intro content
T
FoToÉTE☒E
agg
.
s
Production approach GDP total value value of intermediate
•
-
:
_
hmmmm
=
-
labour shame
-
capital income
labour income +
inputs
.
labour income
=
GDP
→ measures
inequality
Expenditure approach
0
NI-Gcomesfomtaxmfafg.tl
•
→
if G
>
0
:
:
GPP
=
0+2-1 G
+
if gov budget is not balanced they can
gov borrow $ from priv agents
borrow
.
Summary
•
Y GDP FUG D= C+It G
=
:
=
.
Animal GDP vs Real Gp P
nominal value of product using ament P Mt × )
neat value of
product using fixed P UP+ )
•
-
:
:
-
Gpp
•
-
-
•
=
Price level
=
nominal
heat
GDP deflator
GD Pt
Growth
.
Rice level t
=
Price tendt
-
l
rate
d
Gppthen Gpp+fluctuation
=
GD Pt
=
-
o
deflator
Gpp fluctuation
-
_
-
=
-1
#
Kt )
×
=
-
T
-
U + growth
I
rate %)
t T
-
→
G↑
'
.
.
C↓
'
'
.
consumption saving
-
T
#TÑ7IFT
Lot
① fiscal policy combination of gov
:
debt Bt
→
Gt U + r ) Bt
+
-
-
=
i
IE
→
•
expenditures Gt
needs to te
Bt + Tt
gov
to fund Gt ↑ Bt
,
.
+
tax Tt +
public
paidbaek
inflow
or
↑ Tt
Government Budget
-
Go Bo + To
=
Gi + Utv) Bo T,
=
assuming
-
Go +
→
→
E-
=
B-1=0 and Bo -0
To
+
,
¥
,
increasing Go by ↑ To
increasing Go by
or
↑ Bo
↓ To and ↑ Bo
I
benefits households
② How to stimulate economy in
•
.
more
recession
?
Yt G- bit
I
+
=
agg D
.
-
-
•
To
↑G → ↑ Y
but
recession is
a
00 is
uncertain
situation that agg D
is
weak
fondant if Gt can stimulate economic growth
study the law of consumption
.
we
have to
I
T
Lawof
①
consumption
Keynesian consumption theory
Ct :b -10Mt Tt )
-
nnzoycnnentattertaxinaome
•
b:
•
0
:
→
•
consumption level
marginal consumption propensity MPU
min
.
.
G- 10<0-4 )
tnokey assumptions
:
1.
depends ornament
consumption
not future
income
✗
income
2. MPC -1
-
testfiseatpoticyforneeessionisTG.TB.tt
→
②
G > 1- → gov
Consumption
•
deficit
saving model
-
assumption consumption smoothing motives Aabhecfhow
:
consumption tnndteslcoialandlci .it which gives the
samentihitgthenzstityreter.to
-2
;5w÷;f!L"jn%É?-
c
,
^
•
A
•
utility function of
ahreaswheof
Moon ahigherzch.lk/-Bhla)-Bs0:relative
•
importanceof
"-
0
tomorrow 's
V2
%
bumpy consumption
U,
>
Co
→
consnmp
large Bo patience
.
T
•
Taking lmao )
Budget
-
s<
-
-
lots
:
Bmw )
-
-
as
standard utility
Yo
G- Utr)s+y
0
Yo
borrows
co
>
→
agent
s>
0 → to >
→
+
increment periods returns 'm next period ion
Yo
agent saves
utility max problem
.
maxhnlco )+Bhlu ) s.t.co + So To
-
-
-
c.
①
:
5-
② :S
Yo
-
Gi
=
-
①
=U+r)s+y
-
②
.
Co
Yi
Itr
compute 10=20 yo co Yid
optimal lifetime G- lifetime Y
:
-
-
_
:
Co
co
-
_
yo
=
To
+
¥r
.
-
(4-2)
Itv
a
-4+7+7,7
-
Yo -1
^r
,¥r
tender
s
>
0
- ~
lifetime U lifetime Law
slope
.
y
,
-
-
-
-
-
É&r
I
Utv)
borrower
5<0
too -1Eur
IN
Yo
-
lifetime budget
✓
> Co
T
choice
Optimal
i.
I
I.
•
H
c*→ borrower
-
'
.
co > To
H
'
,
I
co +
¥
-
w
> Co
To
•
Enter equation
-
.
slope of indifference
curve
=
=
7m¥
¥%
,
-
co
=
-
has price normalised to
¥-1
1
.
.
