Principles of Economics- The Classical Long Run Model

7/21/2019 Principles of Economics- The Classical Long Run Model

http://slidepdf.com/reader/full/principles-of-economics-the-classical-long-run-model 1/53

PowerPoint Slides prepared by: Andreea CHIRITESCUEastern Illinois University

PowerPoint Slides prepared by: Andreea CHIRITESCUEastern Illinois University

The Classical Long-Run Model

CHAPTER

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%a&roe&ono+i& %odels

• Classi&al +odel

- %a&roe&ono+i& +odel t$at e)plains t$elon!,r(n be$avior o* t$e e&ono+y

- .eveloped by e&ono+ists in t$e 1/t$ and

early 20t$ &ent(ries - %aret *or&es drive t$e e&ono+y toward

*(ll e+ploy+ent

• reat .epression - (tp(t was st(& *ar below its potential *or

+any years




3i!(reU#S# Real .P' 1420-2010 5"o!arit$+i& S&ale6

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1




• 9eyness ideas

- And t$eir *(rt$er develop+ent $elp (s(nderstand e&ono+i& *l(&t(ations• %ove+ents in o(tp(t aro(nd its lon!,r(n trend

• Classi&al +odel - Has proven +ore (se*(l in e)plainin! t$e

lon!,r(n trend itsel*

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• Ass(+ption in &lassi&al +odel

- So+e si+pli*yin! ass(+ptions - Ass(+ption abo(t $ow t$e world wors:

+arets &lear • T$e pri&e in every +aret will ad=(st (ntil

>(antity s(pplied and >(antity de+anded aree>(al




How %(&$ (tp(t ?ill ?e Prod(&e@

• 200< t$ro(!$ 200 5be*ore t$e re&ession6

- T$e U#S# e&ono+y prod(&ed an avera!eo* abo(t B1 trillion wort$ o* !oods andservi&es per year 5val(ed in 200< dollars6

• Reason *or all t$is prod(&tion: - (r desire *or !oods and servi&es

- (r need *or in&o+e in order to b(y t$e+

• People !et in&o+e

- S(pplyin! labor and ot$er reso(r&es to*ir+s




How %(&$ (tp(t ?ill ?e Prod(&e@

• 3ir+s

- Use t$ese reso(r&es to +ae t$e !oodsand servi&es t$at people de+and

• "abor +aret ass(+ptions

- 3ir+s are already (sin! t$e available>(antities o* t$e ot$er reso(r&es

- A!!re!ate all t$e di**erent types o* labor

into a sin!le variable' labor




T$e "abor %aret

• "abor +aret

- Ho(se$olds s(pply labor

- 3ir+s de+and labor - Horiontal a)is: n(+ber o* worers

- Derti&al a)is: real $o(rly wa!e rate

• Real wa!e

- %eas(red in t$e dollars o* so+e base year - T$e a+o(nt o* !oods t$at worers &an

b(y wit$ an $o(rs earnin!s

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T$e "abor %aret

• "abor s(pply &(rve

- How +any people will want to wor atvario(s real wa!e rates

- Slopes (pward• As t$e wa!e rate in&reases' +ore and +ore

individ(als de&ide t$ey are better o** worin!t$an not worin!

•

A rise in t$e wa!e rate in&reases t$e n(+bero* people in t$e e&ono+y w$o want to wor




T$e "abor %aret

• "abor de+and &(rve

- How +any worers *ir+s will want to $ireat vario(s real wa!e rates

- .ownward slopin!• As t$e wa!e rate in&reases' ea&$ *ir+ in t$e

e&ono+y will *ind: – To +a)i+ie pro*it' it s$o(ld e+ploy *ewer worers

t$an be*ore

• ?$en all *ir+s be$ave t$is way to!et$er – A rise in t$e wa!e rate will de&rease t$e >(antity

o* labor de+anded in t$e e&ono+y




3i!(re

T$e e>(ilibri(+ wa!e rate o*B2< per $o(r is deter+inedat point E' w$ere t$e(pward,slopin! labor s(pply&(rve &rosses t$e

downward,slopin! laborde+and &(rve# At any ot$erwa!e' an e)&ess de+and ore)&ess s(pply o* labor will&a(se an ad=(st+ent ba& toe>(ilibri(+#

T$e "abor %aret


2

(+ber o*?orers

RealHo(rly?a!e

".

