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CeCe Y-T Ac Consumption
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Macro-Market-MicroMacro-Market-Micro
AGEC 430Macroeconomics of Agriculture
Spring 2010
Let’s Look at a Simplified Let’s Look at a Simplified Closed MacroeconomyClosed Macroeconomy
Ce
Y-T
Ac
Consumption
Ce
Y-T
Ac
ie
Ie Ai
Consumption Investment
Ce
Y-T
Ac
ie
Ie Ai
Ad
Pe
Ypot
As
Consumption Investment Aggregate Product
Ye
Remember that aggregate demand includes both consumption and investment expenditures as well as government spending and net exports.
Ce
Y-T
Ac
ie
Ie Ai
Ad
Pe
Ypot
As
Consumption Investment Aggregate Product
LsLd
wre
Ye
Le Lmax
Labor Market
Ce
Y-T
Ac
ie
Ie Ai
Ad
Pe
Ypot
As
Consumption Investment Aggregate Product
LsLd
wre
Ye
Le Lmax
Labor Market Phillips Curve
UR
%ΔP
Ce
Y-T
Ac
ie
Ie Ai
Ad
Pe
Ypot
As
Consumption Investment Aggregate Product
LsLd
wre
Ye
Le Lmax
Labor Market Phillips Curve
UR
%ΔP
These relationships represent a
simplified “real” macroeconomy
MsMd
ie
Qm
Money Market
Policy LinkagesPolicy Linkages
MsMd
ie
Qm Yt-1
h
T
Money Market Tax Revenue
Policy LinkagesPolicy Linkages
MsMd
ie
Qm Yt-1
h
T
Yt-1
h
T
G
Money Market Tax Revenue Budget Deficit
Policy LinkagesPolicy Linkages
MsMd
ie
Qm Yt-1
h
T
Yt-1
h
T
G
Money Market Tax Revenue Budget Deficit
Policy LinkagesPolicy Linkages
National debt
NDt = NDt-1 + Gt - Tt
Wheat Market
Dw Sw
Pwe
Qwe
Ad
Pe
Ypot
As
Aggregate Product
Ye
Macro to Market LinkageMacro to Market Linkage
Wheat Market
Dw Sw
Pwe
Qwe
Wheat Producer
MC
Pwe MR
qwe
Ad
Pe
Ypot
As
Aggregate Product
Ye
Market to Micro LinkageMarket to Micro Linkage
AC
Wheat Market
Dw Sw
Pwe
Qwe
Wheat Producer
MC
Pwe MR
qwe
Ad
Pe
Ypot
As
Aggregate Product
Ye
Market to Micro LinkageMarket to Micro Linkage
AC
Is the wheat producer making a profit?
Wheat Producer
MC
Pwe MR
qwe
Market to Micro LinkageMarket to Micro Linkage
AC
Average profit is the difference between MR and AC at qwe
Total profit therefore is equal to average profit times qwe
Is the wheat producer making a profit?
Wheat Producer
MC
Pwe MR
qwe
Market to Micro LinkageMarket to Micro Linkage
AC
Average profit is the difference between MR and AC at qwe
Total profit therefore is equal to average profit times qwe
Is the wheat producer making a profit?
Any Questions?Any Questions?
Effects of Expansionary Effects of Expansionary Monetary PolicyMonetary Policy
MsMd
ie
Qm
Money Market
Action:The Federal Reserve buys government bonds.
MsMd
ie
Qm
Money Market
Effect:This action expands the money supply, shifting the money supply curve to the right, and lowers the market interest rate.
ie
Ie Ai
Investment
1
Let’s look at the effect on the “real”economy.
ie
Ie Ai
Ad
Pe
Ypot
As
Investment Aggregate Product
Ye
12
ie
Ie Ai
Ad
Pe
Ypot
As
Investment Aggregate Product
Ye
12 Ce
Y-T
Ac
Consumption
3
We defined inflation as follows:
%ΔP = a1(%Δwr) + a2(Y / YPOT)
Is there demand pull inflationdemand pull inflation in this economy? Why?
ie
Ie Ai
Ad
Pe
Ypot
As
Investment Aggregate Product
LsLd
wre
Ye
Le Lmax
Labor Market
12
4
Ce
Y-T
Ac
Consumption
3
We defined inflation as follows:
%ΔP = a1(%Δwr) + a2(Y / YPOT)
Is there cost push inflationcost push inflation in this economy? Why?
What Does The Phillips Curve What Does The Phillips Curve Therefore Look Like in This Therefore Look Like in This
Economy?Economy?
Phillips Curve
UR
%ΔP
??????
Phillips Curve
UR
%ΔP
Phillips Curve
UR
%ΔP
Thus we can ignore the Phillips Curve for now.