.
-1 1- r
Tangent point L optimal condition)
:
MI
=
MU ,
¥-9
Enter equation
-
price of co to a
relative
Budget constraint
:
co
+
¥r
=
-
kr
÷ Putra
=
,¥r
+
To +
combining ③
=
¥
✗
-
④
④
:
co +
B co
-
_
w
-
③
¥wMPo
T
-
co
a
s
=
=
¥p
Ll + r)
=
Yo
-
co
=
=
=
=
=
Mpc
0
-
-
•
-
_
=
w
To
-
To
-
¥
w
ftp.lyo-i?+-r )
you
To
'
-
¥p )
l*
Ep yo
Yi
-
ut B) Utr)
Y
)
-
U + B) Utv)
Y
-
U + B) Utv)
%yo ≥
¥p
tender if
s>
0→
borrower
if
s
<
To
0 →
>
To
A
%+r)
<
General
-
consumption saving model ( co 0W )
General
model
Keynesian
consumption
saving
=
us
lifetime income
dependent
-
in the
→
→
context of
how yo
,
-
current
W)
high
income
dependent %)
Y
,
General 08M borrow $ to smooth consumption ( a
:
Keynesian
:
low
co
,
high
a-
⑧
>
Co )
-
⊕
?⃝
?⃝
T
Evidence for ④
lifetimesincome hypothesis UIH )
similar consumption between
young✗ old despite old's
-
Young's
income
Permanent
-
income
hypothesis 4PM )
permanent income expat to get in every period
:
C
-
e.
g.
salary )
transitory income lucky income
:
Yo =P+
Y
-
income >
=
yr
lifetime income is sensitiveto YP
w
→
→
=
}
YT
assume
y?
=
only
yP+yT+ᵈr
YP increases ty 1when YT increases ty I.
when
w
increases
w
ty It ¥
increases
ty
I
>
1
.
③ Credit Market Fiction
Max
[ In Lw ) + B In La ) ] s.tl
.
co + s
=
c,
yo
=
s≥
U + t)
0 →
s +
y
borrowing
constraint
0
.
T
Cased
•
agentsavestogetfisttest solution
:
na
-
ftp.w.a-U-ri?pwsz0-sTo3p?a+r
G-
)
•
y
-
-
-
-
-
-
-
-
co
-
"
'
'
.
0
•
-1¥
,
'
>
.
Yo
Cased
_w
Co
agentwantstotonowinf.rs/-testcase:.cannotaehiere
:
first test case
C,
^
y
-
-
-
-
-
i
"
i
•
'
i
i
ysuondtestcaselyo.gr )
"
'
'
'
0
-
•
To
G-
ti ;¥o
↳
Yo Guy
/
={÷pwififYo<p%r
Yo≥p%r
{Utr)Bwifyo≥ʰ
ifYo<p%
,
To
,s -0
ifnotcredit constrained
lwanttosavet :co=⊖w,0-
•
"
<
1
ifconstainedlwanttotonow
tntcannot :Co=Yo
a.
,
Bath
L
,
T
Hand to Mouth
-
•
s to
•
MPC = 1
•
Co =
-
.
Yo
conclusion rich will
:
consumption
-
smooth
,
poor
is
HtM
.
fiscal policy public debt
+
T
Multiplier d%_
0 Go
Fiscal
•
=
Main
•
question
:
what kind of fiscal
gov budget Go Bo + To
Keynesian consumption
agg D
•
agg
D
more
?
=
:
•
↑
can
Policy under Keynesian consumption model
Fiscal
•
policy
.
:
Yo
:
co b + D- ( Yo To) b ≥ 0 0 < ⊖ < I
=
-
,
,
Co + Go
=
b + ⊖ ( % To )
=
-
Go
+
7
b + 0 [Yo
=
-
I Go Bo) ]
-
+
Go
¥
Yo
Fiscal
multiplier %÷
high debt level
•
-
↑ Body
policy
suppose ↑ Go try 1
•
Total
↑ Go ↓ To
:
↑ Go
-
ty
Total
1
0
in
D
.
.
Wm
.
un
in 8am →
=
economy
.
→
Dagg
1
by %
unchanged
-
=
useful to stimulate
is
1 → ↑ Yo
☆ best fiscal
•
Bo + Go
+
=
↑Bñ→ TT
↑
,
T.ly
1 in fan to
initial simulation
U Q ) Lt + 0-+0-2 +
+
-
.
.
.
Jan ↓ To try 1 ↑ Bo
agg
⊖
"
+
.
