As a result of studying the materials in this chapter, students should:
know
- balance problems in the markets of goods and services, financial assets, labor;
- the specifics of the formation of supply and demand in a given set of markets;
be able to
To give a theoretical substantiation of the mechanism for establishing equilibrium in the long and short term;
own
- skills of graphical interpretation of theoretical positions;
- graphical analysis skills.
Market of goods and services
16.1.1. Aggregate demand and its components. Theoretical approaches to substantiate the type of aggregate demand curve
Aggregate demand in the market of goods and services reflects the plans of all economic entities regarding the purchase of all volumes of final goods produced in the country during a certain period of time.
The dependence of the planned volumes of purchases of final goods and services produced in the country on the price level is reflected by the aggregate demand curve.
All points of this curve show what volume of final goods and services all economic entities are ready to buy at the planned price level.
The demand curve is constructed on the assumption that all factors except the price level are constant. Changes in non-price factors lead to a shift in the aggregate demand curve. Typically, the aggregate demand curve is decreasing dependence on the price level(Fig. 16.1).
Rice. 16.1.
Let us present some concepts for explaining the decreasing type of aggregate demand.
Assessing the behavior of economic entities in the formation of plans for the purchase of goods and services, Keynes believed that the elasticity of aggregate demand is determined by the sensitivity of investment to changes in interest rates as a result of price fluctuations.
Keynes singled out interest rate effect(Keynes effect). When prices rise ( R) increases the demand for money, which, with a given money supply, leads to an increase in the interest rate. In response to an increase in the interest rate ( i) the volume of planned investments ( I) is reduced.
A decrease in the volume of investment demand leads to a decrease in aggregate demand. Since, according to Keynesian theory, the income function is inelastic with respect to i, then aggregate demand is inelastic.
Considering aggregate demand to be price-inelastic, Keynes believed that aggregate demand is more sensitive to income growth, and often used the planned expenditure curve (Fig. 16.2):
Planned cost curve called the functional dependence of the amount of total planned expenditures on the level of national income Y.
4. Representatives of the neoclassical synthesis, developing Keynes' idea of analyzing the sensitivity of all elements of aggregate demand to price changes, in addition to the Keynes effect, considered two more effects of increasing the price elasticity of aggregate demand.
Effect of real cash balances(Pigou effect): consumer spending can also be sensitive to price changes.
Rice. 16.2. Planned cost curve(A - autonomous expenses)
When prices rise ( R) consumers are faced with the fact that their savings (5) depreciate, they become poorer, the desire to maintain the level of well-being forces economic agents to increase savings by reducing consumption. Empirically, the Pigou effect is weakly expressed.
State procurements (G) not sensitive to price changes.
The effect of import purchases. When prices rise ( R) in a given country, all goods and services become more expensive compared to imported goods. As a result, the subjects of a given country begin to prefer imported goods. At the same time, foreign firms reduce the volume of export purchases, net exports (NX) goes down.
16.1.2. Aggregate supply in the long and short run
In macroeconomics, different postulates are used to define the concept of short-term and long-term periods than in microeconomics. In macroeconomics, all but one factor is assumed to be constant. All factors change only in super-long periods. The division into short-term and long-term periods is based on price flexibility.
Under short term refers to the period during which the prices of resources (for example, wages) do not have time to adjust to changes in commodity prices. Long term- the period during which all resource prices fully adjust to changes in commodity prices.
The dependence of producers' plans on the price level is described aggregate supply curve.
Aggregate supply- the total volume of final goods and services that the producers of a given country are ready to produce and put on the market during a certain period of time.
The length of the period has a great influence on the shape of the aggregate supply curve. There are two types of aggregate supply curves, reflecting dependencies in the short run and long run.
V long term The aggregate supply curve is a vertical straight line at the national income level at full employment ( Y F) (Fig. 16.3).
Rice. 16.3.