"S

E

B0

2<

20

1<0 +illion F

3(ll E+ploy+ent

E)&ess S(pply

o* "abor

E)&ess .e+and

*or "abor

8H

G A



T$e "abor %aret

• I* e)&ess s(pply o* labor

- Co+petition a+on! worers wo(ld drivet$e wa!e downward

• I* e)&ess de+and *or labor

- Co+petition a+on! *ir+s wo(ld drive t$ewa!e (pward

• E>(ilibri(+ total e+ploy+ent

- %aret &lears

- E&ono+y a&$ieves *(ll e+ploy+ent on itsown




3ro+ E+ploy+ent to (tp(t

• Ass(+ptions

- (antities o* ot$er reso(r&es: *i)ed - Te&$nolo!y: *i)ed

• A!!re!ate prod(&tion *(n&tion

- How +(&$ total o(tp(t &an be prod(&edwit$ di**erent >(antities o* labor

- ?$en >(antities o* all ot$er reso(r&es andte&$nolo!y are $eld &onstant

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3i!(re(tp(t .eter+ination in t$e Classi&al %odel

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(+ber o* ?orers

RealHo(rly

?a!e

".

"S

B2<

1<0 +illion

In t$e labor +aret' t$e de+andand s(pply &(rves interse&t todeter+ine e+ploy+ent o* 1<0+illion worers#

(+ber o* ?orers

Total (tp(t5Real .P6

1<0 +illion

T$e prod(&tion *(n&tion s$owst$at t$ose 1<0 +illion worers &anprod(&e B10 trillion o* real .P#

A!!re!ate Prod(&tion 3(n&tion

B10 Trillion

F3(llE+ploy+ent

(tp(t



3ro+ E+ploy+ent to (tp(t

• A!!re!ate prod(&tion *(n&tion

- .e&linin! slope: di+inis$in! ret(rns tolabor • (tp(t rises w$en anot$er worer is added

• T$e rise is s+aller and s+aller wit$ ea&$s(&&essive worer

• E>(ilibri(+ real .P

- In t$e &lassi&al' lon!,r(n view - E&ono+y rea&$es its potential o(tp(t

a(to+ati&ally




T$e Role o* Spendin!

• Total spendin! in a very si+ple e&ono+y

- .o+esti& $o(se$olds• Spend all in&o+e on do+esti& o(tp(t

• o savin!

- .o+esti& b(siness *ir+s - Total spendin! +(st be e>(al to total

o(tp(t




3i!(re

An e&ono+y prod(&in! total o(tp(t o* B10 trillion will' by de*inition' &reate B10 trillion in *a&torpay+ents or total in&o+e# I* $o(se$olds spend all o* t$is in&o+e on &ons(+ption !oods' t$entotal spendin! will e>(al B10 trillion as well#

Total Spendin! in a Si+ple E&ono+y


;



T$e Role o* Spendin!

• Says law

- Total spendin! will be s(**i&ient top(r&$ase t$e total o(tp(t prod(&ed

- Gy prod(&in! !oods and servi&es• 3ir+s &reate a total de+and *or !oods and

servi&es e>(al to w$at t$ey $ave prod(&ed

- S(pply &reates its own de+and

- 3(ll,e+ploy+ent &an be +aintained

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Total Spendin! in a %ore Realisti& E&ono+y

• Ass(+ptions

- Closed e&ono+y - overn+ent

• Colle&ts ta)es and p(r&$ases !oods and

servi&es - Ho(se$olds

• Send t$eir in&o+e on &ons(+ption' ta)es'

and savin!s - G(siness *ir+s

• P(r&$ase &apital !oods 5invest+ent spendin!6


T bl 1



Table3lows in t$e E&ono+y o* Classi&a' 2012


1




• Planned invest+ent spendin! 5IP6

- G(siness p(r&$ases o* plant ande>(ip+ent

- Total invest+ent 5I6 +in(s &$an!e in

inventoriesIPFI, inventories

• et ta)es 5T6

- Total !overn+ent ta) reven(e +in(s!overn+ent trans*er pay+ents





• .isposable in&o+e

- Ho(se$old in&o+e +in(s net ta)es - It is eit$er spent or saved

• Ho(se$old savin! 5S6

- Portion o* a*ter,ta) in&o+e t$at$o(se$olds do not spend on &ons(+ption

- S F .isposable In&o+e - C





• Total spendin! in Classi&a

- S(+ o* t$e p(r&$ases +ade by• Ho(se$old se&tor 5C6

• G(siness se&tor 5IP6

•

overn+ent se&tor 56Total spendin! F C J IP J

• "eaa!es F T J S

- In&o+e earned by $o(se$olds t$at t$ey donot spend on t$e &o(ntrys o(tp(t d(rin! a!iven year