.
.
)
=
finance G) Bo
,
ᵗ
.
.
4+0-+0-2 + + D- + )
→ initial simulation ( > Ut) )
D= U + ⊖ )
"
=
.
.
.
.
.
.
=
1
.
T
Policy under consumption smoothing model
Fiscal
•
•
-
assumptions
:
1
ignore or
2. we focus
.
only lump
on
tax
sum
.
lump sum tax everyone pays the same tax
:
N
-
no
:
→
→
.
of consumption
each
gets
smoothing individuals
-
Yun consumes G. saves St
agg Nyzr Not Nst N Tt Nbt
in
come
:
,
,
.
T
It
for each individual
-
max
:
w
Bt
[In Loo) B In (a)]
+
interestrates of gov
debt
s.t.co +s + b To to
=
C
→
assume
r=
=
,
-
U tr) s + U+ r b) b + Yi ti
-
rb
Ts bank 3k
→
→
lifetime budget
⊖
=
¥B
:
:
co +
¥ Wmg Yo
-
to +
co = D-w
↳
+
b- To to
-
-
-
co
To to
=
% t'
-
=
-
-
I
+r
µ
⊖w
MPC = 0--1
u
↳ consumer tends $ to gov then save
,
mfr
b.
-
agg
.
G- Co
=
=
Ty
IN
Nco Now
=
=
ON
=
⊖
[yo to +
[ Yo
-
-
To
+
%¥ ]
Y,]
.
T
gor
budget:G:Go +
:To
n
+
( 0[Y0
=
depends
<-
-
2
89
on
i k]
+
EW
70 10 G0 ->
T G0 0
=
+
10 G0
=
* PG-IGDP
best fiscal
·
GoL1
-
Total
5
+
=
+
[Yotyn
-
G]
8(Y. -)
BtPB is useless.
policy:4Go= 1 4% 1.
suggested by
=
Jan,
in
agg.
Keynes p
dToGyI Bo
D H-F) 4 8 8 ...
=
+
+
+
8" ...)
+
10 to
=
1
=
·
only
Bo
Fiscal
->
noX
policy under
·
MPC 1
·
nomalise N =1.
·
aggD
HTM
=
In one HM, H-N)
and
consumpt-smoothing
Type I: 3 Yo-to-P
:
*
-type 2:20
·
total
CC
=
0
=
=
sub &
(Yo- to
+
it)
1c +4 1
0
-
into B:
C
-
M(%
-
E
B
=
-
To)
↳
HAM
)
Y
.
+
-
To
+
consumption smoothing.
-
T
since
Go:To
+
20:N(Yo- To)
e.g.
+
policy:To, 4B, 4Go
mcalthe:
↓
↑HM insome/c
* if there
when to
account
for 0?
-H-MO(Y0 +
-G).
:*G
are some
HM,
only nottax for
consumpt-smoothing
GPP.(7 2 G)
=
+
optimal fiscal policy:NGo, MB, dTo
* stimulation effectgreater for
->:
-
HM: MPCnam: 1
HM.
Downside of
high B
·
Governmentdefault:
-no
punishment
can
result
large
in
gor
refuses to
recession
pay
->
debt (+v) Bo
distrustbetween you a
~
people
momota
see
policy7:Is
un
nve
T
1. Whatis
·
-
·
usinga piece of
paper to obtain goodie intrinsic value
public
accepted
Money supply:saving accountbalance total cash sills
+
MO, M1, M2:
-
-
-
MO:cash
till
directly printed by central bank)
equivalents
MI:MO+ other
M2: MI+ shattern
2. How to
·
!
Money:special debt
-
·
money
bans
e.g. meditcards savings account.
change mopply? controlled
nominal interest, it:includes inflation
the unit
real interest, itexcludes inflation
-calculate IP & good as the unit
Printpaper cash
①
-
calculate IR & money
tycentral
as
·
②
Lower
-
tanksit to
how it - &
sorrow
more
debt.
knowing
i
↑
i,
is
↓
MS
i
· MP
mys,
MS
bank.
T
-changing
1x i
i:
promised payoff
=
Ot
ma
priceofthe
money-equivalsee
ent
-open marketactivity:CB says a sells money
to change is MS.
-> more
money quir purchased -> PX-id
indirecteffecton
Fisher
v:
⑦
eql:it vt it
=
+
it-i (vt v)
=
deviation π
from average
3. who controls
·
·
B
not gov.
equivalents
money supply?