The flexibility of resource prices explains the vertical appearance of the curve. The entrepreneur reaches the optimal level of output, and when his costs in the long run grow in the same proportion as the price level, it makes no sense for him to change this level.
The flexibility of resource prices, characteristic of the long run, allows the entrepreneur to pay workers such wages that keep full employment in the economy.
V short term the assumption of resource price flexibility is not met, the short run aggregate supply curve (AScr) differs from the long run aggregate supply curve (ASdl).
In the case when all resource prices are constant, and the production function allows the entrepreneur to attract new workers without changing labor productivity, the aggregate supply curve (CSP) will be horizontal (Fig. 16.4).
In general terms, the aggregate supply curve in the short run is an increasing function of the price level (Fig. 16.5).
Rice. 16.4.
Rice. 16.5.
In modern economic theory, there are four concepts that explain the form of an increasing aggregate supply curve. Two concepts focus on the imperfection of the labor market, two - on the imperfection of the goods market.
Each model identifies a specific reason why an unexpected price change causes output to fluctuate.
16.1.3. The mechanism of adaptation of the economic system to short-term and long-term equilibrium in the goods market
Macroeconomic balance in the market of goods and services is observed when the volume of national production coincides with the planned costs for its purchase, i.e. when aggregate demand (AC) equals aggregate supply (SP). Macroeconomic equilibrium does not mean that demand is equal to supply for each specific type of product. It may be accompanied by imbalances in individual product markets. In this case, the deficit in some industry markets must be covered by a surplus in others, so that aggregate demand equals aggregate supply.
Distinguish between short-term and long-term macroeconomic equilibrium.
Short term the equilibrium is less stable, because in a market economy there are internal reasons, motives that bring it out of equilibrium for a certain period. Long term the balance is more stable.
Let us briefly consider the reaction of the economic system to an imbalance in conditions when there is an increase in aggregate demand. Assumption: Initially, the economy is in a state of long-term and short-term equilibrium (Fig. 16.6).
For whatever reason, there was an increase in MA, a shift in aggregate demand AD 0 to position AD 1 (AD 0 → AD 1).
At a price R there will be a shortage in the commodity market d > s at the rate of Y 1 > Y F.
If wages remained tight, then entrepreneurs began to raise prices in response to increased demand ( R) and increase production.
The rise in prices lowered the value of the MA, and at the point E 1 short-term equilibrium is reached, output is equal to Y 2.
In the long run, resource prices begin to rise. Rising costs make it unprofitable to maintain production at the level Y 2, therefore, firms will reduce the volume of production at a given price level - there will be a shift in the CSP (AScr0 → AScr1).
The volume of production will decrease ( Y 1 < Y 2), the price level will rise ( R 2 > R 1). Dot E 2 – new short run equilibrium.
If entrepreneurs raise wages in line with rising prices, then there will be a further increase in production costs, which will lead to a shift in the CSP of the short run, shifts will continue until the economy moves into a state of short-term and long-term equilibrium.
By what amount will prices increase (from R 0 to R 3) depends on the elasticity of demand. The higher the elasticity of demand, the higher the rate of inflation.
Price growth in the short term (from R 0 to R 1) depends on the elasticity of the corresponding PCB. The lower the elasticity of the JV, the greater the rise in prices in the short run.
Rice. 16.6.
The Russian economy is characterized by low elasticity of aggregate demand and aggregate supply in the short run.
Low elasticity of demand predetermined by the fact that the investment demand of the entrepreneur is insensitive to the interest rate due to the imperfection of the credit mechanism for financing investments.
Low elasticity of aggregate supply associated with long-term stable developing inflation.
In some cases, when the MA is practically inelastic, the country's economy, with the growth of the MA, can fall into inflation trap, i.e. a situation in which domestic market forces are able to bring the economy to a state of stable long-term equilibrium, in which prices practically stabilize. Aggregate demand is almost parallel to aggregate supply in the long run (Figure 16.7).