Since no inflation possible
ie
Ie Ai
Ad
Pe
Ypot
As
Investment Aggregate Product
LsLd
wre
Ye
Le Lmax
Labor Market
12
4
Wheat Market
Dw Sw
PWe
QWe
5
Ce
Y-T
Ac
Consumption
3
Increase in wages and disposable personal income increases the demand for wheat as long as the income elasticity > zero.
ie
Ie Ai
Ad
Pe
Ypot
As
Investment Aggregate Product
LsLd
wre
Ye
Le Lmax
Labor Market
12
4
Wheat Market
Dw Sw
PWe
QWe
Wheat Producer
MC
PWe MR
qwe
5 6
Ce
Y-T
Ac
Consumption
3
AC
Farm Income Statement:Farm revenue UpFarm expenses Up slightlyFarm taxable income Up Income taxes No change Net farm income Up
Impact on Farm Financial StatementsImpact on Farm Financial Statements
MC
PWe MR
qwe
6
AC
Farm Income Statement:Farm revenue UpFarm expenses Up slightlyFarm taxable income Up Income taxes No change Net farm income Up
Impact on Farm Financial StatementsImpact on Farm Financial Statements
Remember taxes assumed to be based on Yt-1 and not current income.
Farm Income Statement:Farm revenue UpFarm expenses Up slightlyFarm taxable income Up Income taxes No change Net farm income Up
Farm Balance Sheet: 1/Current assets Up Current liabilities Up (accrued taxes)Land values 2/ Up Fixed liabilities No changeFixed assets No change Net worth UpTotal assets Up Total debt and equity Up
Impact on Farm Financial StatementsImpact on Farm Financial Statements
1/ Assumes a current market value balance sheet.2/ Capitalized land values rise due to higher farm income.
Farm Income Statement:Farm revenue UpFarm expenses Up slightlyFarm taxable income Up Income taxes No change Net farm income Up
Farm Balance Sheet: 1/Current assets Up Current liabilities Up (accrued taxes)Land values 2/ Up Fixed liabilities No changeFixed assets No change Net worth UpTotal assets Up Total debt and equity Up
Impact on Farm Financial StatementsImpact on Farm Financial Statements
1/ Assumes a current market value balance sheet.2/ Capitalized land values fall due to lower farm income.
Conclusion: Expansionary monetary policy good for farmers.
Any Questions?Any Questions?
Effects of Contractionary Effects of Contractionary Fiscal PolicyFiscal Policy
Yt-1
h
T
Tax Revenue
Action:The government raises the income tax rate.
Yt-1
h
T
Yt-1
h
T
G
Tax Revenue Budget Deficit
Effect:Raises tax revenue and lowers the budget deficit in the short run since tax revenue based on last year’s income.
Ce
Y-T
Ac
Consumption
1Let’s look at the effect on the “real”Economy again.
Ce
Y-T
Ac
Consumption
1
ie
Ie Ai
Investment
2
Ce
Y-T
Ac
Consumption
1
ie
Ie Ai
Investment
2
Ad
Pe
Ypot
As
Aggregate Product
Ye
3
LsLd
wre
Le Lmax
Labor Market
4
Ce
Y-T
Ac
Consumption
1
ie
Ie Ai
Investment
2
Ad
Pe
Ypot
As
Aggregate Product
Ye
3
LsLd
wre
Le Lmax
Labor Market
4
Wheat Market
Dw Sw
PWe
QWe
5
Ce
Y-T
Ac
Consumption
1
ie
Ie Ai
Investment
2
Ad
Pe
Ypot
As
Aggregate Product
Ye
3
Decrease in wages and disposable personal income decreases the demand for wheat as long as the income elasticity > zero.
LsLd
wre
Le Lmax
Labor Market
4
Wheat Market
Dw Sw
PWe
QWe
Wheat Producer
MCPWe MR
qwe
5 6
Ce
Y-T
Ac
Consumption
1
ie
Ie Ai
Investment
2
Ad
Pe
Ypot
As
Aggregate Product
Ye
3
AC
Farm Income Statement:Farm revenue DownFarm expenses Down slightlyFarm taxable income Down Income taxes Down Net farm income Down
Impact on Farm Financial StatementsImpact on Farm Financial Statements
MCPWe MR
qwe
6
AC
Farm Income Statement:Farm revenue DownFarm expenses Down slightlyFarm taxable income Down Income taxes Down Net farm income Down
Impact on Farm Financial StatementsImpact on Farm Financial Statements
Last year’s income taxed at a higher rate.
Farm Income Statement:Farm revenue DownFarm expenses Down slightlyFarm taxable income Down Income taxes Down Net farm income Down
Farm Balance Sheet: 1/Current assets Down Current liabilities Down (accrued taxes)Land values 2/ Down Fixed liabilities No changeOther assets No change Net worth Down Total assets Down Total debt and equity Down
Impact on Farm Financial StatementsImpact on Farm Financial Statements
1/ Assumes a current market value balance sheet.2/ Capitalized land values fall due to lower farm income.
Farm Income Statement:Farm revenue DownFarm expenses Down slightlyFarm taxable income Down Income taxes Down Net farm income Down
Farm Balance Sheet: 1/Current assets Down Current liabilities Down (accrued taxes)Land values 2/ Down Fixed liabilities No changeOther assets No change Net worth Down Total assets Down Total debt and equity Down
Impact on Farm Financial StatementsImpact on Farm Financial Statements
1/ Assumes a current market value balance sheet.2/ Capitalized land values fall due to lower farm income.
Conclusion: Contractionary fiscal policy not good for farmers.
Any Questions?Any Questions?
Know These RelationshipsKnow These Relationships