1
00:00:17,239 --> 00:00:22,839
Okay, let's uh let's start. Um

2
00:00:21,399 --> 00:00:26,079
So, what you have there in that picture

3
00:00:22,839 --> 00:00:27,920
is uh is the result of a survey to a

4
00:00:26,079 --> 00:00:30,119
bunch of economists

5
00:00:27,920 --> 00:00:31,640
on which are asked to assess the

6
00:00:30,120 --> 00:00:34,920
probability that there is a recession

7
00:00:31,640 --> 00:00:37,240
within the next 12 months.

8
00:00:34,920 --> 00:00:38,719
Recession means essentially a decline in

9
00:00:37,240 --> 00:00:41,560
aggregate output.

10
00:00:38,719 --> 00:00:43,600
Um and well, the first thing to notice

11
00:00:41,560 --> 00:00:45,880
here is that you know, it's not very

12
00:00:43,600 --> 00:00:48,200
good news. There is a very high chances

13
00:00:45,880 --> 00:00:50,760
at at least according to

14
00:00:48,200 --> 00:00:53,160
this expert that that the US enters a

15
00:00:50,759 --> 00:00:55,479
recession within the next 12 months or

16
00:00:53,159 --> 00:00:57,000
so. Pretty high probability.

17
00:00:55,479 --> 00:00:59,039
You can see that that number typically

18
00:00:57,000 --> 00:01:01,759
is very very low and it goes very high

19
00:00:59,039 --> 00:01:03,679
sort of real next to recessions.

20
00:01:01,759 --> 00:01:05,879
And now we're not in a recession, but

21
00:01:03,679 --> 00:01:08,200
but there is a sort of very high per se

22
00:01:05,879 --> 00:01:10,560
probability that we may

23
00:01:08,200 --> 00:01:12,920
go into recession in the near future.

24
00:01:10,560 --> 00:01:15,120
So, how is that these people come up

25
00:01:12,920 --> 00:01:17,760
with this forecast? Well,

26
00:01:15,120 --> 00:01:20,560
at some level, either explicitly or

27
00:01:17,760 --> 00:01:21,480
implicitly, they must have some model

28
00:01:20,560 --> 00:01:23,320
uh

29
00:01:21,480 --> 00:01:24,960
that of the determination of equilibrium

30
00:01:23,319 --> 00:01:26,479
output. I mean, you know, they need to

31
00:01:24,959 --> 00:01:28,079
understand

32
00:01:26,480 --> 00:01:29,719
they need to see certain things that

33
00:01:28,079 --> 00:01:32,719
suggest

34
00:01:29,719 --> 00:01:34,079
when you go through a model that output

35
00:01:32,719 --> 00:01:36,000
will decline.

36
00:01:34,079 --> 00:01:38,200
Um so, that's what we're going to start

37
00:01:36,000 --> 00:01:40,040
doing today. And

38
00:01:38,200 --> 00:01:40,840
and in fact, that's what we're going to

39
00:01:40,040 --> 00:01:42,480
do

40
00:01:40,840 --> 00:01:46,079
throughout this course. It's we're going

41
00:01:42,480 --> 00:01:49,359
to try to find ever more complex perhaps

42
00:01:46,079 --> 00:01:51,599
or or richer models of

43
00:01:49,359 --> 00:01:53,319
uh output determination, aggregate

44
00:01:51,599 --> 00:01:55,359
output determination. So, that's

45
00:01:53,319 --> 00:01:56,079
essentially what this course is about.

46
00:01:55,359 --> 00:01:58,239
Uh

47
00:01:56,079 --> 00:01:59,239
and so, and understanding sort of we're

48
00:01:58,239 --> 00:02:01,559
going to try to understand what is it

49
00:01:59,239 --> 00:02:03,479
that drives that equilibrium output and

50
00:02:01,560 --> 00:02:05,200
how is it that we get to one specific

51
00:02:03,480 --> 00:02:06,400
level of output.

52
00:02:05,200 --> 00:02:08,520
That's what it means to find the

53
00:02:06,400 --> 00:02:10,360
equilibrium level of output.

54
00:02:08,520 --> 00:02:11,920
Um and we're going to do it sort of in

55
00:02:10,360 --> 00:02:13,760
three stages.

56
00:02:11,919 --> 00:02:15,559
In the first part of the course, that is

57
00:02:13,759 --> 00:02:17,560
up to quiz one,

58
00:02:15,560 --> 00:02:19,879
uh we're going to focus on on on the

59
00:02:17,560 --> 00:02:22,479
very short run. How output is determined

60
00:02:19,879 --> 00:02:23,560
in the very short run, say within a year

61
00:02:22,479 --> 00:02:24,519
or so.

62
00:02:23,560 --> 00:02:25,159
Uh

63
00:02:24,520 --> 00:02:27,280
uh

64
00:02:25,159 --> 00:02:29,359
well, a little more even, but but that

65
00:02:27,280 --> 00:02:31,120
type of frame time frame.

66
00:02:29,360 --> 00:02:34,000
Then we're going to focus on the medium

67
00:02:31,120 --> 00:02:35,599
run. That's sort of is

68
00:02:34,000 --> 00:02:38,120
at the beginning of

69
00:02:35,599 --> 00:02:38,840
of of the second part of the course.

70
00:02:38,120 --> 00:02:40,480
Uh

71
00:02:38,840 --> 00:02:41,920
and by the medium run, simply we're

72
00:02:40,479 --> 00:02:44,000
going to mean by the time in which

73
00:02:41,919 --> 00:02:47,159
prices begin to adjust sufficiently.

74
00:02:44,000 --> 00:02:49,479
Okay? Before that, is most of the action

75
00:02:47,159 --> 00:02:52,039
happens in in quantities. There is

76
00:02:49,479 --> 00:02:53,599
little movement in goods prices. There's

77
00:02:52,039 --> 00:02:55,840
lots of movement in asset prices, but

78
00:02:53,599 --> 00:02:57,239
little movement in goods prices.

79
00:02:55,840 --> 00:02:59,200
And in the last part of the course,

80
00:02:57,240 --> 00:03:00,800
we're going to look at how output is

81
00:02:59,199 --> 00:03:02,280
determined over the long run, which is

82
00:03:00,800 --> 00:03:04,920
quite different from how output is

83
00:03:02,280 --> 00:03:06,599
determined in the short run.

84
00:03:04,919 --> 00:03:08,559
The determination of output in the short

85
00:03:06,599 --> 00:03:11,439
run is what we mostly mean by business

86
00:03:08,560 --> 00:03:12,759
cycle analysis. Okay? And short or

87
00:03:11,439 --> 00:03:14,520
medium run, the way we're going to

88
00:03:12,759 --> 00:03:15,879
define it here, is what we mean by

89
00:03:14,520 --> 00:03:17,520
business cycle. The country's in a

90
00:03:15,879 --> 00:03:19,359
recession, it's in a boom, it's an

91
00:03:17,520 --> 00:03:20,800
expansion. Those are all terminologies

92
00:03:19,360 --> 00:03:23,200
of the short run

93
00:03:20,800 --> 00:03:24,560
or short or medium run.

94
00:03:23,199 --> 00:03:26,679
The determination of equilibrium output

95
00:03:24,560 --> 00:03:29,240
in the long run is when we think about

96
00:03:26,680 --> 00:03:31,480
growth. When we talk about why is it

97
00:03:29,240 --> 00:03:32,840
China grows faster than the US today?

98
00:03:31,479 --> 00:03:34,759
Well, that's a that's a question not

99
00:03:32,840 --> 00:03:37,400
about the business cycle. It's a

100
00:03:34,759 --> 00:03:40,759
question about the long-run determinants

101
00:03:37,400 --> 00:03:42,840
of output growth. Okay? And and they're

102
00:03:40,759 --> 00:03:44,479
even different class of models.

103
00:03:42,840 --> 00:03:46,159
In more advanced models, if you were

104
00:03:44,479 --> 00:03:48,599
doing a PhD, those things are a lot

105
00:03:46,159 --> 00:03:50,079
closer to each other and and and but but

106
00:03:48,599 --> 00:03:52,199
in this course, they're going to be very

107
00:03:50,080 --> 00:03:54,160
different type of models. It's easier to

108
00:03:52,199 --> 00:03:56,919
analyze these things with different type

109
00:03:54,159 --> 00:03:59,560
of models than trying to integrate all

110
00:03:56,919 --> 00:04:01,439
in one big machine. Okay? But let's

111
00:03:59,560 --> 00:04:02,640
start with the the simple part. In the

112
00:04:01,439 --> 00:04:04,359
short run,

113
00:04:02,639 --> 00:04:08,000
the key mechanism, something that will

114
00:04:04,360 --> 00:04:10,480
will keep showing up uh in all the

115
00:04:08,000 --> 00:04:11,280
models and sub models we analyze

116
00:04:10,479 --> 00:04:13,560
uh

117
00:04:11,280 --> 00:04:15,280
in the first eight lectures or so or

118
00:04:13,560 --> 00:04:17,759
seven lectures of the next seven

119
00:04:15,280 --> 00:04:19,279
lectures or so, is this mechanism. In

120
00:04:17,759 --> 00:04:21,879
the very short run,

121
00:04:19,279 --> 00:04:23,159
output, that is equilibrium output, the

122
00:04:21,879 --> 00:04:25,399
thing that these economists are

123
00:04:23,160 --> 00:04:27,840
forecasting that will decline in the

124
00:04:25,399 --> 00:04:30,000
next 12 within the next 12 months,

125
00:04:27,839 --> 00:04:32,399
is determined primarily

126
00:04:30,000 --> 00:04:33,360
by act what we call demand.

127
00:04:32,399 --> 00:04:35,919
Okay?

128
00:04:33,360 --> 00:04:37,520
So, demand will determine output. That's

129
00:04:35,920 --> 00:04:39,160
the change in demand that will change

130
00:04:37,519 --> 00:04:41,319
production.

131
00:04:39,160 --> 00:04:43,120
But when production changes, that will

132
00:04:41,319 --> 00:04:44,560
also change income. That you know from

133
00:04:43,120 --> 00:04:47,759
national accounts. Remember we said that

134
00:04:44,560 --> 00:04:49,079
we could measure output from the

135
00:04:47,759 --> 00:04:50,639
production side, but we also could

136
00:04:49,079 --> 00:04:52,639
measure the income side. And they're

137
00:04:50,639 --> 00:04:54,159
exactly the same. More production,

138
00:04:52,639 --> 00:04:57,199
somebody has to receive the proceeds of

139
00:04:54,160 --> 00:04:59,400
that. Workers and owners, capital

140
00:04:57,199 --> 00:05:02,079
owners, the government, whatever.

141
00:04:59,399 --> 00:05:02,919
But so, changes in in So, the second

142
00:05:02,079 --> 00:05:04,719
step we're going to make is those

143
00:05:02,920 --> 00:05:07,040
changes in production that were brought

144
00:05:04,720 --> 00:05:08,680
about by the changes in demand will lead

145
00:05:07,040 --> 00:05:10,280
to a change in income.

146
00:05:08,680 --> 00:05:11,840
But when income changes, that will

147
00:05:10,279 --> 00:05:14,079
change demand again.

148
00:05:11,839 --> 00:05:16,560
And so on and so forth. Okay? So, that's

149
00:05:14,079 --> 00:05:18,639
essentially that's quintessential

150
00:05:16,560 --> 00:05:19,959
short-run macro. It's to to try to

151
00:05:18,639 --> 00:05:21,399
understand this

152
00:05:19,959 --> 00:05:23,359
aggregate demand, because that's the

153
00:05:21,399 --> 00:05:24,799
main driver, and then how it gets

154
00:05:23,360 --> 00:05:27,439
multiplied

155
00:05:24,800 --> 00:05:28,360
uh in the short run. Okay? And

156
00:05:27,439 --> 00:05:30,000
in this lecture, we're going to talk

157
00:05:28,360 --> 00:05:31,920
about just about that.

158
00:05:30,000 --> 00:05:33,560
You know, primarily about that. Okay?

159
00:05:31,920 --> 00:05:35,640
But that's that's when So, when I mean

160
00:05:33,560 --> 00:05:36,600
short-run macro, that's the structure I

161
00:05:35,639 --> 00:05:38,360
have in mind and that's the structure

162
00:05:36,600 --> 00:05:39,920
most people have in mind. Something

163
00:05:38,360 --> 00:05:41,439
where aggregate demand will determine

164
00:05:39,920 --> 00:05:42,480
that. That's the reason why in the short

165
00:05:41,439 --> 00:05:45,160
run you worry a lot about whether

166
00:05:42,480 --> 00:05:46,600
consumer confidence is high or low.

167
00:05:45,160 --> 00:05:48,680
That's demand. If consumers are very

168
00:05:46,600 --> 00:05:50,760
depressed, they tend to reduce demand.

169
00:05:48,680 --> 00:05:52,480
If consumers are very bullish, that will

170
00:05:50,759 --> 00:05:54,519
tend to increase

171
00:05:52,480 --> 00:05:56,319
demand. And since in the short run

172
00:05:54,519 --> 00:05:58,039
output is determined by demand, the

173
00:05:56,319 --> 00:06:00,319
business cycle, whether we have got a

174
00:05:58,040 --> 00:06:02,040
recession or not, depends on about how

175
00:06:00,319 --> 00:06:03,680
demand feels. So, if somebody's

176
00:06:02,040 --> 00:06:07,400
forecasting a recession within the next

177
00:06:03,680 --> 00:06:09,600
12 months, he's forecasting really that

178
00:06:07,399 --> 00:06:12,639
demand will decline within the next 12

179
00:06:09,600 --> 00:06:14,200
months. Okay?