Rice. 16.7.
Shifts in the aggregate supply curve do not lead to an increase in prices, in this situation, in order to restore long-term equilibrium, state intervention (restriction policy) is necessary, aimed at reducing aggregate demand ( AD 1→ AD 0).
In the opposite situation, when the imbalance is caused by a reduction in aggregate demand (AD 0 → AD 2), with inelasticity of the SS, there may be deflationary trap, expressed in the fact that the price level will fall, but at the same time, low employment will be observed in the economy. In a situation of a deflationary trap, the state introduces stimulation of the SS until it returns to an equilibrium state.
In macroeconomics, the AD-AS model is the basis for studying fluctuations in output and price levels in the economy as a whole, the causes and consequences of their changes. With its help, various options for the economic policy of the state can be described.
Aggregate demand is the sum of all expenditures on final goods and services produced in an economy.
It reflects the relationship between the volume of aggregate output demanded by economic agents and the general level of prices in the economy. In the absence of strong inflation and production constraints, growth in aggregate demand stimulates output and employment, with little effect on the price level. If the economy is close to full employment, then an increase in AD will cause not so much an increase in output as an increase in prices.
In the AD structure, we can distinguish:
Demand for consumer goods and services;
Demand for investment goods;
Demand for goods and services from the state;
Demand for export from foreigners.
The aggregate demand curve (AD) shows the combinations of price level and output level at which commodity markets and asset markets are simultaneously in equilibrium. It is easy to obtain from the IS-LM model. Let us first turn to the graphical derivation of the aggregate demand curve. Having fixed prices at the level P0, we find the corresponding equilibrium income Y0 and depict this point in the Y-P axes. Consider a lower price level P' (P'
Fig.7. Graphical display of the AD curve
Movement along the AD curve reflects the change in aggregate demand depending on the dynamics of the general price level. This dependence can be obtained from the equation of the quantity theory of money:
MV=PY, P=MV/Y, Y=MV/P.
The negative slope of the AD curve is explained as follows: the higher the price level, the lower the real stock of money (M / P), and therefore the smaller the amount of goods and services for which demand is presented. The curve is constructed under the condition of a fixed supply of money and the velocity of their circulation.
TO non-price factors that affect AD includes everything that affects household consumption spending, firms' investment spending, government spending, and net exports. These are: the welfare of consumers, their expectations, taxes and interest rates, subsidies and concessional loans to investors, exchange rate fluctuations, the supply of money and the velocity of their circulation.
2. Keynesian consumption function. Modern theories of consumption (the "life cycle" hypothesis of F. Modigliani, S. Kuznets and the "mystery of consumption", the "permanent income" hypothesis of M. Friedman).
3. Consumer demand and savings: Keynesian and neoclassical savings functions.
4. Interrelation of savings and investments.
Basic concepts a student should know
Aggregate demand(aggregate demand, AD) is the total quantity of goods and services that households, businesses, the state and foreign countries intend to buy at different price levels in the country.
AD = C + Ig + G + EXn
Price Factors dynamics of aggregate demand, the action of which explains the negative slope AD ( sliding along a curve AD):
Consumption (C) - the process of individual and/or sharing of goods in order to satisfy needs.
Personal consumption spending includes household spending on current consumption, durable goods, doctors, lawyers, teachers, etc.
Research in this area belongs to the English economist John Maynard Keynes (1883-1946):
1. Real consumption (i.e., consumption adjusted for inflation) depends on current real incomes and changes along with the latter: C = C (Y);
2. The “basic psychological law” of society: consumption is growing, but not in the same proportion as income is growing. As a result, the share of consumption in income decreases.
Consumer spending are divided into:
1) autonomous (autonomous consumption expenditures, CA) that do not depend on current disposable income ;
2) derivatives - dependent on the dynamics of current disposable income.
disposable income (Yd) – total income (Y) net of taxes (T).
