has constant returns to scale, then labor income plus capital income equals total income (output).,slide 56,Chapter summary,The economys output is used for consumption (which depen
11、ds on disposable income) investment (depends on the real interest rate) government spending (exogenous) The real interest rate adjusts to equate the demand for and supply of goods and services loanable funds,slide 57,Chapter summary,A decrease in national saving causes the interest rate to rise and investment to fall. An increase in investment demand causes the interest rate to rise, but does not affect the equilibrium level of investment if the supply of loanable funds is fixed.,slide 58,