180
00:06:12,639 --> 00:06:15,319
Why they're forecasting that, that's

181
00:06:14,199 --> 00:06:16,399
something we're going to learn in the

182
00:06:15,319 --> 00:06:17,959
steps

183
00:06:16,399 --> 00:06:19,039
uh as we go through the course. What

184
00:06:17,959 --> 00:06:20,639
what are the kind of things that they

185
00:06:19,040 --> 00:06:22,920
may be thinking about? What are the

186
00:06:20,639 --> 00:06:25,039
drugs on aggregate demand that are

187
00:06:22,920 --> 00:06:26,800
likely to depress demand?

188
00:06:25,040 --> 00:06:30,240
Uh and so on and so forth. But that

189
00:06:26,800 --> 00:06:31,759
we'll we'll get there. Okay?

190
00:06:30,240 --> 00:06:34,280
Anyways, first let me tell you about the

191
00:06:31,759 --> 00:06:35,159
components of aggregate demand.

192
00:06:34,279 --> 00:06:37,879
Uh

193
00:06:35,160 --> 00:06:39,080
the first and one of the and the largest

194
00:06:37,879 --> 00:06:41,399
component of aggregate demand is

195
00:06:39,079 --> 00:06:43,519
consumption. Okay? And when I mean

196
00:06:41,399 --> 00:06:45,679
aggregate demand, okay,

197
00:06:43,519 --> 00:06:47,399
I'll be

198
00:06:45,680 --> 00:06:49,759
I'll pause for a for a slide. Let me let

199
00:06:47,399 --> 00:06:51,599
me go over the definition. Consumption,

200
00:06:49,759 --> 00:06:53,959
we're going to denote by C,

201
00:06:51,600 --> 00:06:57,360
is the goods and services purchased by

202
00:06:53,959 --> 00:06:59,199
consumers. Okay? Households and so on.

203
00:06:57,360 --> 00:07:00,759
Investment, which we're going to denote

204
00:06:59,199 --> 00:07:02,879
by I,

205
00:07:00,759 --> 00:07:05,639
is the sum of non-residential and

206
00:07:02,879 --> 00:07:08,079
residential investment. So, equipment

207
00:07:05,639 --> 00:07:09,319
and establish and and and you know,

208
00:07:08,079 --> 00:07:11,159
factories

209
00:07:09,319 --> 00:07:12,879
on one side, and then residential

210
00:07:11,160 --> 00:07:14,760
investment is houses.

211
00:07:12,879 --> 00:07:15,800
Stuff like that, apartment buildings and

212
00:07:14,759 --> 00:07:17,439
so on.

213
00:07:15,800 --> 00:07:19,199
Which is also these are goods and

214
00:07:17,439 --> 00:07:21,240
services as well. They're just capital

215
00:07:19,199 --> 00:07:22,800
goods and so on, but they're also goods

216
00:07:21,240 --> 00:07:24,319
and services.

217
00:07:22,800 --> 00:07:26,600
Government spending, that's what we're

218
00:07:24,319 --> 00:07:28,519
going to denote by G, are purchases of

219
00:07:26,600 --> 00:07:31,160
goods and services by the federal,

220
00:07:28,519 --> 00:07:32,680
state, and local government. Okay?

221
00:07:31,160 --> 00:07:35,320
Excluding, and that's important,

222
00:07:32,680 --> 00:07:36,759
government transfers.

223
00:07:35,319 --> 00:07:38,399
What is a government transfer? Many of

224
00:07:36,759 --> 00:07:39,360
you may have received that during COVID.

225
00:07:38,399 --> 00:07:42,120
You know, the government sent you a

226
00:07:39,360 --> 00:07:43,879
check, for example. Okay?

227
00:07:42,120 --> 00:07:45,920
Well, that check that is not part of

228
00:07:43,879 --> 00:07:46,719
government expenditure. That check is

229
00:07:45,920 --> 00:07:48,480
like a

230
00:07:46,720 --> 00:07:50,080
it's a negative tax and it's going to

231
00:07:48,480 --> 00:07:51,680
enter somewhere else.

232
00:07:50,079 --> 00:07:54,639
When we mean government

233
00:07:51,680 --> 00:07:57,600
expenditure is is things the government

234
00:07:54,639 --> 00:08:00,719
purchases, services the government

235
00:07:57,600 --> 00:08:01,879
acquires and so on. Okay?

236
00:08:00,720 --> 00:08:05,480
Um

237
00:08:01,879 --> 00:08:07,240
then exports, X, which will play no role

238
00:08:05,480 --> 00:08:09,480
until seven lectures or eight lectures

239
00:08:07,240 --> 00:08:10,879
from now, or actually 10 lectures from

240
00:08:09,480 --> 00:08:13,439
now probably,

241
00:08:10,879 --> 00:08:17,199
is purchases of US goods and services,

242
00:08:13,439 --> 00:08:18,360
that is goods produced by US factories,

243
00:08:17,199 --> 00:08:19,439
uh

244
00:08:18,360 --> 00:08:22,960
uh

245
00:08:19,439 --> 00:08:22,959
by foreigners. Okay?

246
00:08:24,079 --> 00:08:30,159
I am is the other side of the story.

247
00:08:26,240 --> 00:08:32,879
Imports is the purchase of foreign goods

248
00:08:30,160 --> 00:08:35,399
and services by US consumers, US firms,

249
00:08:32,879 --> 00:08:36,879
US government. Okay? So, when you buy

250
00:08:35,399 --> 00:08:39,038
something that is produced in Germany,

251
00:08:36,879 --> 00:08:40,120
well, that's an import. When the Germans

252
00:08:39,038 --> 00:08:42,960
buy something that is produced in the

253
00:08:40,120 --> 00:08:44,320
US, that's an export. Okay?

254
00:08:42,960 --> 00:08:45,840
And then the last component is something

255
00:08:44,320 --> 00:08:47,120
we're going to going to pay any

256
00:08:45,840 --> 00:08:49,639
attention whatsoever in this course,

257
00:08:47,120 --> 00:08:51,480
which is inventory investment. Inventory

258
00:08:49,639 --> 00:08:53,199
investment is certainly

259
00:08:51,480 --> 00:08:54,759
it's almost accidental. There is some

260
00:08:53,200 --> 00:08:56,600
planning on it, but but there is a lot

261
00:08:54,759 --> 00:08:58,840
of it's just from the difference between

262
00:08:56,600 --> 00:09:00,639
sales and production. And over the very

263
00:08:58,840 --> 00:09:02,040
short run, there's lots of difference. I

264
00:09:00,639 --> 00:09:03,919
mean, you're not

265
00:09:02,039 --> 00:09:05,719
producing unless you're in a bakery, you

266
00:09:03,919 --> 00:09:07,240
know, you're not producing and selling

267
00:09:05,720 --> 00:09:08,680
immediately. There is there is certain

268
00:09:07,240 --> 00:09:10,720
certain lags.

269
00:09:08,679 --> 00:09:11,959
That's a small thing. It it's volatile,

270
00:09:10,720 --> 00:09:13,920
but it's a small thing, so we're going

271
00:09:11,960 --> 00:09:15,240
to ignore it

272
00:09:13,919 --> 00:09:17,479
for this this course. We're going to

273
00:09:15,240 --> 00:09:18,919
assume actually, unless we explicitly

274
00:09:17,480 --> 00:09:20,879
say the contrary, and that could show up

275
00:09:18,919 --> 00:09:21,959
in a piece that it would never show in a

276
00:09:20,879 --> 00:09:23,480
quiz,

277
00:09:21,960 --> 00:09:24,840
because it's not that important, we're

278
00:09:23,480 --> 00:09:26,800
going to assume that this inventory

279
00:09:24,840 --> 00:09:29,000
investment is equal to zero.

280
00:09:26,799 --> 00:09:30,799
Also, for this part of the course, until

281
00:09:29,000 --> 00:09:32,919
further notice, we're going to assume

282
00:09:30,799 --> 00:09:34,279
that exports and imports are equal to

283
00:09:32,919 --> 00:09:36,599
zero as well.

284
00:09:34,279 --> 00:09:39,799
That's not realistic, but it's easier to

285
00:09:36,600 --> 00:09:41,840
analyze what we call a closed economy.

286
00:09:39,799 --> 00:09:44,159
Okay? An economy that is not interacting

287
00:09:41,840 --> 00:09:45,519
with the rest of the world. In the in

288
00:09:44,159 --> 00:09:47,000
again, 10 lectures from now, we're going

289
00:09:45,519 --> 00:09:48,000
to open the economy to the rest of the

290
00:09:47,000 --> 00:09:49,360
world, and then we're going to have to

291
00:09:48,000 --> 00:09:51,559
talk about

292
00:09:49,360 --> 00:09:53,680
things like import, export, exchange

293
00:09:51,559 --> 00:09:55,959
rates, things of that kind. But for now,

294
00:09:53,679 --> 00:09:57,839
let's keep it simple. Okay?

295
00:09:55,960 --> 00:10:00,879
So, now you So, you get a sense this is

296
00:09:57,840 --> 00:10:02,200
for 2018, but I I mean the the totals

297
00:10:00,879 --> 00:10:03,679
change, but the composition doesn't

298
00:10:02,200 --> 00:10:05,480
change very much

299
00:10:03,679 --> 00:10:08,000
of GDP.

300
00:10:05,480 --> 00:10:08,000
Okay.

301
00:10:08,919 --> 00:10:12,759
Of of GDP

302
00:10:11,399 --> 00:10:16,079
output

303
00:10:12,759 --> 00:10:19,120
aggregate demand they're all the same

304
00:10:16,080 --> 00:10:21,480
in equilibrium, but we'll get there.

305
00:10:19,120 --> 00:10:24,799
GDP you see that consumption accounts

306
00:10:21,480 --> 00:10:26,879
for a big chunk close to 70% of

307
00:10:24,799 --> 00:10:28,439
aggregate demand. That's the reason

308
00:10:26,879 --> 00:10:30,159
people worry so much about consumer

309
00:10:28,440 --> 00:10:32,320
sentiment and so on. The

310
00:10:30,159 --> 00:10:34,159
University of Michigan

311
00:10:32,320 --> 00:10:35,800
has many claims to fame, but one of them

312
00:10:34,159 --> 00:10:37,719
is they produce this index of consumer

313
00:10:35,799 --> 00:10:39,439
sentiment, and everyone is watching that

314
00:10:37,720 --> 00:10:41,080
thing. Anyone that worries about macro

315
00:10:39,440 --> 00:10:43,640
or finance is watching that thing

316
00:10:41,080 --> 00:10:47,080
because it tells you a lot about one of

317
00:10:43,639 --> 00:10:49,879
the main drivers of output equilibrium

318
00:10:47,080 --> 00:10:52,720
output. Then you see investment is

319
00:10:49,879 --> 00:10:55,000
substantially smaller, but it's large in

320
00:10:52,720 --> 00:10:56,840
particular non-residential investment.

321
00:10:55,000 --> 00:11:00,519
Government expenditure is a big

322
00:10:56,840 --> 00:11:01,960
component of aggregate demand. And then

323
00:11:00,519 --> 00:11:04,480
I'm not going to worry too much about

324
00:11:01,960 --> 00:11:07,560
for a country like the US the open

325
00:11:04,480 --> 00:11:11,639
openness part is is relatively small.

326
00:11:07,559 --> 00:11:11,639
If you go to uh you know

327
00:11:11,759 --> 00:11:16,519
small a small economy typically will

328
00:11:14,519 --> 00:11:18,039
have sort of very large exports relative

329
00:11:16,519 --> 00:11:21,240
to GDP and so on. But that's not the

330
00:11:18,039 --> 00:11:23,719
case of the US.

331
00:11:21,240 --> 00:11:25,399
And there you see why we're going to set

332
00:11:23,720 --> 00:11:27,920
in inventory investment to zero. It's a

333
00:11:25,399 --> 00:11:30,079
small thing. It it moves a lot more than

334
00:11:27,919 --> 00:11:32,639
than its size, so it can account for for

335
00:11:30,080 --> 00:11:34,879
fluctuations in in

336
00:11:32,639 --> 00:11:36,838
sort of the monthly level of GDP, but

337
00:11:34,879 --> 00:11:39,838
it's not that important

338
00:11:36,839 --> 00:11:41,480
in a slightly longer periods of time.

339
00:11:39,839 --> 00:11:44,200
Okay. So, that's more or less the story.

340
00:11:41,480 --> 00:11:47,279
So, now this is the this is the model.

341
00:11:44,200 --> 00:11:48,520
Please stop me say if you Is there

342
00:11:47,279 --> 00:11:50,199
anything here you don't understand

343
00:11:48,519 --> 00:11:51,720
because any everything that we'll build

344
00:11:50,200 --> 00:11:53,120
from here to

345
00:11:51,720 --> 00:11:56,000
quiz one

346
00:11:53,120 --> 00:11:58,200
will build on understanding this what

347
00:11:56,000 --> 00:12:00,480
I'm about to say. Very simple, but if

348
00:11:58,200 --> 00:12:01,640
you miss a step here everything is going

349
00:12:00,480 --> 00:12:02,800
to be confusing in the next few

350
00:12:01,639 --> 00:12:04,159
lectures. So,

351
00:12:02,799 --> 00:12:05,799
and you're not supposed to understand it

352
00:12:04,159 --> 00:12:07,919
in the first run. So, so it's okay that

353
00:12:05,799 --> 00:12:10,479
you ask me. But let's make sure that you

354
00:12:07,919 --> 00:12:12,719
understand what's going on here.