Saving(savings, S) are defined as household income minus consumption. Total savings (S) are subdivided into private savings ( Sp), state ( Sg) and the savings of the external (rest) world ( Sr):
S = Sp + Sg + Sr
Private savings equals the amount of income ( Y), transfers (transfers TR), interest on public debt (debt, D) net of taxes ( T) and consumption ( C):
Sp = (Y+TR+D-T) - C
Government savings is defined as:
Sg = (T-TR-D) - G
A negative amount of government savings indicates the presence of a budget deficit (budget deficit, BD): BD = -Sg
The savings of the outside world (the rest of the world) is equal to the income that the outside world receives from imports ( IM), minus export costs ( EX):
Sr = IM – EX = - EXn
TO factors determining the dynamics of investments include:
3) the level of taxation;
4) changes in production technology;
5) cash fixed capital;
6) economic expectations;
7) dynamics of total income.
Investment is a function of the interest rate (rate, r): the higher the interest rate, the lower the level of investment:
The most important macroeconomic proportions, reflecting the interaction of investment, savings and income, can be represented as follows (we abstract from government spending and net exports):
If C + I = C + S, then I = S
Investments are functions of the interest rate: I = I (r), and savings are a function of income: S = S (Y).
The equality of investment and saving demonstrates the importance of maintaining certain proportions in the economy for the balance between aggregate demand and aggregate supply (it should be noted that this equality is not automatically observed).
Typical tasks
TASK №17. The consumption function C = 50+0.7Yd is given. Express savings as a function of pre-tax income if the income tax rate is 13%. Yd is disposable income (net of taxes).
TASK №18. The relationship between the value of national income and the volume of household consumption is given by the table:
Define:
1) algebraic form of the Keynesian consumption function;
2) At what income are savings equal to zero?
TASK №19. Household consumption function C = 40+0.75Yd Determine the amount of savings if the income tax rate is 20% and the total household income is 300 den. units Yd is disposable income (net of taxes).
TASK №20. The economy is represented by the table data. Calculate private savings, public savings.
D) real money supply.
4. What non-price factors shift the aggregate demand curve upward;
C) excess of imports over exports;
5. The aggregate demand curve will shift to the right if:
A) the price level will rise
B) purchases of imported goods will increase;
C) consumption spending by the population will increase;
D) there will be a drop in production.
6. All of the following shift the aggregate demand curve to the right, except:
A) growth in public procurement;
C) an increase in the nominal money supply
D) tax cuts.
7. What non-price factors shift the aggregate demand curve downward:
A) a decrease in government purchases;
B) reduction of the tax burden;
C) increase in income of buyers;
D) optimistic expectations of buyers.
8. A shift in the aggregate demand curve cannot reflect:
A) an increase in the price level and real GNP at the same time;
B) an increase in the price level in the absence of growth in real GNP;
C) the growth of real GDP in the absence of price increases;
D) an increase in the price level and a fall in real GNP at the same time.
9. Consumption is:
A) part of household income spent on the purchase of goods and services in the current period;
B) part of the income intended for the purchase of goods and services in the future period;
C) the balance of income accumulated in bank accounts;
D) All answers are wrong.
10. Savings are:
A) all accumulated property of households and savings of the population;
B) real cash balances of all market entities;
C) part of the income invested in securities;
D) part of household income not spent in a given period of time.
11. What is meant by autonomous consumption:
A) the level of consumption is below the equilibrium state;
B) the level of consumption that makes it possible to save;
C) consumption that does not depend on income;
D) the portion of income that goes to consumption.
12. The change in the value of autonomous consumption can be graphically represented as:
A) movement along the curve of planned costs;
B) change in the slope of the planned expenditure curve;
C) a shift in the planned expenditure curve;
D) moving along the consumer function curve as the level of income changes.
13. If consumer spending is 9,000 while disposable income is 10,000, then the marginal propensity to consume is:
D) is an indefinite quantity.