-
(Tz F)
+
-
inflation
rate
T
FF
ROMANG
O
VE:
HINT
ARY
N
YC
only take
C
① Is anve with
=
negatively correlate
under
consumption smoothing
·r
in
-
(t 0[Yz
yt- G]
+
=
-
lifetime in some, wo
-if 4, nd -C+d.
-
r and I are
non-linear
related in
same
C as
fluctuation
-
=
me
*
for Y (YA
and I (It).
It
=
b(Vt V)
=
-
elasticity of It
since
mite
Ct 1
a
· deviation of
-
....
Ct I
a
from I
ways
0Y+
e
+
+
consumptionshockone
-
doe
It It, yt b(vt v) Oy +
=
=
-7 8Yz
-
it
-
-
=
b(rt F)
-
e+
+
et
+
b(u+ v) et
+
-
=
1
Yt
+
-
=
-
-
8.
(rt
-
v)
+
=
Mn
↳
xt
=
Lagg. D shock)
Δ
to
Is came
agg GDP unrelated
r.
T
real IR, r
↑
E
de
n
a
n
a
=Br-high
>output,
y,8
② Is are with
·
I
may
also
in
1:
y
G.
negatively correlate wre
It (r + 1)
-
=
↓
ton
of
sensitivity
-
MPK.Pr I
f
diminishing marginal productocapital
-wite variables
in
terms
fluctuation
y1
=
Y(
:
Y+
-
y (t 1
=
1z y
-
-
G
+
1
+
1-
+
+
z
Gz
5
+
z y
=
(tc+2z- z Gt E
-
=
+
-
Y
I
Y
y
(tE(z) Iz1(z) Gt e
E
=
+
+
mu
share of
C
in
GDP
Yt a
=
t
<
t
↓
ai
a.It ag.Gt.
+
+
my
ag
T
sub
[z=-b (r -r)
=
and
yt act- b(r+ v)]
=
-
=-
It v (r v) into t
+
=
-
ait-V(rt -v)]+
+
/demand shock
Lacb+air)(rt -F) +
no
casneral
"t b (rt
Issue form:
③ Movement
·
·
=
-
r.
V) Xt
+
along shift ofIsame
movement along are:
if only changes
is
shiftof1that ->Y:
demand shocks (x+ 0)
realIR,
:
r
B
RE==-n-managenn..nem
seein
along IS.
T
&METAROLCH
OR
how stimulates aggD.
·
25-MP model
·
·
changes)
change by changing i:
I (never
=
CB
can
it i 1- F
=
-
realIRR
<heg.
RF
=
-
D
IS- MP,
-
①
shock.
MP
.azisy
R
o
①
=
min
* IS-tM
·
·
vs
A
MP
pati 2sS
↓
mps@CB decease vin
recession
IS-MP.
expansionary fiscal policy/lower T->RGDP.
IS-rM:
expansionary fiscal policy/lower He has influence
IS-Mp:
no
GDP.
on
monetary policy 2:As-AD
T
#
RVE
&
M:CB
·
targets
MS
↑
directly,
Mb M
·
=
=c,Y c4 xy ve
=
-
-
Tis fixed: .Y 1
-
=
2,502:
-
sensitivity ofMrs to
if CB targets
a
Ya
constantMs, M =
0,
LM:1:
j
↑
M
motit
·
MB
I
>M
In
·
i
a
recession,
=2 π .',
+
we
① Inflations
·
Mpshould wr
understand .
Philips Canner
Inflation rate.
inflation rates %
needto
Pt P1
-
T
+
=
Pt1
N
0
--------------
>unemploymentrate
ty
T
·
firm's
MC to total output
MC wY* of
=
-
supplyarms:PEMC:wY
fim's
P-MC
-
wK
↑
RD-firm wants to
produce
move
#
-
p*
-
===--;
-i
↑
it Tt
:DaggD
MP changes
rt - if
=
+
it and ΔTT
if TI < it, MP
of
pto
tendency SD
.
↑
Vitimi
=
hange a
can
sticky piece
constantdespite Δ
remain
changes
·
in
sticky wage:wage prefixed
is
-Why 1
=
-
(normalised
Pt1 w+1
=
-WE H
=
U
=
Tt9Wt1
+
T* Pt-1
+
m
int 1 aboutinflation
expectation
inflation
-
fromUEPEwAYUtHPITYTO
in the
A
->
under
m
sticky wage assumption, & if agg Yor TEM.