355
00:12:10,480 --> 00:12:14,399
Okay. So, that's aggregate demand. First

356
00:12:12,720 --> 00:12:17,080
definitions. We're going to denote

357
00:12:14,399 --> 00:12:18,600
aggregate demand by this Z, okay? Letter

358
00:12:17,080 --> 00:12:21,560
Z.

359
00:12:18,600 --> 00:12:23,440
And aggregate demand is going to be When

360
00:12:21,559 --> 00:12:25,359
we say aggregate demand, remember what

361
00:12:23,440 --> 00:12:27,640
what what is the exercise we're trying

362
00:12:25,360 --> 00:12:30,720
to do. Ultimately, what we want to

363
00:12:27,639 --> 00:12:32,879
determine is the output the production

364
00:12:30,720 --> 00:12:34,360
of the US economy, say.

365
00:12:32,879 --> 00:12:35,679
So, when we mean when we talk about

366
00:12:34,360 --> 00:12:38,080
aggregate demand, we're trying to

367
00:12:35,679 --> 00:12:39,919
determine the demand for domestically

368
00:12:38,080 --> 00:12:41,080
produced goods for goods produced in the

369
00:12:39,919 --> 00:12:43,199
US.

370
00:12:41,080 --> 00:12:44,759
That's what we're trying to pin down.

371
00:12:43,200 --> 00:12:46,640
And so,

372
00:12:44,759 --> 00:12:48,439
that's the reason aggregate demand looks

373
00:12:46,639 --> 00:12:50,559
like that. It's well, consumers.

374
00:12:48,440 --> 00:12:52,280
Consumers are going to demand goods.

375
00:12:50,559 --> 00:12:55,279
Investment

376
00:12:52,279 --> 00:12:56,519
G plus exports. If foreign demand US

377
00:12:55,279 --> 00:12:57,679
goods, that's also increases US

378
00:12:56,519 --> 00:13:01,519
production.

379
00:12:57,679 --> 00:13:04,319
Minus imports because imports is

380
00:13:01,519 --> 00:13:06,838
uh goods and services that consumers,

381
00:13:04,320 --> 00:13:08,440
firms, and governments sort of buy from

382
00:13:06,839 --> 00:13:10,400
foreigners, but they're not produced by

383
00:13:08,440 --> 00:13:12,720
by US companies. So, they are not affect

384
00:13:10,399 --> 00:13:14,919
the determination of equilibrium output

385
00:13:12,720 --> 00:13:17,600
in the US. Okay? That's the reason you

386
00:13:14,919 --> 00:13:19,079
subtract it. Now, that distinction is

387
00:13:17,600 --> 00:13:21,200
not going to matter

388
00:13:19,080 --> 00:13:23,160
uh until 10 lectures from now because

389
00:13:21,200 --> 00:13:25,520
we're going to set X and IM equal to

390
00:13:23,159 --> 00:13:27,279
zero from the point of view of modeling.

391
00:13:25,519 --> 00:13:29,399
So, all demand is demand for

392
00:13:27,279 --> 00:13:31,399
domestically produced goods in this part

393
00:13:29,399 --> 00:13:34,919
of the course. Okay? So, aggregate

394
00:13:31,399 --> 00:13:36,679
demand for us will be this C plus I plus

395
00:13:34,919 --> 00:13:39,399
G. So, we need to understand what

396
00:13:36,679 --> 00:13:41,199
determines C plus I plus G.

397
00:13:39,399 --> 00:13:43,159
And at least initially, we're going to

398
00:13:41,200 --> 00:13:44,520
keep it very very simple. We're not

399
00:13:43,159 --> 00:13:46,719
going to think too much about what

400
00:13:44,519 --> 00:13:48,199
determines investment. In fact, we're

401
00:13:46,720 --> 00:13:49,720
going to assume it's a constant is

402
00:13:48,200 --> 00:13:51,280
given. So, it's determined somewhere

403
00:13:49,720 --> 00:13:53,000
else not in the model I'm about to

404
00:13:51,279 --> 00:13:55,319
solve.

405
00:13:53,000 --> 00:13:56,919
Government expenditure

406
00:13:55,320 --> 00:13:58,080
the same. I'm going to assume you know,

407
00:13:56,919 --> 00:14:00,519
it's determined by some other

408
00:13:58,080 --> 00:14:01,800
priorities, you know, green agendas and

409
00:14:00,519 --> 00:14:05,319
stuff like that. It has very little to

410
00:14:01,799 --> 00:14:07,359
do with with with what we're doing here.

411
00:14:05,320 --> 00:14:08,839
And then taxes is something that doesn't

412
00:14:07,360 --> 00:14:10,800
show up there, but it will show up very

413
00:14:08,839 --> 00:14:12,640
shortly. We're also going to assume that

414
00:14:10,799 --> 00:14:14,719
they're being determined somewhere else.

415
00:14:12,639 --> 00:14:16,639
In pieces and later on in the course

416
00:14:14,720 --> 00:14:19,200
we're going to endogenize all that, but

417
00:14:16,639 --> 00:14:21,319
not now. Let's assume I'm trying to come

418
00:14:19,200 --> 00:14:22,920
up with a the simplest possible model of

419
00:14:21,320 --> 00:14:24,680
aggregate demand.

420
00:14:22,919 --> 00:14:27,599
And I'm making two of these terms

421
00:14:24,679 --> 00:14:30,399
trivial just constants. Okay? And I'm

422
00:14:27,600 --> 00:14:31,839
going to focus all my effort here in

423
00:14:30,399 --> 00:14:34,480
this component here, which I already

424
00:14:31,839 --> 00:14:35,680
told you is the most important component

425
00:14:34,480 --> 00:14:37,800
of aggregate demand, which is

426
00:14:35,679 --> 00:14:39,599
consumption. Okay?

427
00:14:37,799 --> 00:14:41,000
So, we're going to assume here we're

428
00:14:39,600 --> 00:14:42,279
going to have a function. Something has

429
00:14:41,000 --> 00:14:44,879
to move so for the model to be

430
00:14:42,279 --> 00:14:47,159
interesting. So, this this this we're

431
00:14:44,879 --> 00:14:49,320
going to assume that consumption

432
00:14:47,159 --> 00:14:51,078
is an increasing function of disposable

433
00:14:49,320 --> 00:14:52,640
income. I'm about to define what

434
00:14:51,078 --> 00:14:53,958
disposable income is, but you can

435
00:14:52,639 --> 00:14:56,799
imagine what it is. It's something you

436
00:14:53,958 --> 00:14:58,239
can use to consume and so on. So, very

437
00:14:56,799 --> 00:14:59,879
naturally, if you have a higher

438
00:14:58,240 --> 00:15:01,839
disposable income, you're going to

439
00:14:59,879 --> 00:15:03,600
consume more. That's what this says.

440
00:15:01,839 --> 00:15:05,680
Okay?

441
00:15:03,600 --> 00:15:07,200
In reality, that consumption function is

442
00:15:05,679 --> 00:15:09,279
a lot more complex. There are lots of

443
00:15:07,200 --> 00:15:11,680
things that enter there that that we're

444
00:15:09,279 --> 00:15:14,439
not modeling for now. But let's

445
00:15:11,679 --> 00:15:15,719
start from the basics. Okay? So, that's

446
00:15:14,440 --> 00:15:17,360
going to be the only behavioral

447
00:15:15,720 --> 00:15:18,639
assumption we're going to make for a

448
00:15:17,360 --> 00:15:21,959
while.

449
00:15:18,639 --> 00:15:24,720
That that the consumers consume more

450
00:15:21,958 --> 00:15:27,078
when they have more disposable income.

451
00:15:24,720 --> 00:15:27,079
Okay.

452
00:15:27,480 --> 00:15:31,720
And I'm going to make it even simpler.

453
00:15:29,480 --> 00:15:34,159
I'm going to assume that consumption is

454
00:15:31,720 --> 00:15:36,399
a linear function of disposable income.

455
00:15:34,159 --> 00:15:38,838
Okay? So, there's going to be some

456
00:15:36,399 --> 00:15:40,159
constant C0, which captures lots of

457
00:15:38,839 --> 00:15:42,360
things that we're not modeling here. For

458
00:15:40,159 --> 00:15:44,360
example, the fact that for any given

459
00:15:42,360 --> 00:15:47,240
level of disposable income,

460
00:15:44,360 --> 00:15:48,959
if you know, if you if you

461
00:15:47,240 --> 00:15:51,120
if you're richer, suppose you have some

462
00:15:48,958 --> 00:15:52,479
shares and now the shares double in

463
00:15:51,120 --> 00:15:53,720
value, you probably are going to consume

464
00:15:52,480 --> 00:15:55,200
more as well.

465
00:15:53,720 --> 00:15:56,160
Okay? There are lots of other things

466
00:15:55,200 --> 00:15:58,200
that affect

467
00:15:56,159 --> 00:16:01,919
consumption, which are different from

468
00:15:58,200 --> 00:16:02,959
aside from your disposable income.

469
00:16:01,919 --> 00:16:03,958
But we're not going to model that. So,

470
00:16:02,958 --> 00:16:05,799
that's we're going to call it

471
00:16:03,958 --> 00:16:07,119
autonomous. Autonomous in the sense that

472
00:16:05,799 --> 00:16:08,399
we're not going to determine it here.

473
00:16:07,120 --> 00:16:10,279
We're going to take it as a parameter

474
00:16:08,399 --> 00:16:12,078
that comes from somewhere else. We may

475
00:16:10,279 --> 00:16:15,639
do some experiments moving that variable

476
00:16:12,078 --> 00:16:17,958
around, but it's not going to

477
00:16:15,639 --> 00:16:19,958
be part of what we model.

478
00:16:17,958 --> 00:16:21,479
C1 is a more interesting parameter for

479
00:16:19,958 --> 00:16:23,119
this part of the course, and it's what

480
00:16:21,480 --> 00:16:25,159
we call the marginal propensity to

481
00:16:23,120 --> 00:16:27,560
consume

482
00:16:25,159 --> 00:16:30,759
out of disposable income in this case.

483
00:16:27,559 --> 00:16:32,159
That is C1 tells you the share if you

484
00:16:30,759 --> 00:16:34,439
get an extra dollar of disposable

485
00:16:32,159 --> 00:16:37,319
income, how much of that do you spend in

486
00:16:34,440 --> 00:16:41,480
consumption? Okay? So, say you get an

487
00:16:37,320 --> 00:16:44,200
extra dollar of income, if you spend

488
00:16:41,480 --> 00:16:47,039
60 cents in in the things you normally

489
00:16:44,200 --> 00:16:49,640
consume of that extra dollar, well, then

490
00:16:47,039 --> 00:16:51,559
your C1 is .6. Okay? That's the marginal

491
00:16:49,639 --> 00:16:52,919
propensity to consume.

492
00:16:51,559 --> 00:16:54,359
And that's what gives us our increasing

493
00:16:52,919 --> 00:16:55,719
function. You get an extra dollar,

494
00:16:54,360 --> 00:16:56,839
you're going to do you're going to save

495
00:16:55,720 --> 00:16:58,639
part, but some of it you're going to

496
00:16:56,839 --> 00:17:02,920
spend. That part you're going to spend

497
00:16:58,639 --> 00:17:04,240
is the C1 that we have there. Okay?

498
00:17:02,919 --> 00:17:06,720
Good.

499
00:17:04,240 --> 00:17:06,720
Uh

500
00:17:07,559 --> 00:17:10,639
And I

501
00:17:08,640 --> 00:17:12,560
Now, let me tell you what how we define

502
00:17:10,640 --> 00:17:14,480
disposable income. Disposable income is

503
00:17:12,559 --> 00:17:16,039
just equal to income, which is equal to

504
00:17:14,480 --> 00:17:18,400
production, you

505
00:17:16,039 --> 00:17:20,838
minus taxes. That's disposable income.

506
00:17:18,400 --> 00:17:24,519
Okay? It's whatever you earn as a either

507
00:17:20,838 --> 00:17:25,958
as a worker as a capital owner,

508
00:17:24,519 --> 00:17:27,400
well, then the government takes its

509
00:17:25,959 --> 00:17:29,400
something out of it. That's your

510
00:17:27,400 --> 00:17:31,160
disposable income, and that's where you

511
00:17:29,400 --> 00:17:32,679
have to decide how much to save and how

512
00:17:31,160 --> 00:17:34,080
much to consume.

513
00:17:32,679 --> 00:17:35,720
Okay?

514
00:17:34,079 --> 00:17:37,519
That's

515
00:17:35,720 --> 00:17:38,839
So, so that means that our consumption

516
00:17:37,519 --> 00:17:40,519
function is

517
00:17:38,839 --> 00:17:43,199
can be written that way

518
00:17:40,519 --> 00:17:45,599
after all these assumptions I made, you

519
00:17:43,200 --> 00:17:47,600
know, equal to this autonomous component

520
00:17:45,599 --> 00:17:49,359
plus C1 the marginal propensity to

521
00:17:47,599 --> 00:17:54,639
consume times

522
00:17:49,359 --> 00:17:54,639
uh income output minus taxes.