14. What happens to the MPC and MPS with an increase in the income of the population:
A) MRS > 0; MPS< 1;
B) MPC and MPS increase;
C) MPC decreases, MPS increases;
D) can't say for sure.
15. A high marginal propensity to save means that:
A) the aggregate demand curve is steeper
B) the aggregate demand curve is flatter;
C) the aggregate demand curve is flat if MPS is greater than 0.5;
D) has nothing to do with aggregate demand.
16. Which of the following factors affect investment demand:
A) the rate of interest
B) the expected rate of net profit;
C) optimism or pessimism of entrepreneurs;
D) all of the above factors.
17. What underlies induced investments:
A) ever-increasing consumer demand;
B) scientific and technological progress;
18. What is the reason for the appearance of induced investments:
A) with an increase in national income and aggregate demand;
B) with population growth;
C) with the need to implement a technical innovation;
D) with the development of new mineral deposits.
19. In the context of an economic downturn in business activity:
A) the ratio between investment and savings is 1;
B) the volume of savings is equal to the volume of investments;
C) investment consumption is lower;
D) All answers are wrong.
20. If households do not spend all their income on consumption and put the unspent amount in the bank, then they can be said to:
A) both save and invest;
B) save, but do not invest;
C) invest but do not save;
D) do not save or invest;
E) save, but do not invest, part of the savings that is used to purchase securities.
Issues for discussion
1. Can the marginal propensity to consume be equal to the marginal propensity to save?
2. Do you agree with the basic psychological law of John Keynes? What factors can influence the specific forms of its implementation?
3. What is the essence of the disagreement between the Keynesians and the classics on the issue of the decisive factor that determines the dynamics of savings? Can savings be inversely related to interest rate dynamics?
4. What, in your opinion, is the practical significance of identifying the parameters of consumer spending in a particular country at a particular stage of its development?
5. Explain, using an example, the negative functional dependence of the amount of investment and the bank interest rate?
Educational literature
1., Seregina: textbook / under the general editorship. Doctor of Economics, prof. ; Moscow State University . - 8th ed., revised. and additional [Text] - M .: Publishing house "Delo and Service", 2007. - 496 p. - ("Textbooks of Moscow State University.") - ISBN 978-5-8018-0332-6, Chapters 4.5;
2. Course of economic theory: textbook - 7th ed., add. and reworked. [Text] - Kirov: ASA, 2011. - 880 p. - ISBN 978-5-85271-287-5, Chapter 18;
3. Macroeconomics: textbook for bachelors / [and others]; ed. ; Higher school economy, national research un-t. - M. : Yurayt, 2011. - 522 p. - ISBN 978-5-9916-1328-6, Chapter 3;
4. Mankiw macroeconomics. 4th ed. / Per. from English. [Text] - St. Petersburg: Peter, 2010. - 544 p. – ISBN 978-5-91180-167-0, Chapters 5, 7;
5. Tarasevich: textbook /,. - 7th ed., Rev. and additional [Text] - M .: Higher education, Yurayt-Izdat, 2009. - 654 p. (Universities of Russia) - ISBN 978-5-9692-0371-6, Chapter 3.
1. Aggregate demand in macroeconomics is:
a) Government spending and investment demand of enterprises.
b) Household demand and net exports.
c) Demand of households and investment demand of enterprises.
d) Demand of all macroeconomic subjects of the economy.
e) Household and government demand.
2. The negative slope of the AD curve is explained by the effects:
a) Wealth.
b) Feedback.
c) Substitutions.
d) interest rate.
e) Import purchases.
3. What, according to J.M. Keynes, is the main instrument for maintaining macroeconomic equilibrium:
a) Household spending.
b) Gross investment.
c) government spending.
d) Net exports.
e) All answers are correct.
