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EFLATIONARY GAP EFLATIONARY GAP
M.POURHOSSEINI M.POURHOSSEINI
MACROECONOMIC BACKGROUNDMACROECONOMIC BACKGROUND
• IN THIS TUTORIAL IN THIS TUTORIAL WE REVIEW SOME WE REVIEW SOME BASIC BASIC MACROECONOMIC MACROECONOMIC AGGREGATES AGGREGATES
• The purpose is to The purpose is to provide the students provide the students whose first degree is whose first degree is not economics with not economics with some basic tools some basic tools
• The tutorial will focus The tutorial will focus on deflationary gap, on deflationary gap,
and accelerator and accelerator principle principle
UNEMPLOYMENT AND INFLATION IN THE UNEMPLOYMENT AND INFLATION IN THE SIMPLE KEYNESIAN MODELSIMPLE KEYNESIAN MODEL
• The deflationary gap
– withdrawals and injections approach
• The deflationary gap
– withdrawals and injections approach
The deflationary gapThe deflationary gap
OY
W
W, J
J
Ye
OY
W
W, J
J
YeYF
The deflationary gapThe deflationary gap
OY
W
W, J
J
YeYF
Deflationary gap
c
d
The deflationary gapThe deflationary gap
UNEMPLOYMENT AND INFLATION IN THE UNEMPLOYMENT AND INFLATION IN THE SIMPLE KEYNESIAN MODELSIMPLE KEYNESIAN MODEL
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
OY
W, J, E
YeYF
Y
E
The deflationary gapThe deflationary gap
OYYe
YF
Y
Ea
b
Deflationary gap
W, J, EThe deflationary gapThe deflationary gap
OY
W
J
YeYF
c
d
Y
Ea
b
Deflationary gap
W, J, EThe deflationary gapThe deflationary gap
UNEMPLOYMENT AND INFLATION IN THE UNEMPLOYMENT AND INFLATION IN THE SIMPLE KEYNESIAN MODELSIMPLE KEYNESIAN MODEL
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
UNEMPLOYMENT AND INFLATION IN THE UNEMPLOYMENT AND INFLATION IN THE SIMPLE KEYNESIAN MODELSIMPLE KEYNESIAN MODEL
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
– withdrawals and injections approach
• The deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
– withdrawals and injections approach
The inflationary gapThe inflationary gap
OY
W
W, J
Ye
J
OY
W
W, J
YeYF
J
The inflationary gapThe inflationary gap
OY
W
W, J
YeYF
g
h
Inflationary gap
J
The inflationary gapThe inflationary gap
UNEMPLOYMENT AND INFLATION IN THE UNEMPLOYMENT AND INFLATION IN THE SIMPLE KEYNESIAN MODELSIMPLE 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 deflationary gap
– withdrawals and injections approach
– income and expenditure approach
• The inflationary gap
– withdrawals and injections approach
– income and expenditure approach
OYYe
YF
YE
W, J, EThe inflationary gapThe inflationary gap
OYYe
YF
YE
Inflationary gap
e
f
W, J, EThe inflationary gapThe inflationary gap
OYYe
YF
YE
Inflationary gap
e
f
W
Jg
h
W, J, EThe inflationary gapThe inflationary gap
UNEMPLOYMENT AND INFLATION IN THE UNEMPLOYMENT AND INFLATION IN THE SIMPLE KEYNESIAN MODELSIMPLE KEYNESIAN MODEL
• Inflation and unemployment at the same time
– inflationary pressures before the full-employment level of income
– implications for shape of AS curve
• Inflation and unemployment at the same time
– inflationary pressures before the full-employment level of income
– implications for shape of AS curve
Unemployment and inflationUnemployment and inflation
OY
Pri
ce le
vel
YF
AS1
OY
AS1
Pri
ce le
vel
YF
AS2
Unemployment and inflationUnemployment and inflation
UNEMPLOYMENT AND INFLATION IN THE UNEMPLOYMENT AND INFLATION IN THE SIMPLE KEYNESIAN MODELSIMPLE 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