523
00:17:56,599 --> 00:18:00,000
Is it clear?

524
00:17:59,000 --> 00:18:01,599
Yes?

525
00:18:00,000 --> 00:18:03,079
So, all these are assumptions. Now,

526
00:18:01,599 --> 00:18:04,678
they're not crazy assumptions in the

527
00:18:03,079 --> 00:18:06,240
sense that you know, that we know that

528
00:18:04,679 --> 00:18:07,679
that there is a relationship between

529
00:18:06,240 --> 00:18:09,319
these two things. Again,

530
00:18:07,679 --> 00:18:11,160
the consumption function in practice is

531
00:18:09,319 --> 00:18:13,359
much richer than that.

532
00:18:11,160 --> 00:18:15,840
And there is lots of randomness random

533
00:18:13,359 --> 00:18:17,559
terms around and so on, but that's not

534
00:18:15,839 --> 00:18:18,919
what we're about here.

535
00:18:17,559 --> 00:18:20,399
But that's if you want to start with a

536
00:18:18,920 --> 00:18:24,519
consumption function, this is a pretty

537
00:18:20,400 --> 00:18:25,920
reasonable one to start with. Okay?

538
00:18:24,519 --> 00:18:28,559
Okay. So, that's going to look in the

539
00:18:25,920 --> 00:18:30,080
space of disposable income or income. I

540
00:18:28,559 --> 00:18:31,559
could have put income there not

541
00:18:30,079 --> 00:18:33,158
disposable income. So, it's going to

542
00:18:31,559 --> 00:18:34,759
look like that.

543
00:18:33,159 --> 00:18:37,800
Okay?

544
00:18:34,759 --> 00:18:39,039
So, C0 is that autonomous consumption is

545
00:18:37,799 --> 00:18:40,559
some something you're going to consume

546
00:18:39,039 --> 00:18:41,519
regardless of your level of disposable

547
00:18:40,559 --> 00:18:43,879
income. I mean, there is a minimum

548
00:18:41,519 --> 00:18:46,200
consumption you have to have. You know,

549
00:18:43,880 --> 00:18:47,880
say. And then

550
00:18:46,200 --> 00:18:50,159
and then

551
00:18:47,880 --> 00:18:52,240
the slope of that is is the marginal

552
00:18:50,159 --> 00:18:55,880
propensity to consume, which is C1,

553
00:18:52,240 --> 00:18:55,880
which is a number between zero and one.

554
00:18:57,119 --> 00:19:02,039
Okay. So, let's let's determine

555
00:18:59,079 --> 00:19:02,039
equilibrium output.

556
00:19:02,159 --> 00:19:07,640
So, we have aggregate demand, which is C

557
00:19:04,880 --> 00:19:09,440
plus I plus G. Okay?

558
00:19:07,640 --> 00:19:11,000
There we are.

559
00:19:09,440 --> 00:19:12,759
That's that was our definition of

560
00:19:11,000 --> 00:19:14,519
aggregate demand.

561
00:19:12,759 --> 00:19:16,319
Uh I'm going to stick in now the

562
00:19:14,519 --> 00:19:18,759
functional forms. Well, these guys are

563
00:19:16,319 --> 00:19:20,799
very boring. They're constants. And I'm

564
00:19:18,759 --> 00:19:23,559
plugging in here the the consumption the

565
00:19:20,799 --> 00:19:27,519
consumption function. Okay? So, what we

566
00:19:23,559 --> 00:19:29,879
have here is that aggregate demand

567
00:19:27,519 --> 00:19:32,000
is an increasing function of output or

568
00:19:29,880 --> 00:19:33,400
income. Okay?

569
00:19:32,000 --> 00:19:35,919
It's also a function of taxes,

570
00:19:33,400 --> 00:19:37,679
investment, and so on, but but it's an

571
00:19:35,919 --> 00:19:39,679
increasing function of output. And And

572
00:19:37,679 --> 00:19:42,519
this is important because I'm Remember,

573
00:19:39,679 --> 00:19:44,600
the the goal of this is to find

574
00:19:42,519 --> 00:19:46,400
equilibrium output.

575
00:19:44,599 --> 00:19:48,879
So, here I have on the right hand side

576
00:19:46,400 --> 00:19:51,519
of my aggregate demand

577
00:19:48,880 --> 00:19:53,600
output. That's good. I have one equation

578
00:19:51,519 --> 00:19:55,759
in which output shows up.

579
00:19:53,599 --> 00:19:57,359
Okay? Now, I cannot find equilibrium

580
00:19:55,759 --> 00:19:59,720
output just from this equation. Why is

581
00:19:57,359 --> 00:19:59,719
that?

582
00:20:00,319 --> 00:20:03,359
So, I'm Remember, we're trying to build

583
00:20:02,039 --> 00:20:05,119
a model

584
00:20:03,359 --> 00:20:07,879
to find

585
00:20:05,119 --> 00:20:09,759
equilibrium output.

586
00:20:07,880 --> 00:20:11,400
That's our goal. That's what will tell

587
00:20:09,759 --> 00:20:13,039
us whether we're in a recession or not.

588
00:20:11,400 --> 00:20:15,960
Output is low, recession. Output is

589
00:20:13,039 --> 00:20:17,599
high, we're in a boom.

590
00:20:15,960 --> 00:20:19,960
Obviously, I cannot solve it from this.

591
00:20:17,599 --> 00:20:23,079
I have two unknowns.

592
00:20:19,960 --> 00:20:25,519
What are my two unknowns?

593
00:20:23,079 --> 00:20:29,240
Two unknowns, one equation.

594
00:20:25,519 --> 00:20:29,240
What is my second unknown there?

595
00:20:37,039 --> 00:20:41,879
Aggregate demand, of course. We have to

596
00:20:39,319 --> 00:20:42,839
determine Z and Y.

597
00:20:41,880 --> 00:20:45,160
Okay?

598
00:20:42,839 --> 00:20:46,279
So, how are we going to do that?

599
00:20:45,160 --> 00:20:48,600
Well,

600
00:20:46,279 --> 00:20:50,160
using a second equation, which is the

601
00:20:48,599 --> 00:20:52,159
equilibrium condition. It's not a

602
00:20:50,160 --> 00:20:53,400
function. This is a function. This is

603
00:20:52,160 --> 00:20:56,560
not a function. This is an equilibrium

604
00:20:53,400 --> 00:20:59,120
condition. It says, "In equilibrium, not

605
00:20:56,559 --> 00:21:02,799
outside equilibrium. In equilibrium,

606
00:20:59,119 --> 00:21:03,919
output is equal to aggregate demand."

607
00:21:02,799 --> 00:21:05,159
Okay?

608
00:21:03,920 --> 00:21:07,160
That's what this

609
00:21:05,160 --> 00:21:08,519
equilibrium condition tells us. Off

610
00:21:07,160 --> 00:21:10,120
equilibrium, this doesn't hold. That's

611
00:21:08,519 --> 00:21:12,799
the reason this is not a function. This

612
00:21:10,119 --> 00:21:14,079
holds everywhere. It's a function.

613
00:21:12,799 --> 00:21:16,599
This is an equilibrium condition. It

614
00:21:14,079 --> 00:21:18,679
says, "At equilibrium, aggregate demand

615
00:21:16,599 --> 00:21:19,919
is equal to output."

616
00:21:18,680 --> 00:21:23,840
So, now we're done because we have two

617
00:21:19,920 --> 00:21:23,840
equations with two unknowns. Okay?

618
00:21:24,680 --> 00:21:27,920
Good.

619
00:21:25,799 --> 00:21:29,839
And the reason I post on this is that I

620
00:21:27,920 --> 00:21:30,920
see that mistake made often.

621
00:21:29,839 --> 00:21:32,959
Okay?

622
00:21:30,920 --> 00:21:34,840
That this is interpreted as a function.

623
00:21:32,960 --> 00:21:36,840
It's not. It's an equilibrium condition.

624
00:21:34,839 --> 00:21:38,480
At equilibrium, it holds. And that you

625
00:21:36,839 --> 00:21:40,159
can see, actually, I'm going to

626
00:21:38,480 --> 00:21:42,920
illustrate the same point in in the

627
00:21:40,160 --> 00:21:44,440
diagram. So, this is the

628
00:21:42,920 --> 00:21:46,920
Let me Let me keep going. So, this is

629
00:21:44,440 --> 00:21:48,640
clear, no? So, this is This is just a

630
00:21:46,920 --> 00:21:50,360
summary of what we had in the previous

631
00:21:48,640 --> 00:21:53,000
slides. It's

632
00:21:50,359 --> 00:21:55,159
And this is the new thing here, which is

633
00:21:53,000 --> 00:21:56,920
in equilibrium, output is equal to

634
00:21:55,160 --> 00:22:00,320
aggregate demand.

635
00:21:56,920 --> 00:22:02,120
And and and the and the

636
00:22:00,319 --> 00:22:04,359
And again, that's what makes

637
00:22:02,119 --> 00:22:07,319
this a really a short

638
00:22:04,359 --> 00:22:08,959
short-run model. You see, I'm saying

639
00:22:07,319 --> 00:22:12,359
output in the short run is whatever

640
00:22:08,960 --> 00:22:12,360
demand wants it to be.

641
00:22:12,400 --> 00:22:17,040
Which is different from from from

642
00:22:15,359 --> 00:22:18,678
the long run that says, "No, no. Hold on

643
00:22:17,039 --> 00:22:20,159
a second. I mean, but you

644
00:22:18,679 --> 00:22:21,920
How much output you can produce is a

645
00:22:20,160 --> 00:22:23,279
function of the capital you have, of the

646
00:22:21,920 --> 00:22:24,320
workers you have." Yeah, yeah, that's

647
00:22:23,279 --> 00:22:26,079
true in the long run. But in the short

648
00:22:24,319 --> 00:22:27,879
run, you have lots of flexibility

649
00:22:26,079 --> 00:22:29,000
because you have lots of unused capacity

650
00:22:27,880 --> 00:22:31,280
and so on.

651
00:22:29,000 --> 00:22:33,039
Okay? So, this is pretty It's a big

652
00:22:31,279 --> 00:22:35,799
assumption, and there is schools of

653
00:22:33,039 --> 00:22:37,920
thoughts within microeconomy that split

654
00:22:35,799 --> 00:22:40,039
by this assumption, whether you believe

655
00:22:37,920 --> 00:22:43,080
that that that in the short run, output

656
00:22:40,039 --> 00:22:45,279
is aggregate demand determined or not.

657
00:22:43,079 --> 00:22:47,159
At MIT, we tend to believe that in the

658
00:22:45,279 --> 00:22:48,839
short run. The long run, no. But in the

659
00:22:47,160 --> 00:22:51,120
short run, that's what it does.

660
00:22:48,839 --> 00:22:53,480
Now, sometimes the long run gets to you

661
00:22:51,119 --> 00:22:54,599
very quickly. And at this point, we're

662
00:22:53,480 --> 00:22:55,960
in a situation like that. That's the

663
00:22:54,599 --> 00:22:57,000
reason we're seeing inflation and so on,

664
00:22:55,960 --> 00:22:58,039
but that's something you'll understand

665
00:22:57,000 --> 00:23:01,559
later on.

666
00:22:58,039 --> 00:23:03,159
Okay? But but but for now, so this is

667
00:23:01,559 --> 00:23:04,559
this is important. We're going to We're

668
00:23:03,160 --> 00:23:06,200
saying here

669
00:23:04,559 --> 00:23:07,519
output I don't need another equation. I

670
00:23:06,200 --> 00:23:08,880
could have done aggregate demand like

671
00:23:07,519 --> 00:23:11,000
this, and then output a function of

672
00:23:08,880 --> 00:23:12,160
capital, labor, lots of things.

673
00:23:11,000 --> 00:23:14,519
I'm not going to even do that. I'm going

674
00:23:12,160 --> 00:23:17,480
to say, "No, no. Output will be whatever

675
00:23:14,519 --> 00:23:18,759
demand wants it to be." Okay?

676
00:23:17,480 --> 00:23:20,480
And that means in equilibrium, they have

677
00:23:18,759 --> 00:23:21,440
to be equal.

678
00:23:20,480 --> 00:23:24,360
Good.

679
00:23:21,440 --> 00:23:24,360
You had a question.

680
00:23:28,079 --> 00:23:31,439
No, they are the same for us.

681
00:23:31,880 --> 00:23:35,840
That's our definition. GDP for us is

682
00:23:33,920 --> 00:23:38,039
output.

683
00:23:35,839 --> 00:23:39,199
So, when I say aggregate output, I mean

684
00:23:38,039 --> 00:23:41,119
GDP.

685
00:23:39,200 --> 00:23:43,200
Remember? Real GDP. We're talking all

686
00:23:41,119 --> 00:23:44,239
about real GDP. Okay?

687
00:23:43,200 --> 00:23:46,039
Uh

688
00:23:44,240 --> 00:23:47,519
And it's also equal to income. Not

689
00:23:46,039 --> 00:23:49,240
disposable, but it's equal to income.

690
00:23:47,519 --> 00:23:50,639
Remember when we did those little tables

691
00:23:49,240 --> 00:23:52,079
where we look on our

692
00:23:50,640 --> 00:23:55,160
the three different ways of doing it?

693
00:23:52,079 --> 00:23:56,879
Well, the first two were output.

