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Froyen:Macroeconomics 10th, Kindle Edition. Macroeconomicstraces the history, evolution, and challenges of Keynesian economics, presenting a comprehensive, detailed, and unbiased view of modern macroeconomic theory. Used this book for my Intermediate Macro Theory Class. Macroeconomics: Theories and Policies, 10th Edition. Richard T. Froyen, University of North Carolina at Chapel Hill. © |Pearson | Available. Share this. Microeconomics macroeconomics economy-wide variables (aggregates) .. [ froyenmacrotp] Froyen, Richard T. () Macroeconomics: Theories and .

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Trove: Find and get Australian resources. Books, images, historic newspapers, maps, archives and more. Download as PDF, TXT or read online from Scribd. Flag for Richard T. Froyen University of Chapter 4 Classical Macroeconomics (II): Money, Prices, and. microeconomics-r froyen - Free ebook download as PDF File .pdf) or read book Macroeconomics: Theories and Policies 10th Edition Richard T. Froyen.

Classical economics, which dates from Adam Smith's Wealth of Nations , reflects the summary judgment that markets work and that market-economies grow—implying a policy recommendation of laissez faire. It is this judgment that Keynes called into question and that lies at the root of modern debate. Is there a market mechanism that coordinates economic activities over time?

More pointedly, does saving today get translated into investment for the future? The Austrian economists, particularly F. Hayek, focused attention on the rate of interest and showed how intertemporal coordination is or, at least, can possibly be achieved in a market economy. Keynes rejected the classical and Austrian views and made the summary judgment that the saving-cum-investment nexus of the market economy is failure-prone. The perceived absence of vital market mechanisms caused him to recommend policy activism as an alternative means of securing full employment.

A quarter of a century after the publication of Keynes's General Theory, a trumped-up classical model was introduced into macroeconomic textbooks. This model, which no know classical economist ever endorsed, either ignores the saving-cum-investment coordination mechanism or fails to integrate that mechanism into the classical framework.

But the relevance and plausibility of this model rests on the implicit assumption that the market has no problem in translating saving into investment.

By the end of the term, the student should have a good understanding of the core of ideas that unite the various schools of thought as well as the major issues that separate them. Total expenditures E consist of the expenditures made by consumers C , investors I , and the government G.

Preview this title online. Request a copy. Download instructor resources. Additional order info. Buy this product. Buy an eText. Macroeconomics traces the history, evolution, and challenges of Keynesian economics, presenting a comprehensive, detailed, and unbiased view of modern macroeconomic theory.

This book narrates the evolution of economic theory, presenting the most recent and modern developments, without glossing over the fundamental disagreements among macroeconomists on both theory and policy. Many of the post developments in macroeconomics have been the result of dissatisfaction with the Keynesian theory and the policy prescriptions that follow from it.

In order for students to understand the evolution of macroeconomics, the author presents the history of Keynesian thought by:. Several new additions have been added which include topics on monetary policy and economic growth:. Introduction Chapter 2: Classical Macroeconomics I: Equilibrium Output and Employment Chapter 4: Classical Macroeconomics II: Money, Prices, and Interest Chapter 5: The Keynesian System I: The Role of Aggregate Demand Chapter 6: The Keynesian System II: Money, Interest, and Income Chapter 7: The Keynesian System IV: The Monetarist Counterrevolution Chapter Output, Inflation, and Unemployment: Alternative Views Chapter New Classical Economics Chapter Macroeconomic Models: The items added in going from national income to personal income are payments to persons that are not in return for current production of goods and services.

These portions include corporate profits tax payments and undistributed profits retained earnings. For some purposes.

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Government interest pay- ments are made on bonds previously issued by federal. The relevant income concept is all income received by per- personal income sons. These are predominantly government transfer payments such as Social Security payments. The first item is transfer payments. The details of the necessary adjust- ments are not central to our focus. Personal saving is the part of personal disposable income that is not spent.

Household wealth was reduced. British Economic Growth: Cambridge University Press. Most of it was spent for consumption. There were two other expenditures.. This was a high saving rate relative to the recent past. These are of interest in chart. They economic life of a country. Although it is only in were compiled by Gregory King. In terms of from previous eras. The first was interest paid to business installment credit and credit card interest.

Table shows how U. The recession of —09 had been characterized by falling asset prices. We assume that national income and national product or output are the same. The foreign sector is reintroduced into our models later. Wages and salaries were 37 percent of for England and Wales today.

The in We assume that all corporate profits are paid out as dividends. It is estimated eign trade. We assume that all taxes. The simplifications we impose are as follows: In excluding the foreign sector. Indirect taxes and the other discrepancies between GNP and national income are ignored see Table But it was an open econ- national income show that in England and Wales omy. The terms national income and output are used interchangeably throughout this book.

Letting net taxes T equal tax payments minus transfers. Several simplifications are made in the relationship between national income and personal disposable income. Depreciation is ignored except where explicitly noted. Esti- smaller fraction and rents. The foreign sector will be omitted.