2;© 201 Cen!a!e "earnin!# All Ri!$ts Reserved# %ay not be &opied' s&anned' or d(pli&ated' in w$ole or in part' e)&ept *or (se asper+itted in a li&ense distrib(ted wit$ a &ertain prod(&t or servi&e or ot$erwise on a password,prote&ted website *or &lassroo+ (se#




• In=e&tions F J IP

- Spendin! on a &o(ntrys o(tp(t *ro+so(r&es ot$er t$an its $o(se$olds

• Total spendin! will e>(al total o(tp(t

- I* and only i* total leaa!es are e>(al tototal in=e&tions

S J T F IP J

2<© 201 Cen!a!e "earnin!# All Ri!$ts Reserved# %ay not be &opied' s&anned' or d(pli&ated' in w$ole or in part' e)&ept *or (se asper+itted in a li&ense distrib(ted wit$ a &ertain prod(&t or servi&e or ot$erwise on a password,prote&ted website *or &lassroo+ (se#

3i <



3i!(re"eaa!es and In=e&tions


<

Gy de*inition' total o(tp(t e>(als total in&o+e# "eaa!esKnet ta)es 5T6 and savin! 5S6Kred(&e&ons(+ption spendin! below total in&o+e# In=e&tionsK !overn+ent p(r&$ases 56 pl(s plannedinvest+ent spendin! 5Ip6K&ontrib(te to total spendin!# ?$en leaa!es e>(al in=e&tions' totalspendin! e>(als total o(tp(t#



T$e "oanable 3(nds %aret

• "oanable *(nds +aret

- Savers +aer t$eir *(nds available toborrowers

• Total s(pply o* loanable *(nds

- Is e>(al to $o(se$old savin! - 3(nds s(pplied are loaned o(t

• Ho(se$olds re&eive interest pay+ents on

t$ese *(nds


T$ " bl 3 d %




• S(pply o* *(nds &(rve

- "evel o* $o(se$old savin! at vario(sinterest rates

- Slopes (pward: >(antity o* *(nds s(pplied

to t$e *inan&ial +aret depends positivelyon t$e interest rate


3i!(re 7



3i!(reHo(se$old S(pply o* "oanable 3(nds

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7

Trillions

o* .ollars

per Lear

Interest

Rate

<M

M

1#<

Total S(pply o* 3(nds5Savin!6

A

1#<

G

As t$e interest rate rises' savin!or t$e >(antity o* loanable *(nds

s(pplied in&reases

T$ " bl 3 d % t




• .e+and *or loanable *(nds

- Gy b(siness *ir+s and !overn+enta!en&ies

• G(sinesses de+and *or loanable *(nds

- Is e>(al to t$eir planned invest+entspendin!

- 3(nds obtained are borrowed

- 3ir+s pay interest on t$ese *(nds


T$ " bl 3 d % t




• G(d!et de*i&it' - T

- E)&ess o* !overn+ent p(r&$ases over netta)es

• overn+ents de+and *or loanable *(nds

- Is e>(al to its b(d!et de*i&it - 3(nds are borrowed

- overn+ent pays interest on its loans


T$ " bl 3 d % t




• G(d!et s(rpl(s' T ,

- E)&ess o* net ta)es over !overn+entp(r&$ases

• G(siness de+and *or *(nds &(rve

- "evel o* invest+ent spendin! *ir+s plan atvario(s interest rates

• ?$en t$e interest rate *alls

- Invest+ent spendin! rises

- G(siness borrowin! rises


3i!(re



3i!(reG(siness .e+and *or "oanable 3(nds


Trillions o*.ollars per

Lear

Interest

Rate

<M

M

1#<

Planned Invest+ent 5I p )

5G(siness .e+and *or 3(nds6

A

1#0

G

As t$e interest rate *alls' b(siness*ir+s de+and +ore loanable *(nds*or invest+ent pro=e&ts#