694
00:23:55,160 --> 00:23:58,800
And the last one was income, and they

695
00:23:56,880 --> 00:23:59,960
had to be the same.

696
00:23:58,799 --> 00:24:04,480
Okay?

697
00:23:59,960 --> 00:24:04,480
So, why is real GDP for us?

698
00:24:04,559 --> 00:24:07,759
That's real GDP.

699
00:24:07,960 --> 00:24:13,240
What happens in the table I show you,

700
00:24:11,200 --> 00:24:14,600
I already used the fact that real GDP is

701
00:24:13,240 --> 00:24:15,799
equal to aggregate demand, and that's

702
00:24:14,599 --> 00:24:17,799
the reason I show you the different

703
00:24:15,799 --> 00:24:20,720
components of Z.

704
00:24:17,799 --> 00:24:23,720
I show you that, that, and that.

705
00:24:20,720 --> 00:24:23,720
Okay? But in equilibrium, they're equal.

706
00:24:28,640 --> 00:24:32,520
There's really a figure that that will

707
00:24:30,960 --> 00:24:34,880
clarify, I think, a lot of that. But

708
00:24:32,519 --> 00:24:36,599
let's Let me keep solving this. So,

709
00:24:34,880 --> 00:24:38,360
we have that And so, what I'm going to

710
00:24:36,599 --> 00:24:39,759
do next is just solve it. So, we have

711
00:24:38,359 --> 00:24:42,519
this equilibrium condition. I'm going to

712
00:24:39,759 --> 00:24:43,440
plug in my aggregate demand function

713
00:24:42,519 --> 00:24:45,359
here,

714
00:24:43,440 --> 00:24:47,120
and so I can solve out for equilibrium

715
00:24:45,359 --> 00:24:48,678
output. And here we have the first for

716
00:24:47,119 --> 00:24:50,919
the first time in this course, an

717
00:24:48,679 --> 00:24:52,160
equation for equilibrium output.

718
00:24:50,920 --> 00:24:55,600
There you are. That's your equilibrium

719
00:24:52,160 --> 00:24:55,600
output in this economy.

720
00:24:56,160 --> 00:24:58,519
Okay?

721
00:24:58,880 --> 00:25:02,880
Now, this guy here

722
00:25:01,160 --> 00:25:04,679
is very famous,

723
00:25:02,880 --> 00:25:06,679
and is very macro.

724
00:25:04,679 --> 00:25:11,560
Doesn't happen in micro. It happens in

725
00:25:06,679 --> 00:25:11,560
macro only. Okay? This guy here.

726
00:25:11,880 --> 00:25:16,280
Another guy there is called the

727
00:25:13,400 --> 00:25:16,280
multiplier.

728
00:25:16,440 --> 00:25:18,559
Okay?

729
00:25:19,200 --> 00:25:24,480
And it's a very important macro concept.

730
00:25:20,880 --> 00:25:24,480
A huge concept in macro.

731
00:25:24,799 --> 00:25:28,678
Now, why do you think it's called a

732
00:25:26,200 --> 00:25:29,720
multiplier?

733
00:25:28,679 --> 00:25:32,160
Well, obviously, it multiplies

734
00:25:29,720 --> 00:25:34,079
something, but a multiplier sounds like,

735
00:25:32,160 --> 00:25:36,080
you know,

736
00:25:34,079 --> 00:25:38,599
that multiplies that makes something

737
00:25:36,079 --> 00:25:38,599
bigger, no?

738
00:25:39,119 --> 00:25:45,678
So, what happens if C1 is

739
00:25:42,400 --> 00:25:45,679
uh greater than zero?

740
00:25:48,240 --> 00:25:51,559
Is What happens if C1 is greater than

741
00:25:50,079 --> 00:25:53,439
zero? Remember, it's between zero and

742
00:25:51,559 --> 00:25:54,879
one. But what happens if it's greater

743
00:25:53,440 --> 00:25:59,559
than zero? What happened with that

744
00:25:54,880 --> 00:25:59,560
number there, one over one minus C1?

745
00:26:02,559 --> 00:26:06,039
It's greater than one. That's what this

746
00:26:04,079 --> 00:26:07,240
is. It multiplies. Okay? So, that's the

747
00:26:06,039 --> 00:26:09,759
reason we call it a multiplier. There's

748
00:26:07,240 --> 00:26:11,519
not nothing deep there. Uh okay? So,

749
00:26:09,759 --> 00:26:12,720
this thing here is sort of autonomous

750
00:26:11,519 --> 00:26:14,279
stuff, you know? It's what the

751
00:26:12,720 --> 00:26:15,679
government spends, what firms are

752
00:26:14,279 --> 00:26:19,399
spending, capital.

753
00:26:15,679 --> 00:26:21,600
This is autonomous consumption. Uh

754
00:26:19,400 --> 00:26:24,759
And this Actually, this is a typo there.

755
00:26:21,599 --> 00:26:25,959
There should be a C1 in front of that.

756
00:26:24,759 --> 00:26:28,480
Typo.

757
00:26:25,960 --> 00:26:29,559
It comes from there. C1 times

758
00:26:28,480 --> 00:26:31,240
T.

759
00:26:29,559 --> 00:26:33,000
So, fix that typo, please. I I'm going

760
00:26:31,240 --> 00:26:35,920
to upload the slides again with with the

761
00:26:33,000 --> 00:26:35,920
typo fixed. Okay?

762
00:26:36,799 --> 00:26:42,240
I'm just It comes from here. C1 times T.

763
00:26:40,679 --> 00:26:44,160
Okay, so that's what this does. It

764
00:26:42,240 --> 00:26:45,679
multiplies. So, whatever it is that that

765
00:26:44,160 --> 00:26:47,800
is happening here, whatever it is that

766
00:26:45,679 --> 00:26:49,759
the government is spending or whatever,

767
00:26:47,799 --> 00:26:53,879
this term multiplies it. And that's a

768
00:26:49,759 --> 00:26:55,879
huge thing. Uh There was a big debate uh

769
00:26:53,880 --> 00:26:57,160
almost always when you're trying to get

770
00:26:55,880 --> 00:26:58,920
out of a recession and the governments

771
00:26:57,160 --> 00:27:00,880
are spending, a big question is, "Well,

772
00:26:58,920 --> 00:27:02,120
how big is the multiplier?" If the

773
00:27:00,880 --> 00:27:03,840
multiplier is small, you're going to

774
00:27:02,119 --> 00:27:05,799
have to spend a lot to get the economy

775
00:27:03,839 --> 00:27:07,759
out of the recession. If the multiplier

776
00:27:05,799 --> 00:27:09,960
is large,

777
00:27:07,759 --> 00:27:11,519
then then uh

778
00:27:09,960 --> 00:27:13,000
you you're going to have have to spend

779
00:27:11,519 --> 00:27:14,759
very little, and then the multiplier

780
00:27:13,000 --> 00:27:16,759
will take you away from from that

781
00:27:14,759 --> 00:27:18,119
recession.

782
00:27:16,759 --> 00:27:20,960
So, what is it that makes the multiplier

783
00:27:18,119 --> 00:27:20,959
large or small?

784
00:27:23,000 --> 00:27:27,679
Well, mechanically, when is it that

785
00:27:25,000 --> 00:27:30,119
multiplier large?

786
00:27:27,679 --> 00:27:31,440
When C1 is closer to one. So, when when

787
00:27:30,119 --> 00:27:34,199
people are spending more of their income

788
00:27:31,440 --> 00:27:35,840
on Exactly. When C1 is large.

789
00:27:34,200 --> 00:27:38,480
And that that gives you the logic, and

790
00:27:35,839 --> 00:27:40,039
that's very important in macro. It's

791
00:27:38,480 --> 00:27:42,720
Why is it that a big multiplier? Well,

792
00:27:40,039 --> 00:27:45,119
because think what happens in macro. If

793
00:27:42,720 --> 00:27:47,640
the government spends,

794
00:27:45,119 --> 00:27:49,879
that increases output.

795
00:27:47,640 --> 00:27:51,560
But now, output increases income. And if

796
00:27:49,880 --> 00:27:52,960
consumers spend a big share of their

797
00:27:51,559 --> 00:27:55,039
extra income

798
00:27:52,960 --> 00:27:57,120
in output and consumption again, then

799
00:27:55,039 --> 00:27:59,279
that increases output again, which

800
00:27:57,119 --> 00:28:00,519
increases income again, and

801
00:27:59,279 --> 00:28:01,799
you keep going.

802
00:28:00,519 --> 00:28:03,119
Okay?

803
00:28:01,799 --> 00:28:04,839
So, that's the sequence. On the

804
00:28:03,119 --> 00:28:06,079
contrary, if consumers are very scared,

805
00:28:04,839 --> 00:28:07,599
they don't want to spend any extra

806
00:28:06,079 --> 00:28:09,759
dollar they receive, anything of the

807
00:28:07,599 --> 00:28:11,879
extra dollar they receive, then you

808
00:28:09,759 --> 00:28:13,839
don't get any multiplier because this

809
00:28:11,880 --> 00:28:16,160
initial increase in output that comes

810
00:28:13,839 --> 00:28:17,519
from the government expansion, that does

811
00:28:16,160 --> 00:28:19,080
lead to increase in income, but if

812
00:28:17,519 --> 00:28:20,920
consumers don't spend it, it doesn't

813
00:28:19,079 --> 00:28:22,918
recirculate into the economy, and then

814
00:28:20,920 --> 00:28:24,919
you don't get a multiplier. Okay? So,

815
00:28:22,919 --> 00:28:27,600
that's that's the reason we call it the

816
00:28:24,919 --> 00:28:27,600
multiplier.

817
00:28:27,919 --> 00:28:32,360
So, that diagram is is an important

818
00:28:29,679 --> 00:28:34,519
diagram. I'm just

819
00:28:32,359 --> 00:28:34,519
uh

820
00:28:34,559 --> 00:28:39,200
doing this, actually. In that diagram,

821
00:28:37,119 --> 00:28:40,639
I'm plotting the aggregate demand

822
00:28:39,200 --> 00:28:42,679
function,

823
00:28:40,640 --> 00:28:44,960
and then this equilibrium condition,

824
00:28:42,679 --> 00:28:46,480
output equal to aggregate demand,

825
00:28:44,960 --> 00:28:47,480
in the space

826
00:28:46,480 --> 00:28:48,799
of

827
00:28:47,480 --> 00:28:51,559
uh

828
00:28:48,799 --> 00:28:53,759
aggregate demand and output, production,

829
00:28:51,559 --> 00:28:55,639
and income here. But remember, income is

830
00:28:53,759 --> 00:28:58,919
equal to production. Okay?

831
00:28:55,640 --> 00:29:01,360
So, there's your aggregate demand,

832
00:28:58,919 --> 00:29:03,520
and that's your 45 degree line because

833
00:29:01,359 --> 00:29:05,319
this output equal to So, whatever is in

834
00:29:03,519 --> 00:29:07,079
this axis is equal to that axis. That's

835
00:29:05,319 --> 00:29:09,279
the 45 degree line.

836
00:29:07,079 --> 00:29:12,240
Okay? That's your equilibrium condition.

837
00:29:09,279 --> 00:29:13,720
It says, "At equilibrium, this guy here,

838
00:29:12,240 --> 00:29:16,279
aggregate demand Z, will have to be

839
00:29:13,720 --> 00:29:17,519
equal to Y." Those are That's straight

840
00:29:16,279 --> 00:29:20,039
there.

841
00:29:17,519 --> 00:29:23,720
This is aggregate demand.

842
00:29:20,039 --> 00:29:23,720
Why is this line flatter than that?

843
00:29:25,440 --> 00:29:29,000
Why is aggregate demand flatter than

844
00:29:30,839 --> 00:29:34,678
Uh because people don't spend their

845
00:29:32,159 --> 00:29:36,640
entire dollar on Exactly. Because C1 is

846
00:29:34,679 --> 00:29:38,400
less than one.

847
00:29:36,640 --> 00:29:40,360
So, the slope of the aggregate demand in

848
00:29:38,400 --> 00:29:42,440
this space is C1.

849
00:29:40,359 --> 00:29:44,079
It's the marginal propensity to consume.

850
00:29:42,440 --> 00:29:46,000
How much more they demand if they get an

851
00:29:44,079 --> 00:29:48,480
extra dollar? Well, And don't get They

852
00:29:46,000 --> 00:29:51,920
don't demand one one extra unit they

853
00:29:48,480 --> 00:29:53,920
demand C1 unit and C1 is less than one.

854
00:29:51,920 --> 00:29:56,120
Okay, that's the reason this.

855
00:29:53,920 --> 00:29:58,039
So, if C1 is very small,

856
00:29:56,119 --> 00:29:59,959
this line is going to be very flat.

857
00:29:58,039 --> 00:30:01,480
If C1 is very large, very high marginal

858
00:29:59,960 --> 00:30:02,759
propensity to consume, this is going to

859
00:30:01,480 --> 00:30:03,920
be very steep,

860
00:30:02,759 --> 00:30:05,359
the red line.

861
00:30:03,920 --> 00:30:06,480
The other one doesn't change, the 45°

862
00:30:05,359 --> 00:30:09,479
line.