In deriving these identities. This means that we drop the net exports term from GDP see Table and the net foreign transfers item from personal outlays in breaking down the disposition of personal income see Table Using T With these simplifications. We can write 2. Such a measure would be most closely related to employment.

GDP meas- current dollars ured at current market prices will change when the overall price level changes as well as when the volume of production changes. Changes in GDP in valued dollars then provide a measure of quantity changes between these years.

For many purposes. The traditional way of constructing real GDP is to measure output in terms of constant prices from a base year. Identities are relationships that follow from accounting or other definitions and therefore hold for any and all values of the variables. The GDP measure that changes only when quantities. Measuring real GDP in terms of prices from a base year. From the income side of the national income accounts. It is a measure of the of goods and aggregate or overall price level..

Because the same goods and services appear at the top and bottom. Column 2 shows the value of real GDP as measured in prices for each of these years. The ratio of nomi- level relative to a nal GDP to real GDP is a measure of the value of current production in current prices chosen base year e. The table shows.

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In prior years. We explain the two procedures in turn. Real GDP. Nominal GDP changes whenever the quantity of goods produced changes or when the market price of those goods changes. In both periods. This means that GDP at current prices in nominal GDP was 11 percent higher than the same goods and services valued at prices.

If in calculating real GDP we use the higher prices to weight the computer component. One prob- lem is that every time the base year changes.

As measured by this index. From Table In the base year. Two examples of explicit price indices are considered in the next section. We do not explicitly measure the average movement in prices. We can also use the implicit GDP deflator to measure price changes between two years.

A second. In effect. Instead of using prices in a base year as weights. To address these problems. The aggregate price level. The PPI. Con- versely. The acceleration of inflation in the —75 and —80 periods is evident in each series. Many gov- goods and services ernment pensions. Survey of Current Business. Because items sold at the measures the wholesale level include many raw materials and semifinished goods. In terms of broad movement in the infla- tion rate. Two other price indices are widely reported.

There are. Figure shows the annual inflation rates for the years — as measured by the three price indices we have discussed. The CPI is the price index most relevant to consumers because it of several thousand measures the prices of goods and services directly purchased by them.

But in recent years. Over these periods. What are sustainable high levels of resource allocation? In later years. It is in the longer run that growth of productive potential output. We have already discussed the measurement of actual real output being used at benchmark high GDP. Such short-run movements in output consist of be reached if changes in the utilization rates of labor and capital. The Congressional Budget Office.

Over the past decade the PPI has been especially volatile relative to the other measures of inflation. As we go along we simply want to distinguish the cyclical movements in output that our models attempt to explain and the ongoing growth in potential output that results from increases in the factors of production and from technological change.

Government agencies. The quantity of money is a key variable in all the models we consider later. August April 39 8 The peak measures the end of an expansion. In the United States. Business Cycles expansions. Some other variables e. On December November 11 average. The economic expansion that began July March 92 8 March November 8 in March and ended in March was the December June 73 18 longest of the post—World War II period months. For now. Judgments must be made.

In addition to further discussion money of the empirical definition of money. None of the postwar recessions came near the month con. The exception is money. Control of the monetary policy quantity of money. January July 58 6 traction period that began the Great Depression July November 12 16 of the s. The definition of money turns out to be of control of the somewhat more complicated than it seems at first glance and is best put off until later.

Explain which transactions in the economy are included in GDP. Three price indices were considered in this chapter: Explain the concept of potential output. Using the data in Table Define the term gross domestic product. Define the terms personal income and personal disposable income. What are the two types of intermediary goods that are counted in the GDP calculation?

Explain why these two goods are integrated in the GDP calculation. Why is potential output difficult to measure? Explain the differences among these different measures of the price level. What problems with the previous measure of real GDP led to the introduction of this new measure? Of what use are these measures? Explain some of the major limitations of the GDP concept.

Explain the concept of chain-weighted real GDP. Using the GDP deflator as a price index.

We start with the classical model and then turn to the Keynesian model that developed as an attack on the classical system—the so-called Keynesian revolution. Aggregate Supply and Demand T he chapters in this part begin our analysis of macroeconomic models.

A prerequisite for this analysis is a knowledge of the classical system that Keynes attacked. The book containing this theory was The General Theory of Employment. Absent full employment. The ideas that formed the Keynesian revolution.

The classical model also provides the starting point for challenges that have been mounted against the Keynesian theory by monetarists.. One theory and set of policy conclusions swept the field and became a new orthodoxy in macr- oeconomic thought. Pigou The Theory of Unem- ployment..

Classical theory also plays a positive role in the later development of macroeconomics. The forces that determine income. Keynes used the term classical to refer to virtually all economists who had written on macroeconomic questions before Output and Employment 3. The world Depression that began in added urgency to the study of macroeconomic questions.

But revolution against what? What was the old orthodoxy? Interest and Money. Equilibrium for a variable refers to a state in which all the forces acting on that variable are in balance. It was an important tenet of clas- sical economists that only full-employment points could be positions of even short-run equilibrium.

