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7000
6000
Consumption
5000
4000
3000
2000
1000
0
0 2000 4000 6000 8000 10000
Real GDP
U.S. Annual Data, 1929 - 2001
Consumption Function
c = mpc = C/Yd = marginal propensity to consume
C
C = C0 + mpc x Yd
C Or
Yd C = C0 + cYd
C0
Yd
Original Aggregate
Expenditure Model
Z=AS
Nominal Value
of Output (Py)
C
De = AD
E*
There is a limit to the
profitable expansion of
output. If Says Law held,
there could be no obstacle
to full employ-ment. Output
could profitably be
increased until excess labor
was absorbed. Thus, this is
N*
a refutation of Says Law.
Nf
o
45 line
Real GDP exceeds
d e
6.0
b c Equilibrium
4.0
expenditure
a Planned
C0 expenditure
exceeds
G real GDP
I
0 2 4 6 8 10
Real GDP (trillions of 1992 dollars per year)
Algebra of the Model
Y=C+I+G But this means that
1
but C = C0 + c(Y-T), so Y G
1 c
Y = C0 + c(Y-T) + I + G 1
Y I
Y = C0 + cY cT + I + G 1 c
Y cY = C0 + I + G cT 1
Y C
1 c
Y(1-c) = C0 + I + G cT but
Y*
1
C0 I G cT c
Y T
1 c 1 c
Policy
Planned
Expenditures
E
1
E
0
Y0 Yf Y
Sourcess
http://www.en.Wikipedia.org/Keynesian_Economics
http://www.academia.edu/Birt_of_macroeconomics
Alvin Hansen (1887-1975)
Background
Taught at Brown Univ., Univ. of Minnesota, and
finally Harvard (1937)
Famous students
Wrote a paper pointing out a math error in
Keynes Treatise on Money; not enthusiastic
about the General Theory at first.
Business Cycle Theory (1927)
1941, Fiscal Policy and Business Cycles
Extended Keynes Policy Recommendations
Supported Keynes analysis of the 1930s
A Guide to Keynes (1953)
Hansen (2)
Hicks-Hansen Synthesis (IS-LM)
r LM
r*
IS
y* y
Hansen (3)
Hicks (1939) had pointed out problems with
Keynes theory, utilizing his own IS-LM
apparatus. Hicks and Hansen worked out the
indeterminacy of the interest rate and other
problems.
Extensive revision of Keynes aggregate
expenditure model.
1937-38, Advisory Council on Social Security
Economic advisor to Federal Reserve Board
Participated at Bretton Woods
Involved in the Full Employment Act and the
creation of the Council of Economic Advisors
Hansen (4)
Stagnation Thesis
1938, Full Recovery or Stagnation
Inadequacy of investment of keep
pace, making it impossible for the
economy to naturally maintain full
employment
Advocated (govt) compensatory
finance to compensate for inadequate
private sector investment
Abba P. Lerner (1903-1982)
Background
Taught by John R. Hicks, Lionel
Robbins, von Hayek
Socialist at London School
Focus on policy recommendations,
including functional finance.
Paul Samuelson (1915- )
1970, 1st American Nobel in Economics
Textbook, Economics
PhD, Harvard
Phillips Curve with Solow
wage Consumer
inflation price
inflation
u u
Phillips curve Samuelson-Solow Curve
Samuelson (2)
Contributions
Comparative statics
Revealed preference theory
Efficient markets hypothesis
Product and factor mobility
Public goods theory
Methodological innovations
Use of mathematics
Called economics full of inherited contradictions,
overlaps, and fallacies.
Dissertation Foundations of Economic Analysis,
published in 1947.
Samuelson (Accelerator)
The desired capital stock is proportional to the
level of output:
K td Yt
Investment is the process of moving from the
current level of capital to a desired level:
In,t K td K t 1
We assume that whatever the capital stock
ended up being last period was the level of
capital that businesses actually wanted:
K t 1 K td1 Yt 1
Accelerator (2)
This allows us to rewrite:
In,t K td K t 1
As
In,t K td K t 1 Yt Yt 1 (Yt Yt 1 )
In,t Yt
Thus investment is related to the rate of
change in output.
If the economy is growing rapidly, then investment
grows rapidly.
If the economy is not growing, then investment
slows, and net investment (after depreciation) may
actually be negative.
Post Keynesians
Sraffa, Robinson, Pasinetti, Weintraub, Davidson
Neo-Ricardian view of production, value, and
distribution
Oligopolistic corporations. markup pricing
Endogenous money
Cyclical instability
Incomes policy
Class struggle for income shares, markup pricing
necessitate a permanent incomes policy
New Keynesians
Fischer, Taylor, Howitt, and many others
Rational expectations, general
equilibrium, microfoundations
Offer theoretical support at the firm profit
maximization level for Keynesian features
in the economy
Contracting models
Menu/transactions costs
Efficiency wages
Insider-Outsider theory