863
00:30:06,480 --> 00:30:11,360
Okay? And what I said is that

864
00:30:09,480 --> 00:30:13,120
at equilibrium So, you see if I take an

865
00:30:11,359 --> 00:30:14,399
off-equilibrium level of output, say

866
00:30:13,119 --> 00:30:15,599
this,

867
00:30:14,400 --> 00:30:16,920
aggregate demand is different from

868
00:30:15,599 --> 00:30:19,480
output.

869
00:30:16,920 --> 00:30:22,279
It's only at equilibrium that these two

870
00:30:19,480 --> 00:30:22,279
things will hold.

871
00:30:22,880 --> 00:30:27,280
Okay?

872
00:30:23,720 --> 00:30:28,680
This function I can plot it everywhere.

873
00:30:27,279 --> 00:30:30,399
But this one will hold only at

874
00:30:28,680 --> 00:30:31,320
equilibrium.

875
00:30:30,400 --> 00:30:34,640
Okay?

876
00:30:31,319 --> 00:30:34,639
That's when these two things are equal.

877
00:30:35,559 --> 00:30:41,720
So, what I solve here,

878
00:30:39,319 --> 00:30:42,960
here I just found this point.

879
00:30:41,720 --> 00:30:46,400
Okay?

880
00:30:42,960 --> 00:30:46,960
So, parameters here are C0,

881
00:30:46,400 --> 00:30:50,960
uh

882
00:30:46,960 --> 00:30:53,319
C1 * T, and G. They all shifters of this

883
00:30:50,960 --> 00:30:55,200
aggregate demand up and down.

884
00:30:53,319 --> 00:30:59,279
Okay?

885
00:30:55,200 --> 00:31:01,640
And and that point here

886
00:30:59,279 --> 00:31:03,480
is exactly that. And those all those

887
00:31:01,640 --> 00:31:05,800
things are parameters in my aggregate

888
00:31:03,480 --> 00:31:05,799
demand.

889
00:31:11,240 --> 00:31:15,319
I really want you to internalize this

890
00:31:12,839 --> 00:31:15,319
diagram.

891
00:31:15,720 --> 00:31:18,480
Any questions about

892
00:31:19,640 --> 00:31:24,360
Just stare at this little bit because

893
00:31:21,559 --> 00:31:25,839
it's going to show up repeatedly.

894
00:31:24,359 --> 00:31:28,359
And and later on it's not going to show

895
00:31:25,839 --> 00:31:29,919
up, but whenever you get confused, the

896
00:31:28,359 --> 00:31:31,599
way to get yourself out of that

897
00:31:29,920 --> 00:31:32,960
confusion is going to be to go back to

898
00:31:31,599 --> 00:31:34,839
the diagram.

899
00:31:32,960 --> 00:31:37,240
You'll see. I'll remind you when when

900
00:31:34,839 --> 00:31:39,839
when that's likely to happen.

901
00:31:37,240 --> 00:31:42,839
Okay? So, so you better understand

902
00:31:39,839 --> 00:31:44,480
this diagram. Play with it. Move

903
00:31:42,839 --> 00:31:46,559
Here the only thing you can move around

904
00:31:44,480 --> 00:31:48,599
is the ZZ, the the the aggregate demand

905
00:31:46,559 --> 00:31:49,960
curve. Okay?

906
00:31:48,599 --> 00:31:52,559
The other thing is our equilibrium

907
00:31:49,960 --> 00:31:55,400
condition. You can't move that that 45°

908
00:31:52,559 --> 00:31:58,079
line. But ZZ you can move it around. So,

909
00:31:55,400 --> 00:32:00,320
let's do a a few exercises. Well, one,

910
00:31:58,079 --> 00:32:05,039
the most obvious.

911
00:32:00,319 --> 00:32:06,678
Suppose that C0 increases by 1 billion.

912
00:32:05,039 --> 00:32:07,960
Okay? So, autonomous consumption, that

913
00:32:06,679 --> 00:32:09,560
is that level of consumption which is

914
00:32:07,960 --> 00:32:10,480
independent of income, goes up by 1

915
00:32:09,559 --> 00:32:12,119
billion.

916
00:32:10,480 --> 00:32:14,559
And that could be, you know, we're all

917
00:32:12,119 --> 00:32:16,199
in a better mood. You know, okay,

918
00:32:14,559 --> 00:32:18,399
disposable income is whatever it is

919
00:32:16,200 --> 00:32:20,880
today, but you know, there's great

920
00:32:18,400 --> 00:32:24,120
expectation that that in the that the

921
00:32:20,880 --> 00:32:26,040
economy will enter a boom next year.

922
00:32:24,119 --> 00:32:28,199
And so, then you feel richer and so on,

923
00:32:26,039 --> 00:32:29,440
and you may decide to consume not wait

924
00:32:28,200 --> 00:32:31,559
until next year, you may decide to

925
00:32:29,440 --> 00:32:34,400
consume more today. That kind of thought

926
00:32:31,559 --> 00:32:36,639
experiment can be captured by a C0 type

927
00:32:34,400 --> 00:32:38,679
shift, go up. And that's when you I talk

928
00:32:36,640 --> 00:32:41,120
about consumer sentiment. Well, consumer

929
00:32:38,679 --> 00:32:42,320
sentiment is about a lot about C0. For

930
00:32:41,119 --> 00:32:45,239
any given level of income, will

931
00:32:42,319 --> 00:32:47,000
consumers are likely to to to consume

932
00:32:45,240 --> 00:32:48,160
more than they would otherwise or or

933
00:32:47,000 --> 00:32:50,039
less.

934
00:32:48,160 --> 00:32:52,000
And that's what C0 captures.

935
00:32:50,039 --> 00:32:53,279
So, let's go

936
00:32:52,000 --> 00:32:54,599
everything in this model, there's no

937
00:32:53,279 --> 00:32:57,079
dynamics

938
00:32:54,599 --> 00:32:59,119
in this simple model, so we immediately

939
00:32:57,079 --> 00:33:00,678
but we know is if just were to solve the

940
00:32:59,119 --> 00:33:03,199
equation,

941
00:33:00,679 --> 00:33:05,120
and I tell you what happens to if output

942
00:33:03,200 --> 00:33:07,319
what happens to output if C0 goes up by

943
00:33:05,119 --> 00:33:09,159
1 billion,

944
00:33:07,319 --> 00:33:11,559
you know that output will rise by how

945
00:33:09,160 --> 00:33:11,560
much?

946
00:33:12,279 --> 00:33:15,440
Let's keep it simple.

947
00:33:14,759 --> 00:33:17,160
I

948
00:33:15,440 --> 00:33:19,160
just staring at that equation. If I tell

949
00:33:17,160 --> 00:33:20,560
you autonomous consumption goes up by 1

950
00:33:19,160 --> 00:33:22,279
billion,

951
00:33:20,559 --> 00:33:25,960
what happens to equilibrium output? Goes

952
00:33:22,279 --> 00:33:29,759
up by more or less than 1 billion?

953
00:33:25,960 --> 00:33:29,759
Or or exactly 1 billion?

954
00:33:33,519 --> 00:33:37,799
Exactly. And the multiplier is greater

955
00:33:35,359 --> 00:33:40,399
than one. So, we know that the output

956
00:33:37,799 --> 00:33:41,919
will increase by more than 1 billion.

957
00:33:40,400 --> 00:33:43,759
Will increase by 1 billion times the

958
00:33:41,920 --> 00:33:46,480
multiplier.

959
00:33:43,759 --> 00:33:49,599
If C1 is .5, then it will increase by 2

960
00:33:46,480 --> 00:33:51,880
billion dollars equilibrium output.

961
00:33:49,599 --> 00:33:54,319
Now, I'm going to get you to from the 1

962
00:33:51,880 --> 00:33:55,960
billion to the 2 billion in a steps

963
00:33:54,319 --> 00:33:58,200
using the diagram. That's what I intend

964
00:33:55,960 --> 00:34:00,240
to do next.

965
00:33:58,200 --> 00:34:02,319
Okay? So,

966
00:34:00,240 --> 00:34:04,440
this shift here, so we're starting from

967
00:34:02,319 --> 00:34:06,960
this equilibrium output here.

968
00:34:04,440 --> 00:34:08,039
This shift here,

969
00:34:06,960 --> 00:34:10,240
boom,

970
00:34:08,039 --> 00:34:14,679
is increasing C0. That's a 1 billion.

971
00:34:10,239 --> 00:34:16,119
So, distance A to B is 1 billion. That's

972
00:34:14,679 --> 00:34:17,720
it will be because what I did is for any

973
00:34:16,119 --> 00:34:20,199
given level of output I shift this

974
00:34:17,719 --> 00:34:22,000
aggregate demand up by 1 billion. That's

975
00:34:20,199 --> 00:34:23,039
autonomous consumption up.

976
00:34:22,000 --> 00:34:24,039
Okay?

977
00:34:23,039 --> 00:34:27,079
Well,

978
00:34:24,039 --> 00:34:30,279
because output is whatever demand wants,

979
00:34:27,079 --> 00:34:32,279
that immediately increases output

980
00:34:30,280 --> 00:34:35,720
by 1 billion. So, B, the distance

981
00:34:32,280 --> 00:34:36,679
between B and C is also 1 billion.

982
00:34:35,719 --> 00:34:38,480
Okay?

983
00:34:36,679 --> 00:34:41,918
Demand increase by 1 billion, boom,

984
00:34:38,480 --> 00:34:45,000
output immediately catches up.

985
00:34:41,918 --> 00:34:48,000
So, output increases by 1 billion.

986
00:34:45,000 --> 00:34:51,119
But if output increases by 1 billion,

987
00:34:48,000 --> 00:34:51,119
what has happened to income?

988
00:34:56,239 --> 00:35:01,000
It also increased by 1 billion. Income

989
00:34:58,440 --> 00:35:02,079
is the same as output.

990
00:35:01,000 --> 00:35:04,400
So,

991
00:35:02,079 --> 00:35:05,880
income has increased by 1 billion.

992
00:35:04,400 --> 00:35:09,358
Well, if income has increased by 1

993
00:35:05,880 --> 00:35:11,400
billion and C1 is different from zero,

994
00:35:09,358 --> 00:35:12,840
that means part of that extra billion is

995
00:35:11,400 --> 00:35:15,358
going to be spent

996
00:35:12,840 --> 00:35:18,800
in consumption, second round.

997
00:35:15,358 --> 00:35:21,000
So, say C1 is .5, then now you get 500

998
00:35:18,800 --> 00:35:22,880
million dollars more of expenditure.

999
00:35:21,000 --> 00:35:25,358
But if it's of consumption, and if

1000
00:35:22,880 --> 00:35:26,760
there's 500 dollars that's that's a C

1001
00:35:25,358 --> 00:35:29,000
CD.

1002
00:35:26,760 --> 00:35:31,720
Shift, that's 500 million.

1003
00:35:29,000 --> 00:35:33,320
Obviously, this C1 here is is less than

1004
00:35:31,719 --> 00:35:35,000
.5 because otherwise

1005
00:35:33,320 --> 00:35:37,519
you know, this would be half of that,

1006
00:35:35,000 --> 00:35:39,800
but but it's not. Anyway,

1007
00:35:37,519 --> 00:35:41,679
you get 500 million more.

1008
00:35:39,800 --> 00:35:43,640
But if you if now there's 500 million

1009
00:35:41,679 --> 00:35:45,679
more of demand, since output does

1010
00:35:43,639 --> 00:35:47,559
whatever production does whatever demand

1011
00:35:45,679 --> 00:35:49,079
wants, then you get 500 more of

1012
00:35:47,559 --> 00:35:51,119
production.

1013
00:35:49,079 --> 00:35:52,599
And if you have 500 more million dollars

1014
00:35:51,119 --> 00:35:54,199
more of production, then you have 500

1015
00:35:52,599 --> 00:35:56,039
million more of income.

1016
00:35:54,199 --> 00:35:57,960
And if you have 500 more of income and

1017
00:35:56,039 --> 00:36:00,159
so your C1 is greater than zero,

1018
00:35:57,960 --> 00:36:02,000
say .5, you're going to spend 250

1019
00:36:00,159 --> 00:36:05,358
million more.

1020
00:36:02,000 --> 00:36:06,880
But 250 million more will generate 250

1021
00:36:05,358 --> 00:36:09,079
million dollars of production, which

1022
00:36:06,880 --> 00:36:10,400
also will generate 250 million dollars

1023
00:36:09,079 --> 00:36:11,880
more

1024
00:36:10,400 --> 00:36:13,358
of

1025
00:36:11,880 --> 00:36:16,480
income,

1026
00:36:13,358 --> 00:36:17,920
which will generate 125 million more

1027
00:36:16,480 --> 00:36:20,440
of consumption, and blah blah blah blah

1028
00:36:17,920 --> 00:36:22,039
blah. You you you get your Okay?

1029
00:36:20,440 --> 00:36:24,119
So, that's and that's what is happening

1030
00:36:22,039 --> 00:36:25,800
here.

1031
00:36:24,119 --> 00:36:27,920
Boom.

1032
00:36:25,800 --> 00:36:27,920
Yeah.

1033
00:36:29,358 --> 00:36:34,840
From C

1034
00:36:30,679 --> 00:36:38,159
to D. Okay. So, this is initial

1035
00:36:34,840 --> 00:36:39,440
shift in aggregate demand up, 1 billion.

1036
00:36:38,159 --> 00:36:41,559
That

1037
00:36:39,440 --> 00:36:42,280
lead to leads to

1038
00:36:41,559 --> 00:36:45,159
uh

1039
00:36:42,280 --> 00:36:48,120
1 billion more of production as well,

1040
00:36:45,159 --> 00:36:50,679
which means 1 billion more of income.

