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.qxd 14/1/07 3:01 PM Page 739CHAPTER 26 The Keynesian Expenditure Model 739curves, corresponding to P = 90 and P = 110, drawn multiplier effect on real output (RGDP) is zero.Changesin Exhibit 1.) in aggregate expenditure lead to no increase in output.Originally, we had equilibrium at point A with Try this exercise with a different autonomous changeoutput of $8 trillion when the price level was 100.such as wealth or expectations.After the increase in government spending, the As the textbook explains in more detail, in theaggregate expenditure curve shifts up, and we get short run the aggregate supply curve slopes upward, soequilibrium at point D with output of $8.5 trillion an increase in aggregate expenditure will lead to somewhen the price level is 100.Similarly, for any other increase in output in the short run.In that case, thegiven price level, equilibrium output would be higher.effect on real output in the short run will be greaterSo, the new aggregate demand curve on the lower dia- than zero, but not as large as the basic expendituregram has shifted to the right.multiplier, 1/(1 - MPC), which we derived without con-The aggregate demand curve can now be combined sidering the effects of aggregate supply.with a model of aggregate supply in the economy, as dis- So the important point is that supply considera-cussed in greater detail in Chapter 25.As an example, tions are important in constraining the impact of asuppose the aggregate supply curve is vertical, as it must change in aggregate expenditure on output.be in the long run, because the price level has no long-lasting effect on output.Now, consider our example ofan increase in government purchases (or any otherTHE KEYNESIAN SHORT-RUN AGGREGATE SUPPLYautonomous change).As shown in Exhibit 3, the origi-CURVE STICKY PRICES AND WAGESnal aggregate demand curve is AD1 and the increase inKeynes and his followers argued that wages and pricegovernment purchases shifts the aggregate demandare inflexible downward.As we discussed in Chapter 25,curve to AD2.What happens to output? It is unchangedwage stickiness can arise as a result of long-term laborfrom its original level.A rise in the price level fromand raw material contracts, unions, and minimum wage100 to 105 is the only effect of the higher level of gov-laws.If wages and prices are sticky and the economy hasernment expenditures.In this case, the expendituresufficient excess capacity, then the short-run aggregatesupply curve is flat, because full employment of allresources is not reached until RGDPNR.That is, with somany resources idle, producers will not have to competeAggregate DemandSECTI ON 26.8with each other for machinery or labor and input pricesE XHI BI T 3and Aggregate Supplywill tend to stay flat.LRASIn Exhibit 4, we see that in the flat portion of theSRAS curve an increase in AD from AD1 to AD2 haslittle impact on the price level but considerable impacton real GDP and employment.When AD1 increasesto AD2, we see an increase in real gross domestic105product from RGDP1 to RGDP2 a new equilibriumwhere resources are more fully utilized.Similarly, areduction in AD in this region will also leave the priceAD2level unchanged.Specifically, it means that the price100level does not rise or fall much in this situation, butRGDP does.This price and wage inflexibility whenAD is falling played a significant part in theAD1Keynesian theory.With stickiness of wages and otherinput costs, a reduction in aggregate demand will not8lead to a lower price level if the economy has suffi-Real GDP, Y(trillions of dollars)cient excess capacity say at RGDP1 rather thanRGDPNR.Historically, the mid to late 1930s seems toAn increase in government purchases shifts the aggre-fit the Keynesian model quite well increases ingate demand curve from AD1 to AD2.Output isRGDP without simultaneous increases in the priceunchanged, and the price level rises from 100 to 105.level.It was a period of high unemployment ofIn this case, the expenditure multiplier effect on realoutput (RGDP) is zero because the changes in aggre- resources and double-digit unemployment that is,gate expenditure lead to no increase in output.sufficient level of excess capacity and little competi-tion to bid up input prices.Price Level95469_26_Ch26_p719-752.qxd 14/1/07 3:01 PM Page 740740 MODULE 6 Macroeconomic FoundationsMost macroeconomists now believe that price andThe Keynesian AggregateSECTI ON 26.8wages are not completely inflexible downward.E XHI BI T 4Supply CurveHowever, wages and prices do tend to be less flexibleLRASwhen excess capacity is available the slope of theSRAS is flatter the further it is from full employment [ Pobierz całość w formacie PDF ]