T
-
Fluctuation terms:T T8 vY
=
+
->
vs0:
->
ut:
c
supply shock
lamyth affecting Protherthan
+ u ->
+
of
to
+
S
Yxπ
supply shock
↳ e.g. Rproduction -> AP-dT. nt<0
↳ UtCO:the supply shock
↳ 1>0:-we
↳ TE
#
is
supply shock.
consider
supply shock
↑ π+8
a
A..jhe
↓ π+
↓...
e
neut
+
>
·
Y
Movementis shiftalong Philips Cannes
Movementonly 4 changes
-shift:
thatcannot be explained by Y
-
->
->
->
P
any
productivity
material P
↑ future t
T
&>
*
ADFRR1
·
Combine IS
are
a
Yt
AD:
Fisher:
=
-
=
-
b(rz v)
Xz
+
-
b(it It z)
-
-
</ m
monetary policy
it
from Fisher.
given
·
assume
Xt
+
Te T+:
=
Phillips:T
AS:
=
THz
+
rY+
AS-AD model
M
+
endogenous.
y = b(it
z
-
#A
-
H+ 1
=
Tt
-
V)
xt
+
vYt Ht.
+
+
Parameters (don'tchange over time) b, v, r('i not)
2. Shocks/errors:Xt, Ut
can'tcontrol
1.
:
History:T(=THz- 1) I
4.
Endogenous outcome:It, Ye
3.
↳
can
Xt,
Ht
THE1
-
change
↓
it
->
Yt, T.
T
·
it TH, CB chooses it
I
assumptions for MP to work:
AS-AD determines
-
a
Cs/diminishing MPK:Mr. daggD
sticky wage:Pcannot adjustto make neutral.
How to choose it to stabilise
economy?
->
.
->
·
①fix
r
ix i (TH- F)
=
-
->
+
real IP,r,
THz -
the
R
-
is
MP1.
constant
shock
->
& it
-T
T- T
=
=
.
1
* fixing
is
bad
:CB should
As
1% shock -> 1057.
hudiing
recession.
AD:Xt., yt
② fixi
i =i
-
-
MP2.
-since v it
=
-
it , VE -F T
-
=
F Tz
-
2
④
T
=
It
I
-
-
(TH
-F))...AD:Yz b(TTz F) X+
-Nicecard-sloping.:
>
Yt
=
-
+
+v
xxis N
-D
T
#
AD'
↑
Xt <
if we have
AD
shock-driven
AS
0
7.
intput
a
demand-
recession
,Yt.
>|Xtt
Both D E are bad
·
-dr-I during necession... his d
iz rt πz.
↓ d ↓
a good
xπt
+
=
policy.
INFNETIONPLTANR's
*
1
it i N(TT- F), N1C
=
+
measures
from Fisher:rz F
=
·
N >1:MP can make
due to
·
·
now.
Phillips
AD:
are
Yz
=
-
ra
CB towards inflation
attitude of
(i 1) (THz
+
-
-
F)
-
Taylor'sMP
Imove in
same direction
low is
necession),
b(D-1) (Tt
-
F)
Taylor's
MP
xt
+
-rt
-
keep how necession
F
is1:dT, ddi..dr,MD..
LAD
in
T
·
As-ADQ
theDshock (Xt< 0)
stabilise?
-
the Xt:
-e.g. of
x
&
8
a
CB follows
Taylor'sMP,
can
economy
consumption behavior dueto real estate
bubble.
!
-
!xt.
10
-
analysis:how to cool-down overly-noteconomy
Tz
-
T(ft)
R
AS.
I= 1= =
=
=n
Tz
-
=
counter
T(ft)
+
AD,
>
small
moves
TH ->dD
due
up -> 4T- Rit
to
high
AS2.
R
AS.
2
IPFFINSOB
↑ PHRi T R
⑥
i
↑
AP,
ADO
>
aggD),
y,
=
:
1: next - IS shifts
↳ ↑πt + Fi+ - Art -
H.s No - As
t2 i
=
right->aggp ->PR
ot,
->
-> t
y,
r
to
T
t=10:X-
->
disappears ->dD-dT
to
Tz
-
->
(B4i -> dr
⑤
preventnecession
↓
slightD.
T(ft)
AS2.
R
AS.
↑
Elinoxcooremindand
↑
AP,
ADo,y.
Tz
-
T(ft)
AS2.
R
↑
AS.
II NRSOBPHRI
i
ot,
AP,
ADO
>
y,
butAs doesn't?
Why AD
Atwhich pointdoes
Taylor MP stabilise economy?
it 1:
=
-
TR
more
p