1041
00:36:48,119 --> 00:36:53,719
Okay? But now these consumers not only

1042
00:36:50,679 --> 00:36:55,199
have this C0 1 billion higher in C0, but

1043
00:36:53,719 --> 00:36:57,279
they also have 1

1044
00:36:55,199 --> 00:36:59,159
uh billion more of income.

1045
00:36:57,280 --> 00:37:01,200
And since they have 1 billion income and

1046
00:36:59,159 --> 00:37:03,839
they're going to spend part of it, C1

1047
00:37:01,199 --> 00:37:06,319
times that, and I assume C1 was .5,

1048
00:37:03,840 --> 00:37:09,039
that's what gives me CD.

1049
00:37:06,320 --> 00:37:10,720
That's the the extra five 500 million

1050
00:37:09,039 --> 00:37:12,039
dollars.

1051
00:37:10,719 --> 00:37:13,559
And then this that thing here there is

1052
00:37:12,039 --> 00:37:18,519
also 500 million dollars, and then there

1053
00:37:13,559 --> 00:37:20,358
was 250 million, 250 million, 125, 125,

1054
00:37:18,519 --> 00:37:23,559
62 and a half, blah blah blah.

1055
00:37:20,358 --> 00:37:23,559
That's that's the way you get there.

1056
00:37:24,280 --> 00:37:28,160
There's an alternative way of

1057
00:37:26,760 --> 00:37:30,240
finding equilibrium output, which is

1058
00:37:28,159 --> 00:37:32,519
entirely equivalent. And it's the way it

1059
00:37:30,239 --> 00:37:34,759
was initially done, by the way.

1060
00:37:32,519 --> 00:37:37,239
Uh and and and you'll see later on a

1061
00:37:34,760 --> 00:37:38,400
very important curve in this course will

1062
00:37:37,239 --> 00:37:40,959
be

1063
00:37:38,400 --> 00:37:43,200
the IS curve, which is a curve that

1064
00:37:40,960 --> 00:37:45,199
describes all the equilibrium in goods

1065
00:37:43,199 --> 00:37:47,000
markets. We'll get there.

1066
00:37:45,199 --> 00:37:48,439
But but the reason it's called IS is

1067
00:37:47,000 --> 00:37:50,679
because of this alternative way of

1068
00:37:48,440 --> 00:37:52,200
deriving the same I have derived,

1069
00:37:50,679 --> 00:37:54,599
which is

1070
00:37:52,199 --> 00:37:55,919
through you you can arrive to the same

1071
00:37:54,599 --> 00:37:58,599
equilibrium by saying, "Look,

1072
00:37:55,920 --> 00:38:01,840
equilibrium output is that output at

1073
00:37:58,599 --> 00:38:03,319
which investment is equal to saving."

1074
00:38:01,840 --> 00:38:05,840
That's the reason that curve is going to

1075
00:38:03,320 --> 00:38:07,240
be called IS, investment equal to

1076
00:38:05,840 --> 00:38:08,680
saving, S.

1077
00:38:07,239 --> 00:38:10,159
So, let me very quickly do it for you

1078
00:38:08,679 --> 00:38:11,679
and and then make a point and connect

1079
00:38:10,159 --> 00:38:14,559
the two things.

1080
00:38:11,679 --> 00:38:16,639
So, say private saving is, you know,

1081
00:38:14,559 --> 00:38:19,358
what con- sumers do and so on,

1082
00:38:16,639 --> 00:38:21,599
and firms, is just disposable income

1083
00:38:19,358 --> 00:38:22,599
minus consumption. That's your saving.

1084
00:38:21,599 --> 00:38:24,960
Okay?

1085
00:38:22,599 --> 00:38:27,759
So, it's equal to Y minus T, that's

1086
00:38:24,960 --> 00:38:31,079
disposable income, minus C.

1087
00:38:27,760 --> 00:38:32,480
Government saving is taxes minus

1088
00:38:31,079 --> 00:38:34,400
government expenditure. So, if the

1089
00:38:32,480 --> 00:38:36,400
government has a deficit, that thing is

1090
00:38:34,400 --> 00:38:38,840
negative. Governments often have

1091
00:38:36,400 --> 00:38:42,480
negative saving. Okay? If you have a

1092
00:38:38,840 --> 00:38:45,320
surplus, then taxes are greater than G,

1093
00:38:42,480 --> 00:38:47,440
then you have a fiscal surplus. Again,

1094
00:38:45,320 --> 00:38:49,880
rarely happens in the US

1095
00:38:47,440 --> 00:38:51,760
or in the Americas in general. Okay?

1096
00:38:49,880 --> 00:38:53,480
Happens a lot in Asia, but not doesn't

1097
00:38:51,760 --> 00:38:54,800
happen very much in this part of the

1098
00:38:53,480 --> 00:38:57,880
world.

1099
00:38:54,800 --> 00:39:00,200
But there we are. So, in equilibrium,

1100
00:38:57,880 --> 00:39:02,559
investment, I,

1101
00:39:00,199 --> 00:39:03,799
has to be equal to saving. So, that's

1102
00:39:02,559 --> 00:39:06,639
what you are going to use the saving

1103
00:39:03,800 --> 00:39:08,280
for, to invest. Okay?

1104
00:39:06,639 --> 00:39:09,480
So, investment is equal to the sum of

1105
00:39:08,280 --> 00:39:11,880
savings.

1106
00:39:09,480 --> 00:39:14,599
I can replace all that in here, and you

1107
00:39:11,880 --> 00:39:16,599
see that I get exactly the same

1108
00:39:14,599 --> 00:39:18,960
equilibrium condition I had before.

1109
00:39:16,599 --> 00:39:21,079
Output equal to aggregate demand.

1110
00:39:18,960 --> 00:39:22,119
Okay? So, this is an entirely equivalent

1111
00:39:21,079 --> 00:39:24,239
way

1112
00:39:22,119 --> 00:39:26,400
of deriving this, and I just want to

1113
00:39:24,239 --> 00:39:28,639
show you this

1114
00:39:26,400 --> 00:39:31,119
because it's the way it was originally

1115
00:39:28,639 --> 00:39:32,759
done, and and and and and you'll

1116
00:39:31,119 --> 00:39:33,839
understand better the terminology we use

1117
00:39:32,760 --> 00:39:35,280
later on

1118
00:39:33,840 --> 00:39:38,200
if you see that this is an equivalent

1119
00:39:35,280 --> 00:39:40,400
way. This is also a nice way of

1120
00:39:38,199 --> 00:39:41,839
illustrating something why macro can be

1121
00:39:40,400 --> 00:39:43,720
counterintuitive sometimes.

1122
00:39:41,840 --> 00:39:45,840
Microeconomics is very intuitive. I

1123
00:39:43,719 --> 00:39:47,559
mean, things make sense.

1124
00:39:45,840 --> 00:39:49,880
It's like physics, it makes sense. Macro

1125
00:39:47,559 --> 00:39:52,000
is can be confusing.

1126
00:39:49,880 --> 00:39:54,200
For example, there's the well-known

1127
00:39:52,000 --> 00:39:55,400
paradox of saving in the short run, not

1128
00:39:54,199 --> 00:39:57,480
in the long run. In the short run, you

1129
00:39:55,400 --> 00:40:00,280
have the paradox of saving.

1130
00:39:57,480 --> 00:40:02,079
So, you know, we all think that you save

1131
00:40:00,280 --> 00:40:03,840
more is a good thing. Our parents teach

1132
00:40:02,079 --> 00:40:05,079
us that it's a good thing to save more

1133
00:40:03,840 --> 00:40:06,320
and so on.

1134
00:40:05,079 --> 00:40:08,079
And in general,

1135
00:40:06,320 --> 00:40:10,680
that is true. You'll do better in life

1136
00:40:08,079 --> 00:40:12,519
if you save a little more and so on.

1137
00:40:10,679 --> 00:40:15,079
But it's not true for the macro in the

1138
00:40:12,519 --> 00:40:15,079
short run.

1139
00:40:16,360 --> 00:40:20,760
You know, it's not good for

1140
00:40:18,519 --> 00:40:22,759
macroeconomics in the short run

1141
00:40:20,760 --> 00:40:24,520
unless you are in a overheated economy.

1142
00:40:22,760 --> 00:40:27,080
Now, it could help.

1143
00:40:24,519 --> 00:40:30,079
But otherwise, it's not very good for

1144
00:40:27,079 --> 00:40:32,279
equilibrium output. Let me show you that

1145
00:40:30,079 --> 00:40:33,440
very quickly with the expression I just

1146
00:40:32,280 --> 00:40:35,920
showed you. Remember that I said

1147
00:40:33,440 --> 00:40:38,639
equilibrium output is pinned down by

1148
00:40:35,920 --> 00:40:40,000
investment equal to saving. And saving

1149
00:40:38,639 --> 00:40:41,599
of the private saving here is an

1150
00:40:40,000 --> 00:40:45,079
increasing is an increasing function of

1151
00:40:41,599 --> 00:40:48,799
output, okay? It is equal to actually 1

1152
00:40:45,079 --> 00:40:51,440
- c The function has a slope of 1 - c1.

1153
00:40:48,800 --> 00:40:53,960
C1 is the share of income that you spend

1154
00:40:51,440 --> 00:40:55,679
in consumption. Therefore, 1 - c1 is the

1155
00:40:53,960 --> 00:40:57,880
share of your income that you spend in

1156
00:40:55,679 --> 00:41:01,279
saving, okay? So, this function is

1157
00:40:57,880 --> 00:41:03,119
increasing with a slope of 1 - c1.

1158
00:41:01,280 --> 00:41:05,240
So, suppose I tell you now that all we

1159
00:41:03,119 --> 00:41:06,799
decided to to we learn the lessons of

1160
00:41:05,239 --> 00:41:08,879
our parents and say, "Okay, we should

1161
00:41:06,800 --> 00:41:11,080
all save more."

1162
00:41:08,880 --> 00:41:12,800
So, that means for any for any given

1163
00:41:11,079 --> 00:41:15,840
level of income, now we all decide to

1164
00:41:12,800 --> 00:41:17,519
save more. That means the the S function

1165
00:41:15,840 --> 00:41:19,960
shifts up.

1166
00:41:17,519 --> 00:41:21,280
For any given level of income,

1167
00:41:19,960 --> 00:41:22,599
we save more. But

1168
00:41:21,280 --> 00:41:26,080
we have a problem there because now we

1169
00:41:22,599 --> 00:41:26,079
have more saving than investment.

1170
00:41:26,159 --> 00:41:29,759
So, how how do we restore equilibrium?

1171
00:41:28,199 --> 00:41:32,960
That's not an equilibrium.

1172
00:41:29,760 --> 00:41:32,960
How do we restore equilibrium?

1173
00:41:37,480 --> 00:41:42,519
So, now we all decide to be more prudent

1174
00:41:39,559 --> 00:41:45,239
and save a little more.

1175
00:41:42,519 --> 00:41:47,400
At the level of the economy as a whole,

1176
00:41:45,239 --> 00:41:49,319
now we have more saving than investment.

1177
00:41:47,400 --> 00:41:51,400
That can happen. It can It's not an

1178
00:41:49,320 --> 00:41:54,720
equilibrium.

1179
00:41:51,400 --> 00:41:54,720
What restores equilibrium?

1180
00:41:55,039 --> 00:41:57,759
Well,

1181
00:41:55,960 --> 00:41:59,720
in this very simple model, our

1182
00:41:57,760 --> 00:42:01,120
investment is fixed. So, I nothing can

1183
00:41:59,719 --> 00:42:02,759
adjust on the investment side because

1184
00:42:01,119 --> 00:42:04,599
it's fixed. Later on, it's going to

1185
00:42:02,760 --> 00:42:06,320
move, but now it's fixed.

1186
00:42:04,599 --> 00:42:09,000
Nothing can adjust in the public saving

1187
00:42:06,320 --> 00:42:10,720
part because, you know, it can't move.

1188
00:42:09,000 --> 00:42:12,679
We assume that it's exogenous.

1189
00:42:10,719 --> 00:42:15,719
So, something has to happen endogenously

1190
00:42:12,679 --> 00:42:17,119
here that that reverses the increase in

1191
00:42:15,719 --> 00:42:18,719
savings. That's the only thing that can

1192
00:42:17,119 --> 00:42:20,920
happen. And the only thing that can

1193
00:42:18,719 --> 00:42:22,199
happen endogenously here is a declining

1194
00:42:20,920 --> 00:42:24,639
output.

1195
00:42:22,199 --> 00:42:26,759
Output declines, saving declines.

1196
00:42:24,639 --> 00:42:28,519
So, here you end up in a situation in

1197
00:42:26,760 --> 00:42:30,840
which we all decided to be sort of, you

1198
00:42:28,519 --> 00:42:32,280
know, better people, save a little more,

1199
00:42:30,840 --> 00:42:34,400
and we end up sinking the economy in a

1200
00:42:32,280 --> 00:42:35,120
recession.

1201
00:42:34,400 --> 00:42:36,880
Yeah,

1202
00:42:35,119 --> 00:42:37,960
output declines.

1203
00:42:36,880 --> 00:42:41,119
Okay, that's the reason it's called the

1204
00:42:37,960 --> 00:42:41,119
paradox of saving.

