T jason finch

Samuelson's book Summary Chapter 24

Chapter 24 Summary

A. The Basic Multiplier Model 1. The multiplier model provides a simple way to understand the impact of aggregate demand on the level of output. In the simplest approach, household consumption is a function of disposable income while investment is fixed. People's desire to consume and the willingness of businesses to invest are brought into balance by adjustments in output. The equilibrium level of national output must be at the intersection of the saving and investment schedules, SS and II. We can also see this using the expenditure-output approach in which equilibrium output comes at the intersection of the consumption-plus-investment schedule, C + I, with the 45E line. 2. If output is temporarily above its equilibrium level, businesses find output higher than sales, with inventories piling up involuntarily and profits plummeting. Firms therefore cut production and employment back toward the equilibrium level. The only sustainable level of output comes when buyers voluntarily purchase exactly as much as businesses desire to produce. 3. Thus, for the simplified Keynesian multiplier model, investment calls the tune and consumption dances to the music. Investment determines output, while saving responds passively to income changes. Output rises or falls until planned saving has adjusted to the level of planned investment. 4. Investment has a multiplied effect on output. When investment changes, output will at first rise by an equal amount. But as the income receivers in the capital-goods industries get more income, they set in motion a whole chain of additional secondary consumption spending and employment. If people always spend r of each extra dollar of income on consumption, the total of the multiplier chain will be 1 + r + r^2 + ... = 1/(1 - r) = 1/(1 - MPC) = 1/MPS The simplest multiplier is numerically equal to the reciprocal of the MPS or, equivalently, to 1/(1 - MPC). The multiplier works in either direction, amplifying either increases or decreases in investment. This result occurs because it always takes more than a dollar of increased income to increase saving by a dollar. 5. Key points to remember are (a) the basic multiplier model emphasizes the importance of shifts in aggregate demand in affecting output and income and (b) it is primarily applicable for situations with unemployed resources. B. Fiscal Policy in the Multiplier Model 6. The analysis of fiscal policy elaborates the Keynesian multiplier model. It shows that an increase in government purchases-taken by itself, with taxes and investment unchanged-has an expansionary effect on national output much like that of investment. The schedule of C + I + G shifts upward to a higher equilibrium intersection with the 45E line. 7. A decrease in taxes - taken by itself, with investment and government purchases unchanged - raises the equilibrium level of national output. The CC schedule of consumption plotted against GDP is shifted upward and leftward by a tax cut. But since extra dollars of disposable income go partly into saving, the dollar increase in consumption will not be quite so great as the dollars of new disposable income. Therefore, the tax multiplier is smaller than the government expenditure multiplier. 8. Using statistical techniques and macroeconomic theory, economists have developed realistic models to estimate expenditure multipliers. For mainstream approaches, these tend to show multipliers of between 1 and 1½ for periods of up to 4 years.

Samuelson's book Summary Chapter 23

Chapter 23 Summary

A. Business Fluctuations 1. Business cycles or fluctuations are swings in total national output, income, and employment, marked by widespread expansion or contraction in many sectors of the economy. They occur in all advanced market economies. We distinguish the phases of expansion, peak, recession, and trough. 2. Many business cycles occur when shifts in aggregate demand cause sharp changes in output, employment, and prices. Aggregate demand shifts when changes in spending by consumers, businesses, or governments change total spending relative to the economy's productive capacity. A decline in aggregate demand leads to recessions or depressions. An upturn in economic activity can lead to inflation. 3. Business-cycle theories differ in their emphasis on exogenous and internal factors. Importance is often attached to fluctuations in such exogenous factors as technology, elections, wars, exchange-rate movements, or oil-price shocks. Most theories emphasize that these exogenous shocks interact with internal mechanisms, such as the multiplier and investment-demand shifts, to produce cyclical behavior. Just as people suffer from different diseases, so do business-cycle ailments vary in different times and countries. B. Foundations of Aggregate Demand 4. Ancient societies suffered when harvest failures produced famines. The modern market economy can suffer from poverty amidst plenty when insufficient aggregate demand leads to deteriorating business conditions and soaring unemployment. At other times, excessive reliance on the monetary printing press leads to runaway inflation. Understanding the forces that affect aggregate demand, including government fiscal and monetary policies, can help economists and policymakers design steps to smooth out the cycle of boom and bust. 5. Aggregate demand represents the total quantity of output willingly bought at a given price level, other things held constant. Components of spending include (a) consumption, which depends primarily upon disposable income; (b) investment, which depends upon present and expected future output and upon interest rates and taxes; (c) government purchases of goods and services; and (d) net exports, which depend upon foreign and domestic outputs and prices and upon foreign exchange rates. 6. Aggregate demand curves differ from demand curves used in microeconomic analysis. The AD curves relate overall spending on all components of output to the overall price level, with policy and exogenous variables held constant. The aggregate demand curve is downward_sloping primarily because of the money-supply effect, which occurs when a rise in the price level, with the nominal money supply constant, reduces the real money supply. A lower real money supply raises interest rates, tightens credit, and reduces total real spending. This represents a movement along an unchanged AD curve. 7. Factors that change aggregate demand include (a) macroeconomic policies, such as monetary and fiscal policies, and (b) exogenous variables, such as foreign economic activity, technological advances, and shifts in asset markets. When these variables change, they shift the AD curve.