T$ " bl 3 d % t




• overn+ent de+and *or *(nds &(rve

- A+o(nt o* !overn+ent borrowin! atvario(s interest rates

• Independent o* t$e interest rate

- overn+ent se&tors de*i&it - overn+ent de+and *or *(nds

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T$ " bl 3 d % t




• Total de+and *or *(nds &(rve

- Total a+o(nt o* borrowin!• At vario(s interest rates

• As interest rate de&reases

- Total >(antity o* *(nds de+anded rises - (antity o* *(nds de+anded by b(siness

*ir+s in&reases

- (antity de+anded by t$e !overn+entre+ains (n&$an!ed

<© 201 Cen!a!e "earnin!# All Ri!$ts Reserved# %ay not be &opied' s&anned' or d(pli&ated' in w$ole or in part' e)&ept *or (se asper+itted in a li&ense distrib(ted wit$ a &ertain prod(&t or servi&e or ot$erwise on a password,prote&ted website *or &lassroo+ (se#

3i!(re 4



3i!(reT$e .e+and *or 3(nds


4

Trillions o* dollars per year

Interest Rate

5&6


Interest Rate

5a6


Interest Rate

5b6

G(siness .e+and*or 3(nds 5I p )

<M

M

1#<1#0

overn+ent.e+and *or3(nds 5G-T )

0#<

Total .e+and *or

3(nds NI p+(G-T)]

<M

M

2#2<1#<

S(++in! b(sinessde+and *or loanable *(nds

at ea&$ interest rate O

and t$e !overn+ents

de+and *or loanable

*(nds O

!ives (s t$e e&ono+ys totalde+and *or loanable *(nds at

ea&$ interest rate#

<M

M A

G

A

G

A

G

T$ " bl 3 d % t




• E>(ilibri(+ in t$e loanable *(nds +aret

- "oanable *(nds +aret: ass(+ed to &lear - Interest rate will rise or *all

• Until t$e >(antities o* *(nds s(pplied and

de+anded are e>(al• Says law

- It $olds as lon! as t$e loanable *(nds

+aret &lears - Total spendin! e>(als total o(tp(t

• Tr(e even in a +ore realisti& e&ono+y


3i!(re /



3i!(re

S(ppliers and de+anders o**(nds intera&t to deter+inet$e interest rate in t$eloanable *(nds +aret# At an

interest rate o* <M' >(antitys(pplied and >(antityde+anded are bot$ e>(al toB1#< trillion#

"oanable 3(nds %aret E>(ilibri(+


/

Trillions o*.ollars per Lear

Interest

Rate

<M

Total .e+and *or

3(nds NI p+(G-T)]

1#<

Total S(pply

o* 3(nds 5Savin!6

E

3i!(re 10



3i!(re

Ge&a(se t$e loanable*(nds +aret &lears'we now t$at totalleaa!es willa(to+ati&ally e>(altotal in=e&tions# T$eleaa!e o* net ta)es!oes to t$e

!overn+ent and isspent on !overn+entp(r&$ases# I* t$e!overn+ent isr(nnin! a b(d!etde*i&it' it will alsoborrow part o* t$eleaa!e o* $o(se$oldsavin! and spendt$at too#

How t$e "oanable 3(nds %aret Ens(res T$at TotalSpendin! F Total (tp(t

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10

Any $o(se$old savin! le*t over will be borrowed by b(siness *ir+s and spent on &apital# T$(s' every dollar o*leaa!es t(rns into spendin! by eit$er !overn+ent or private b(siness *ir+s#





• Says law wit$ e>(ations

;0© 201 Cen!a!e "earnin!# All Ri!$ts Reserved# %ay not be &opied' s&anned' or d(pli&ated' in w$ole or in part' e)&ept *or (se asper+itted in a li&ense distrib(ted wit$ a &ertain prod(&t or servi&e or ot$erwise on a password,prote&ted website *or &lassroo+ (se#

{

{ {

Quantity of Quantity of

funds funds

Leakages Injections

⇒

⇒

⇒

1 42 43P

supplied demandedP

Loanable unds ma!"e#s clea! $ % & '() - T*

Loanable unds ma!"e#s clea! $ 'T % & ')

Lea"ages %&n+ec#ions To#al spending %To#al ou#pu#

3is&al Poli&y in t$e Classi&al %odel



3is&al Poli&y in t$e Classi&al %odel

• 3is&al poli&y

- C$an!e in !overn+ent p(r&$ases or netta)es desi!ned to &$an!e total o(tp(t

• .e+and,side e**e&ts

- %a&roe&ono+i& poli&y e**e&ts on totalo(tp(t t$at wor t$ro(!$ &$an!es in totalspendin!