• 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 45Allowing for inflation in the 45 line and AD / AS diagrams
P
Cd, W, J, E
Y
Y
AS
AD1
Allowing for inflation in the 45Allowing for inflation in the 45 line and AD / AS diagrams
P
Cd, W, J, E
Y
Y
AS
P1
Y1
AD1
Allowing for inflation in the 45Allowing for inflation in the 45 line and AD / AS diagrams
P
Cd, W, J, E
Y
Y
AS
P1
Y
AD1
E1
Y1
Allowing for inflation in the 45Allowing for inflation in the 45 line and AD / AS diagrams
P
Cd, W, J, E
Y
Y
AS
AD1
P1
Y
AD2
E1
Y1
Allowing for inflation in the 45Allowing for inflation in the 45 line and AD / AS diagrams
P
Cd, W, J, E
Y
Y
AS
AD1
P1
Y
AD2
E1
E2
Y1 Y2
Allowing for inflation in the 45Allowing for inflation in the 45 line and AD / AS diagrams
P
Cd, W, J, E
Y
Y
AS
AD1
P1
Y1
Y
E1
AD2
E2
Y2
P2
Allowing for inflation in the 45Allowing for inflation in the 45 line and AD / AS diagrams
P
Cd, W, J, E
Y
Y
AS
AD1
P1
Y1
Y
E1
AD2
E2
Y2
E3
Y3
P2
KEYNESIAN ANALYSIS OFKEYNESIAN ANALYSIS OFTHE BUSINESS CYCLETHE BUSINESS CYCLE
• The accelerator
– changes in national income and induced investment
• The accelerator
– changes in national income and induced investment
The accelerator effectThe accelerator effect
KEYNESIAN ANALYSIS OFKEYNESIAN ANALYSIS OFTHE BUSINESS CYCLETHE BUSINESS CYCLE
• The accelerator
– changes in national income and induced investment
– the accelerator coefficient
• The accelerator
– changes in national income and induced investment
– the accelerator coefficient
KEYNESIAN ANALYSIS OFKEYNESIAN ANALYSIS OFTHE BUSINESS CYCLETHE BUSINESS CYCLE
• The accelerator
– changes in national income and induced investment
– the accelerator coefficient
– the instability of investment
• The accelerator
– changes in national income and induced investment
– the accelerator coefficient
– the instability of investment
-14
-12
-10-8
-6
-4
-2
0
24
6
8
10
12
1416
18
20
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
GD
P, I
nves
tmen
t (%
ann
ual c
hang
e)Fluctuations in real GDP and investment: 1978-99Fluctuations in real GDP and investment: 1978-99
-14
-12
-10-8
-6
-4
-2
0
24
6
8
10
12
1416
18
20
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
GD
P, I
nves
tmen
t (%
ann
ual c
hang
e)Fluctuations in real GDP and investment: 1978-99Fluctuations in real GDP and investment: 1978-99
GDP
-14
-12
-10-8
-6
-4
-2
0
24
6
8
10
12
1416
18
20
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
GD
P, I
nves
tmen
t (%
ann
ual c
hang
e)Fluctuations in real GDP and investment: 1978-99Fluctuations in real GDP and investment: 1978-99
GDP
Investment
KEYNESIAN ANALYSIS OFKEYNESIAN ANALYSIS OFTHE BUSINESS CYCLETHE BUSINESS CYCLE
• The accelerator
– changes in national income and induced investment
– the accelerator coefficient
– the instability of investment
• The multiplier / accelerator interaction
• The accelerator
– changes in national income and induced investment
– the accelerator coefficient
– the instability of investment
• The multiplier / accelerator interaction
KEYNESIAN ANALYSIS OFKEYNESIAN ANALYSIS OFTHE BUSINESS CYCLETHE 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
• 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 OFKEYNESIAN ANALYSIS OFTHE BUSINESS CYCLETHE 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?
• 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?
