EFLATIONARY GAP
M.POURHOSSEINI
MACROECONOMIC BACKGROUND
• IN THIS TUTORIAL
WE REVIEW SOME
BASIC
MACROECONOMIC
AGGREGATES
• The purpose is to
provide the students
whose first degree is
not economics with
some basic tools
• The tutorial will focus
on deflationary gap,
and accelerator
principle
UNEMPLOYMENT AND INFLATION IN THE
SIMPLE KEYNESIAN MODEL
• The deflationary gap
– withdrawals and injections approach
The deflationary gap
W, J
W
J
O
Ye
Y
The deflationary gap
W, J
W
J
O
Ye
YF
Y
The deflationary gap
W, J
Deflationary gap
W
c
O
Ye
d
J
YF
Y
UNEMPLOYMENT AND INFLATION IN THE
SIMPLE KEYNESIAN MODEL
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
The deflationary gap
W, J, E
Y
E
O
Ye
YF
Y
The deflationary gap
W, J, E
Y
E
a
b
Deflationary gap
O
Ye
YF
Y
The deflationary gap
W, J, E
Y
E
a
b
Deflationary gap
W
c
O
Ye
d
J
YF
Y
UNEMPLOYMENT AND INFLATION IN THE
SIMPLE KEYNESIAN MODEL
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
UNEMPLOYMENT AND INFLATION IN THE
SIMPLE KEYNESIAN MODEL
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
– withdrawals and injections approach
The inflationary gap
W, J
W
J
O
Ye
Y
The inflationary gap
W, J
W
J
O
YF
Ye
Y
The inflationary gap
W, J
Inflationary gap
W
g
J
h
O
YF
Ye
Y
UNEMPLOYMENT AND INFLATION IN THE
SIMPLE KEYNESIAN MODEL
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
– withdrawals and injections approach
– income and expenditure approach
The inflationary gap
W, J, E
Y
E
O
YF
Ye
Y
The inflationary gap
W, J, E
Y
E
e
f
Inflationary gap
O
YF
Ye
Y
The inflationary gap
W, J, E
Y
E
e
f
Inflationary gap
W
g
J
h
O
YF
Ye
Y
UNEMPLOYMENT AND INFLATION IN THE
SIMPLE KEYNESIAN MODEL
• Inflation and unemployment at the same
time
– inflationary pressures before the
full-employment level of income
– implications for shape of AS curve
Unemployment and inflation
Price level
AS1
O
YF
Y
Unemployment and inflation
Price level
AS2 AS1
O
YF
Y
UNEMPLOYMENT AND INFLATION IN THE
SIMPLE KEYNESIAN MODEL
• Inflation and unemployment at the same
time
– inflationary pressures before the
full-employment level of income
– implications for shape of AS curve
– relationship between 45° line diagram and the
AD & AS diagram
Allowing for inflation in the 45 line and AD / AS diagrams
P
AS
AD1
Y
Cd, W, J, E
Y
Allowing for inflation in the 45 line and AD / AS diagrams
P
AS
P1
AD1
Cd, W, J, E
Y1
Y
Y
Allowing for inflation in the 45 line and AD / AS diagrams
P
AS
P1
AD1
Y
Y
Cd, W, J, E
E1
Y
Y
Allowing for inflation in the 45 line and AD / AS diagrams
P
AS
P1
AD2
AD1
Y
Y
Cd, W, J, E
E1
Y
Y
Allowing for inflation in the 45 line and AD / AS diagrams
P
AS
P1
AD2
AD1
Y
Y
E2
Cd, W, J, E
E1
Y
Y
Y
Allowing for inflation in the 45 line and AD / AS diagrams
P
AS
P2
P1
AD2
AD1
Y
Y
E2
Cd, W, J, E
E1
Y
Y
Y
Allowing for inflation in the 45 line and AD / AS diagrams
P
AS
P2
P1
AD2
AD1
Y
Y
E2
E3
E1
Cd, W, J, E
Y
Y Y
Y
KEYNESIAN ANALYSIS OF
THE BUSINESS CYCLE
• The accelerator
– changes in national income and induced
investment
The accelerator effect
Year
0
1
2
3
4
5
6
1000
1000
2000
3000
3500
3500
3400
10
10
20
30
35
35
34
Induced investment (Ii)
(extra machines)
0
10
10
5
0
0
Replacement
investment (Ir)
1
1
1
1
1
0
Total investment
(Ii + Ir)
1
11
11
6
1
0
Quantity demanded by
consumers (sales)
Number of machines
required
KEYNESIAN ANALYSIS OF
THE BUSINESS CYCLE
• The accelerator
– changes in national income and induced
investment
– the accelerator coefficient
KEYNESIAN ANALYSIS OF
THE BUSINESS CYCLE
• The accelerator
– changes in national income and induced
investment
– the accelerator coefficient
– the instability of investment
GDP, Investment (% annual change)
Fluctuations in real GDP and investment: 1978-99
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
GDP, Investment (% annual change)
Fluctuations in real GDP and investment: 1978-99
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
1978
GDP
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
GDP, Investment (% annual change)
Fluctuations in real GDP and investment: 1978-99
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
1978
Investment
GDP
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
KEYNESIAN ANALYSIS OF
THE BUSINESS CYCLE
• The accelerator
– changes in national income and induced
investment
– the accelerator coefficient
– the instability of investment
• The multiplier / accelerator interaction
KEYNESIAN ANALYSIS OF
THE BUSINESS CYCLE
• The accelerator
– changes in national income and induced
investment
– the accelerator coefficient
– the instability of investment
• The multiplier / accelerator interaction
• Fluctuations in stocks
KEYNESIAN ANALYSIS OF
THE BUSINESS CYCLE
• Analysing the phases of the business cycle
– causes of the upturn
– causes of the expansion
– causes of the peaking out
– causes of the recession
• Conclusions
– why do booms and recessions persist?
– why do booms and recessions come to an
end?