• Classi&al +odel - 3is&al poli&y $as no de+and,side e**e&ts


An In&rease in overn+ent P(r&$ases




• In&rease in :

- overn+ent borrows t$e additional *(nds - Interest rate in&reases

• .e&rease in planned invest+ent spendin!

• .e&rease in &ons(+ption spendin! 5in&reasein savin!s6

• overn+ents p(r&$ases

- Have &rowded o(t t$e spendin! o*$o(se$olds 5C6 and b(sinesses 5Ip6


3i!(re 11



3i!(re

Ge!innin! *ro+ e>(ilibri(+ at point A' an in&rease in t$e b(d!et de*i&it &a(sed by additional !overn+entp(r&$ases s$i*ts t$e de+and *or *(nds &(rve *ro+ Ip J 1 Q T to Ip J 2 Q T# At point H' t$e >(antity o*

*(nds de+anded e)&eeds t$e >(antity s(pplied' so t$e interest rate be!ins to rise# As it rises' $o(se$oldsare led to save +ore' and b(siness *ir+s invest less# In t$e new e>(ilibri(+ at point G' bot$ &ons(+ptionand invest+ent spendin! $ave been &o+pletely &rowded o(t by t$e in&reased !overn+ent spendin!#

Crowdin! (t *ro+ an In&rease in overn+ent P(r&$ases


11

Trillions o* .ollars per Lear

InterestRate

<M

I p+G1-T

1#<

Total S(pply

o* 3(nds 5Savin!6

A

I p+G2 -T

M

2#2<

H

2#0<

G

3

C IP

AH F





• Crowdin! o(t

- A de&line in one se&tors spendin! - Ca(sed by an in&rease in so+e ot$er

se&tors spendin!

• Co+plete &rowdin! o(t - A dollar,*or,dollar de&line in one se&tors

spendin!

- Ca(sed by an in&rease in so+e ot$erse&tors spendin!

;;© 201 Cen!a!e "earnin!# All Ri!$ts Reserved# %ay not be &opied' s&anned' or d(pli&ated' in w$ole or in part' e)&ept *or (se asper+itted in a li&ense distrib(ted wit$ a &ertain prod(&t or servi&e or ot$erwise on a password,prote&ted website *or &lassroo+ (se#





• Rise in !overn+ent p(r&$ases' &lassi&al

+odel - Co+pletely &rowds o(t private se&tor

spendin!

- Total spendin! re+ains (n&$an!ed - o de+and,side e**e&ts on total o(tp(t or

total e+ploy+ent

;<© 201 Cen!a!e "earnin!# All Ri!$ts Reserved# %ay not be &opied' s&anned' or d(pli&ated' in w$ole or in part' e)&ept *or (se asper+itted in a li&ense distrib(ted wit$ a &ertain prod(&t or servi&e or ot$erwise on a password,prote&ted website *or &lassroo+ (se#

A .e&rease in et Ta)es




• overn+ent &(ts net ta)es 5T6

- To in&rease total spendin! - Ass(+e: $o(se$olds spend t$e entire ta)

&(t

- G(d!et de*i&it in&reases - In&rease in !overn+ent de+and *or *(nds

- Interest rate in&rease• .e&rease in planned invest+ent spendin!• .e&rease in &ons(+ption spendin! 5+ore

savin!6


3i!(re 12



3i!(re

Ge!innin! *ro+ e>(ilibri(+ at point A' an in&rease in t$e b(d!et de*i&it &a(sed by a ta) &(t s$i*ts t$e de+and*or *(nds &(rve *ro+ Ip J Q T1 to Ip J Q T2# I* t$e ta) &(t is entirely spent' &ons(+ption initially rises by t$e

distan&e AH# At t$e ori!inal interest rate o* < per&ent' t$e >(antity o* *(nds de+anded now e)&eeds t$e>(antity s(pplied# T$is &a(ses t$e interest rate to rise# As t$e interest rate rises' we +ove *ro+ A to G alon!t$e s(pply o* *(nds &(rve# Savin! rises 5and &ons(+ption *alls6 by t$e distan&e A3# T$e *inal rise in&ons(+ption is 3H# ?e also +ove alon! t$e de+and *or *(nds &(rve *ro+ H to G' so invest+ent *alls by t$edistan&e 3H# In t$e new e>(ilibri(+ at point G' &ons(+ption 5w$i&$ $as risen by 3H6 $as &o+pletely &rowdedo(t invest+ent 5w$i&$ $as dropped by 3H6#