4. Keynesian segment on the aggregate supply curve AS:
a) Has a positive slope.
b) Has a negative slope.
c) Represented by a vertical line.
d) Represented by a horizontal line.
e) All answers are wrong.
5. The classical segment of the aggregate supply curve AS is characterized by:
a) An increase in output.
b) Price stability.
c) Decrease in the volume of production.
d) Achieving full employment.
d) an increase in prices.
Topic 10. The cyclical nature of the market economy.
Macroeconomic dynamics
1. What is the cyclical nature of economic development (choose the most correct answer)?
a) Periodic downturns in business activity.
b) Periodic upsurges in business activity.
c) Periodic fluctuations in investment demand.
d) fluctuations in the economic situation, which are of a periodic nature.
e) All answers are wrong.
2. A jobless person due to a downturn in the economy falls into the category of unemployed covered by:
a) seasonal unemployment.
b) A frictional form of unemployment.
c) Structural form of unemployment.
d) Hidden unemployment.
e) Cyclical form of unemployment.
3. The Phillips curve characterizes:
a) The degree of inequality in the personal distribution of national income.
b) Relationship between the rate of interest and the money supply in circulation.
c) Relationship between the unemployment rate and the inflation rate.
d) Relationship between tax rates and tax revenues.
e) Relationship between full employment and the natural rate of unemployment.
4. Stagflation is characterized by:
a) Shortage of goods and services.
b) The rise of the economy, lower prices and unemployment.
c) Stagnation in production, rising prices and unemployment.
d) An increase in the level of employment.
e) A constant increase in the price of the consumer basket.
5. Intensive factors of economic growth include:
a) Scientific and technological progress.
b) Involvement of additional resources in production.
c) Improvement of engineering and production technology.
d) Improving the organization and stimulating labor.
e) Increasing labor productivity.
In macroeconomics, under aggregate demand refers to the total expenditures planned by all macroeconomic entities for the acquisition of all final goods and services created in the national economy.
In accordance with the distribution of costs between individual sectors of the economy as part of aggregate demand distinguish the following main elements:
– consumer spending of households (С);
– investment expenditures of the private sector (/);
– public procurement (b);
– net export (NX).
As a result, aggregate demand as a whole can be represented as the amount of said expenses.
Most of the total demand make up the expenditures of the population on goods and services for consumer purposes, i.e. element C, for brevity often called consumption. The share of this indicator in the national income of the country reaches about 50% in Russia, and about 67% in the USA.
Investment spending refers to the demand of firms and households for investment goods. Firms buy these commodities to increase their stock of real capital and rebuild depreciated capital. The acquisition of houses and apartments is also part of the investment. The total investment is about 15-20% of the country's GNP.
The third element of aggregate demand is public procurement of goods and services. It includes spending by governments at all levels on services (eg education, health care), the purchase of goods, and the payment of wages to government officials. The share of government purchases in the total volume of expenditures on the purchase of goods and services depends on the degree of state participation in the redistribution of the national income of the country, the level of taxation rates and the size of the state budget deficit. In Russia, its value is about 30% of the country's national income.
Net export is the difference between exports (payments by foreigners for goods and services produced in the country) and imports (expenditures by economic entities of a given country to pay for goods and services produced abroad).
There are three other main effects that can influence the change aggregate demand:
– interest rate effect. With an increase in the price level, the demand for money increases, and this, with a constant amount of money in circulation, causes an increase in the interest rate, which in turn reduces incentives for investment and consumer spending. With high interest rates, many consumers lose their interest (or ability) to get loans to buy cars, furniture, real estate and other goods;
– wealth effect is that an increase in the price level reduces the real value of many financial assets that generate fixed income (bonds, deposits). Feeling poorer because of the depreciation of savings, consumers begin to save on purchases;
– effect of import purchases. An increase in the general price level in one country will encourage more goods to be imported into that country, and the value of exports will decrease. As a result, there will be a reduction in net exports, and, consequently, in the overall value of aggregate demand.