1205
00:42:41,519 --> 00:42:44,559
That's not going to happen to you

1206
00:42:42,440 --> 00:42:46,039
individually, but to an economy as a

1207
00:42:44,559 --> 00:42:47,559
whole, that's the reason I said it's

1208
00:42:46,039 --> 00:42:50,559
counterintuitive.

1209
00:42:47,559 --> 00:42:50,559
It it can happen.

1210
00:42:52,400 --> 00:42:54,639
I get

1211
00:42:53,440 --> 00:42:57,240
So, I

1212
00:42:54,639 --> 00:42:57,879
Look, if you don't like this way of

1213
00:42:57,239 --> 00:42:59,039
uh

1214
00:42:57,880 --> 00:43:00,360
and it's not the main way we're going to

1215
00:42:59,039 --> 00:43:02,400
use. If you don't like this way of

1216
00:43:00,360 --> 00:43:04,039
finding equilibrium output, just ignore

1217
00:43:02,400 --> 00:43:06,119
it. I I just wanted you to know it. Go

1218
00:43:04,039 --> 00:43:08,079
back to The thing you really need to

1219
00:43:06,119 --> 00:43:10,719
understand is not this, it's it's this,

1220
00:43:08,079 --> 00:43:11,920
that, that that you need to understand.

1221
00:43:10,719 --> 00:43:14,399
So, let me

1222
00:43:11,920 --> 00:43:16,039
illustrate the paradox of saving

1223
00:43:14,400 --> 00:43:19,119
in in the model we're using, in the one

1224
00:43:16,039 --> 00:43:20,960
I want you to really remember.

1225
00:43:19,119 --> 00:43:23,480
Well,

1226
00:43:20,960 --> 00:43:25,280
the paradox of saving, I can capture by

1227
00:43:23,480 --> 00:43:27,240
a declining c0.

1228
00:43:25,280 --> 00:43:29,360
Okay? For any given level of income, now

1229
00:43:27,239 --> 00:43:31,119
we decide to consume less. If we consume

1230
00:43:29,360 --> 00:43:33,800
less for any given level of income, that

1231
00:43:31,119 --> 00:43:34,799
means we're saving more.

1232
00:43:33,800 --> 00:43:38,080
Okay?

1233
00:43:34,800 --> 00:43:39,360
So, I can capture in this diagram

1234
00:43:38,079 --> 00:43:41,559
uh

1235
00:43:39,360 --> 00:43:44,039
the the fact that we all all become sort

1236
00:43:41,559 --> 00:43:46,519
of more prudent by a declining aggregate

1237
00:43:44,039 --> 00:43:46,519
demand.

1238
00:43:46,719 --> 00:43:49,599
But if aggregate demand declines, so

1239
00:43:48,199 --> 00:43:51,039
suppose we start at this equilibrium

1240
00:43:49,599 --> 00:43:53,119
level of output and then all of a sudden

1241
00:43:51,039 --> 00:43:55,599
we say, "Okay, enough is enough. We need

1242
00:43:53,119 --> 00:43:56,719
We need to start saving more."

1243
00:43:55,599 --> 00:43:58,839
Then,

1244
00:43:56,719 --> 00:44:00,239
what happens? Well, aggregate demand

1245
00:43:58,840 --> 00:44:02,200
declines.

1246
00:44:00,239 --> 00:44:03,319
I mean, for any given level of income,

1247
00:44:02,199 --> 00:44:04,480
if you're going to save more, that means

1248
00:44:03,320 --> 00:44:06,480
you're going to consume less. So,

1249
00:44:04,480 --> 00:44:07,840
aggregate demand declines.

1250
00:44:06,480 --> 00:44:10,400
But what happens when aggregate demand

1251
00:44:07,840 --> 00:44:10,400
declines?

1252
00:44:11,039 --> 00:44:14,400
Output declines.

1253
00:44:13,159 --> 00:44:17,039
What happens when out when output

1254
00:44:14,400 --> 00:44:17,039
declines?

1255
00:44:18,079 --> 00:44:23,279
Income declines.

1256
00:44:19,800 --> 00:44:23,280
What happens when income declines?

1257
00:44:25,519 --> 00:44:28,840
Well, part of that income you consume,

1258
00:44:27,079 --> 00:44:31,599
so you're going to consume less.

1259
00:44:28,840 --> 00:44:33,320
C1 times that. So, then and then you get

1260
00:44:31,599 --> 00:44:35,358
the multiplier working against you. So,

1261
00:44:33,320 --> 00:44:38,680
not only if now we all decide to save

1262
00:44:35,358 --> 00:44:41,079
more, not only output falls

1263
00:44:38,679 --> 00:44:42,440
by the same amount that that we increase

1264
00:44:41,079 --> 00:44:44,079
savings,

1265
00:44:42,440 --> 00:44:45,639
but actually it declines by more than

1266
00:44:44,079 --> 00:44:47,719
that because you get the multiplier

1267
00:44:45,639 --> 00:44:49,599
working against against you.

1268
00:44:47,719 --> 00:44:51,839
Okay?

1269
00:44:49,599 --> 00:44:54,880
That's the reason I'm a big role of

1270
00:44:51,840 --> 00:44:57,320
policy makers really in recession is to

1271
00:44:54,880 --> 00:44:58,640
try to maintain the calm, the you know,

1272
00:44:57,320 --> 00:45:00,880
because you can get into this kind of

1273
00:44:58,639 --> 00:45:02,759
things. If everybody gets scared and and

1274
00:45:00,880 --> 00:45:04,358
you know, we all get scared, so the

1275
00:45:02,760 --> 00:45:06,480
economy can implode just out of bad

1276
00:45:04,358 --> 00:45:08,799
sentiment. Uh

1277
00:45:06,480 --> 00:45:08,800
and so on.

1278
00:45:14,159 --> 00:45:18,799
Now, we're on the opposite side of the

1279
00:45:16,320 --> 00:45:20,519
cycle. We would want output to decline a

1280
00:45:18,800 --> 00:45:22,200
little because we are having other

1281
00:45:20,519 --> 00:45:24,239
problems, inflation and so on, again,

1282
00:45:22,199 --> 00:45:26,159
something we'll discuss later.

1283
00:45:24,239 --> 00:45:28,279
So, now you may want to scare consumers

1284
00:45:26,159 --> 00:45:30,480
a little. And in fact,

1285
00:45:28,280 --> 00:45:30,480
uh

1286
00:45:32,599 --> 00:45:35,599
the the governors of the Federal

1287
00:45:34,039 --> 00:45:36,920
Reserve, and the same is happening in

1288
00:45:35,599 --> 00:45:38,319
other places in the world, are doing

1289
00:45:36,920 --> 00:45:42,440
just that. I mean, when they go out

1290
00:45:38,320 --> 00:45:44,080
there, say the economy is too hot,

1291
00:45:42,440 --> 00:45:45,519
uh we're going to have to mess up this

1292
00:45:44,079 --> 00:45:47,119
economy a little. And then they're

1293
00:45:45,519 --> 00:45:49,480
telling us that.

1294
00:45:47,119 --> 00:45:50,880
And and and the first ones to listen to

1295
00:45:49,480 --> 00:45:52,358
these things are is the financial

1296
00:45:50,880 --> 00:45:54,680
markets. So, every time they come out

1297
00:45:52,358 --> 00:45:56,799
and make a speech of that kind, equity

1298
00:45:54,679 --> 00:45:59,319
markets decline.

1299
00:45:56,800 --> 00:46:00,800
Well, equity markets capture before the

1300
00:45:59,320 --> 00:46:02,640
mood that consumers will have in the

1301
00:46:00,800 --> 00:46:03,920
future. They capture it early. But

1302
00:46:02,639 --> 00:46:06,199
that's the message.

1303
00:46:03,920 --> 00:46:08,200
Okay? So, they're trying to At this

1304
00:46:06,199 --> 00:46:08,759
moment, really,

1305
00:46:08,199 --> 00:46:11,039
uh

1306
00:46:08,760 --> 00:46:13,320
policy makers, at least the the central

1307
00:46:11,039 --> 00:46:15,519
banks, are trying to do just that.

1308
00:46:13,320 --> 00:46:17,880
Depress a little bit consumers.

1309
00:46:15,519 --> 00:46:19,880
So so so we can

1310
00:46:17,880 --> 00:46:22,119
cool off the economy a bit.

1311
00:46:19,880 --> 00:46:22,119
Okay?

1312
00:46:22,480 --> 00:46:26,400
Any questions?

1313
00:46:24,079 --> 00:46:28,639
Again, very important lecture because

1314
00:46:26,400 --> 00:46:30,079
we're going to build on on this and and

1315
00:46:28,639 --> 00:46:32,079
later on this is going to be always in

1316
00:46:30,079 --> 00:46:33,039
the background.

1317
00:46:32,079 --> 00:46:35,199
And

1318
00:46:33,039 --> 00:46:36,960
of this until we actually go to the

1319
00:46:35,199 --> 00:46:38,960
third part of the course,

1320
00:46:36,960 --> 00:46:40,519
the key model will be this. This will be

1321
00:46:38,960 --> 00:46:42,320
in the background. More More things will

1322
00:46:40,519 --> 00:46:45,480
be happening on top,

1323
00:46:42,320 --> 00:46:48,240
but but whenever I ask you a question,

1324
00:46:45,480 --> 00:46:50,719
for example, later on, one example, what

1325
00:46:48,239 --> 00:46:54,439
else would produce a

1326
00:46:50,719 --> 00:46:54,439
this a situation like this?

1327
00:46:54,920 --> 00:46:59,039
What else would What What could have

1328
00:46:56,760 --> 00:47:01,040
What kind of policy

1329
00:46:59,039 --> 00:47:02,440
would generate

1330
00:47:01,039 --> 00:47:04,840
that

1331
00:47:02,440 --> 00:47:06,320
that movement? Well, at this point, we

1332
00:47:04,840 --> 00:47:09,039
haven't introduced monetary policy, so

1333
00:47:06,320 --> 00:47:11,440
you cannot talk about monetary policy.

1334
00:47:09,039 --> 00:47:12,719
But we do we do have

1335
00:47:11,440 --> 00:47:15,159
other kind of policy we could talk

1336
00:47:12,719 --> 00:47:15,159
about.

1337
00:47:24,159 --> 00:47:26,679
Remember?

1338
00:47:30,559 --> 00:47:34,840
Here.

1339
00:47:32,000 --> 00:47:34,840
Fiscal policy.

1340
00:47:35,199 --> 00:47:38,919
Okay?

1341
00:47:36,559 --> 00:47:40,119
Fiscal policy, G and T. Those are fiscal

1342
00:47:38,920 --> 00:47:43,000
parameters.

1343
00:47:40,119 --> 00:47:45,719
When when G goes down or T goes up, we

1344
00:47:43,000 --> 00:47:47,559
call that contractionary fiscal policy.

1345
00:47:45,719 --> 00:47:49,279
Why contractionary? Because it contracts

1346
00:47:47,559 --> 00:47:51,199
aggregate demand.

1347
00:47:49,280 --> 00:47:54,000
If If G goes down, clearly aggregate

1348
00:47:51,199 --> 00:47:55,839
demand goes down immediately. If T goes

1349
00:47:54,000 --> 00:47:57,519
up, well, disposable income for any

1350
00:47:55,840 --> 00:47:59,559
given level of income goes down, and

1351
00:47:57,519 --> 00:48:02,759
therefore consumption goes down. So, so

1352
00:47:59,559 --> 00:48:04,639
we call an increase a declining G or an

1353
00:48:02,760 --> 00:48:05,960
increasing T a contractionary fiscal

1354
00:48:04,639 --> 00:48:08,480
policy.

1355
00:48:05,960 --> 00:48:10,000
The opposite, if G goes up and T goes

1356
00:48:08,480 --> 00:48:11,440
down, we call that an expansionary

1357
00:48:10,000 --> 00:48:14,199
fiscal policy.

1358
00:48:11,440 --> 00:48:16,480
So, I take you back to this diagram

1359
00:48:14,199 --> 00:48:18,358
here,

1360
00:48:16,480 --> 00:48:20,280
and I ask you the question again.

1361
00:48:18,358 --> 00:48:22,000
What kind of fiscal policy will generate

1362
00:48:20,280 --> 00:48:24,160
this type of

1363
00:48:22,000 --> 00:48:27,559
this picture?

1364
00:48:24,159 --> 00:48:27,559
Contractionary or expansionary?

1365
00:48:32,760 --> 00:48:37,280
Contractionary. Contractionary. I mean,

1366
00:48:34,760 --> 00:48:39,640
good mnemonic, the output declined.

1367
00:48:37,280 --> 00:48:41,720
You know? So, contractionary So, that is

1368
00:48:39,639 --> 00:48:43,319
a declining a reduction in G, in

1369
00:48:41,719 --> 00:48:45,599
government expenditure,

1370
00:48:43,320 --> 00:48:47,960
or an increase in taxes

1371
00:48:45,599 --> 00:48:49,920
will shift that curve down, and then the

1372
00:48:47,960 --> 00:48:52,119
multiplier will make it even more

1373
00:48:49,920 --> 00:48:54,760
contractionary than the initial fiscal

1374
00:48:52,119 --> 00:48:54,759
impulse.

1375
00:48:57,639 --> 00:49:01,879
Very good.

1376
00:48:58,639 --> 00:49:01,879
I'll see you on Wednesday.