Crowdin! (t *ro+ a Ta) C(t


12

Trillions o* .ollars per Lear

Interest

Rate

<M

I p+G-T 1

1#<

Total S(pply

o* 3(nds 5Savin!6

A

I p+G-T 2

M

2#2<

H

2#0<

G

3

CIP

AH F T

F Initial C





• C(t in net ta)es' &lassi&al +odel

- Raises &ons(+ption• ?$i&$ &o+pletely &rowds o(t planned

invest+ent

- Total spendin! re+ains (n&$an!ed - o de+and,side e**e&ts on total o(tp(t or

e+ploy+ent


T$e Classi&al %odel: A S(++ary



T$e Classi&al %odel: A S(++ary

• overn+ent

- eednt worry abo(t e+ploy+ent• T$e e&ono+y will a&$ieve *(ll e+ploy+ent on

its own

- eednt worry abo(t total spendin!• T$e e&ono+y will !enerate =(st eno(!$

spendin! on its own to b(y t$e o(tp(t t$at a*(lly e+ployed labor *or&e prod(&es

• 3is&al poli&y• Has no de+and,side e**e&ts on o(tp(t or

e+ploy+ent

;/© 201 Cen!a!e "earnin!# All Ri!$ts Reserved# %ay not be &opied' s&anned' or d(pli&ated' in w$ole or in part' e)&ept *or (se asper+itted in a li&ense distrib(ted wit$ a &ertain prod(&t or servi&e or ot$erwise on a password,prote&ted website *or &lassroo+ (se#

Classi&al %odel: pen E&ono+y




• "eaa!es F I% J S J T

- I+ports' savin!' ta)es• In=e&tions F J IP J

- E)ports' planned invest+ent' !overn+entp(r&$ases

• Total spendin! F C J IP J J5,I%6

• Galan&ed trade: E)ports F I+ports• Says law $olds: Total spendin! on t$e

&o(ntrys o(tp(t will be e>(al in val(e to itstotal o(tp(t

<0© 201 Cen!a!e "earnin!# All Ri!$ts Reserved# %ay not be &opied' s&anned' or d(pli&ated' in w$ole or in part' e)&ept *or (se asper+itted in a li&ense distrib(ted wit$ a &ertain prod(&t or servi&e or ot$erwise on a password,prote&ted website *or &lassroo+ (se#





• Unbalan&ed trade: I+ports E)ports

- Trade de*i&it F I% - - 3orei!ners , s(pply loanable *(nds to t$at

&o(ntry F its trade de*i&it 5I% - 6• Total s(pply o* *(nds F S J 5I% - 6• Total de+and *or *(nds F IP J 5 - T6

- E>(ilibri(+: S J 5I% - 6 F IP J 5 - T6• S J T J I% F IP J J • "eaa!es F In=e&tions

- Says law $olds


3i!(re A#1



!( e

?$en Classi&a r(ns a trade

de*i&it 5its i+ports e)&eed itse)ports6' *orei!ners earn +oredollars 5Classi&as &(rren&y6sellin! !oods to Classi&a t$ant$ey spend on !oods *ro+Classi&a# T$e e)&ess dollarsare ret(rned to Classi&as

loanable *(nds +aret' w$eret$ey be&o+e part o* t$es(pply o* loanable *(nds#?$en t$e loanable *(nds+aret &lears' we $ave S J I%Q F Ip J Q T# T$is' in t(rn'

+eans t$at total leaa!es 5SJ T J I%6 e>(al total in=e&tions5Ip J J 6#

T$e "oanable 3(nds %aret wit$ a Trade .e*i&it


A#1

Trillions o*.ollars per

Lear

Interest Rate

<M

Total .e+and *or

3(nds NI p

+(G-T)]

2#2<

Total S(pplyo* 3(nds NS J5I%,6V

E





• An in&rease in !overn+ent p(r&$ases in

one &o(ntry - %ay not &a(se &o+plete &rowdin! o(t in

t$at &o(ntry

- G(t worldwide' &rowdin! o(t will be&o+plete• T$e rise in !overn+ent p(r&$ases in one

&o(ntry• ?ill be +at&$ed by an e>(al drop in !lobal

&ons(+ption and invest+ent spendin!

Principles of Economics- The Classical Long Run Model

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