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ABE 1010 (1)
rgr (1)
Lecture 1

ABE 1010 Lecture 1: 5J7K2aK9n3

1 Page
90 Views
Fall 2011

Department
ABE - Biological & Agricultural Systems Engineering
Course Code
ABE 1010
Professor
rgr
Lecture
1

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ECONUA1Lecture11ClassicalModel
ClassicalModel:
● Say’sLaw:“supplycreatesitsowndemand”
● Exogenousvariables:land,entrepreneurship,capital,technology,G,T,tasksforworking
● Endogenous:W/P,Labor(L),Output(Y),R(interestrate),Savings,Investment(Ip)
○ Also:C=YST
ComparativeStatics
● Changeinoneofmoreexogenousvariables→changeinendogenousvariables
● Fiscalpolicy:achangeingovernmentspending(G)ortaxes(T)designedtochange
output(Y)andemployment(L)
○ Demandsideeffects
■ Changeintotalspending
○ Supplysideeffects
■ Changeintotalresourcesavailable
■ Changeintechnology
Experiment#1:increaseinG
● Forsimplicity:assumeinitiallyG=T
○ GT=0
○ Gisnotdemandingloanablefunds
● IfGisgreaterthanT,thereisadeficit
○ Consumptiondecreases,Investmentdecreases
○ AmountofdecreaseinC+amountofdecreaseinIp=increaseinG
● Crowdingout:whenanincreaseinonesector’sspendingcausesadecreaseinanother
sector’sspending
● Completecrowdingout:whenanincreaseinonesector’sspending=decreasein
another’sspending
● Conclusion:inclassicalmodel,fiscalpolicyhasnodemandsideeffect
Experiment#2:Taxcut
● InitiallyIpcurveshiftstotherightbecauseofdecreaseinT,causingincreaseinC
● ThenpeopledecidetosavemoreoftheamounttheyhavegainedfromTcut
○ SoConsumptiondecreasesandSavingsincreases
○ AmountofincreaseinC=AmountofdecreaseinIp
○ Totalspendingisunchanged
● Conclusion:inclassicalmodel,fiscalpolicyhasnodemandsideeffect

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Description
ECON UA 1 Lecture 11 Classical Model Classical Model: Says Law: supply creates its own demand Exogenous variables: land, entrepreneurship, capital, technology, G, T, tasks for working Endogenous: WP, Labor (L), Output (Y), R (interest rate), Savings, Investment (Ip) Also: C = YST Comparative Statics Change in one of more exogenous variables change in endogenous variables Fiscal policy: a change in government spending (G) or taxes (T) designed to change output (Y) and employment (L) Demand side effects Change in total spending Supply side effects Change in total resources available Change in technology Experiment 1: increase in G For simplicity: assume initially G = T GT = 0 G is not demanding loanable funds If G is greater than T, there is
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