David Ricardo Principles of Political Economy. Although many early Keynesian writers viewed the classical theory as ready for the scrap heap of out- moded ideas. Keynes believed that the macroeconomic theory of the two periods was homogeneous enough to be dealt with as a whole.

More conventional terminology distin- guishes between two periods in the development of economic theory before The first. To classical economists. Classical equilibrium In contrast to the mercantilists.

Adherence to bullionism led countries to attempt to secure an excess of exports over imports to earn gold and silver through foreign trade. Both of these aspects of classi- cal economics—the stress on real factors and the belief in the efficacy of the free-market mechanism—developed in the course of controversies over long-run questions concerning the determinants of economic development.

Foreign trade was carefully regulated. State action was believed to be necessary to cause the developing capitalist system to further the interests of the state. The use of state action was also advocated on a broader front to develop home industry. Classical analysis was pri- marily real analysis. The classical attack on the mercantilist view of the need for state action to regu- late the capitalist system also had implications for short-run macroeconomic analy- sis.

Macroeconomics: Theories and Policies, 10th Edition

Mercantilist thought was associated with the rise of the nation- state in Europe during the sixteenth and seventeenth centuries. These classical positions on long-run issues were. Two tenets of mercan- tilism were 1 bullionism. Classical economists mistrusted government and stressed the harmony of individual and national interests when the market was left unfettered by government regulations.

Most questions in eco- nomics could be answered without analyzing the role of money. Output and Employment 51 economics examined the factors that determined the level of full-employment output along with the associated levels of other important aggregates.

Money was important only for the sake of the goods it could purchase. Another role money had played in the mercantilist view was as a spur to economic activity. One role for state action in the mercantilist view was to ensure that markets existed for all goods produced. Money played a role only in facilitating transactions as a means of exchange. The attack on bullionism led classical economists to stress that money had no intrinsic value.

For classical economists to ascribe this role to money in determining real varia- bles. Methods used to secure this favorable balance of trade included export subsidies. Classical economists focused on the role of money as a means of exchange. In the short run. For each level of inputs. Money had a role in the economy only as a sectors of the means of exchange.

The state of technology and the population are also assumed to be constant over the period considered. For this short-run period. The summarizes the production function.

University of Toronto Press. Government policies to ensure an adequate demand for output were considered the government. The numbers in Table illustrate the fundamental relationship between a change in labor input and the resulting change in output. Classical economics stressed the self-adjusting tendencies of the economy. The values from Table are plotted in Figures a and b. As drawn.

The classical response is stated by John Stuart Mill: In opposition to these palpable absurdities it was triumphantly established by political economists that consumption never needs encouragement.

Classical economics stressed the role of real as opposed to monetary factors in each of the buying determining output and employment. K is the stock of capital plant and equipment. In each case. In Figure a. The MPN of worker 5 is 1 unit.

On line B. This is the area of diminishing returns to scale. On line G. The increase in output when worker 3 was hired is less than the MPN of worker 2. In this area on the production function. On line C. Fixed Capital Stock. At this point. On line E. The MPN of worker 3 is 8 units.

The MPN of worker 4 is 5 units. This is the area of negative returns. This portion of the production function exhibits diminishing returns to scale. This is the area of constant returns to scale. For very low levels of labor utilization. The MPN of worker 1 is Firms would not hire in the area of negative returns to scale. On line F. The slope of the line gives the increase in output for a given increment in labor input.

On line D. This is the MPN. Output increases at a diminishing rate due to the law of diminishing returns. For the most part. At low levels of labor input. This law states that as variable inputs in this case. Negative returns to scale occur when additional labor input results in decreased.

Firms would not operate on this portion of the production function labor MPN because hiring additional labor results in a decrease in total output. This is total output due to the marginal product of labor MPN. In the classical model. Classical economists assumed that the quantity of labor employed would be determined by the forces of demand and supply in the labor market. There are no barriers to the adjustment of money wages. The perfectly competitive firm will increase output until the marginal cost of producing a unit of output is equal to the marginal revenue received from its sale.

To see how the aggregate demand for labor is determined. This area represents diminishing returns to scale. MPNi for each firm is derived from the production function for each firm.

The capital stock. Firms and individual workers optimize. We defined the units of output produced by the incremental unit of labor employed as the MPN. The marginal product of the additional worker is below the horizontal axis in the area of negative returns to scale. Ni for each firm. Marginal labor cost equals the money wage divided by the number of units of output produced by the additional unit of labor. The short-run production function plotted in Figure a is a technological rela- tionship that determines the level of output given the level of labor input employ- ment.

They have perfect information about relevant prices. The question of whether firms are in fact perfect competitors does. The analysis could be reformulated for the firm facing a downward-sloping demand curve without substantially changing the conclusions that we reach in this chapter.

Output and Employment 55 In the range of constant returns to scale. As more workers are hired. By assumption. For the perfectly competitive firm. In order to get the firm to hire more labor. At a real wage such as 8. The firm will reduce labor to increase profit. The demand for labor schedule for the firm.

The payment to the worker in real terms is less than the real product produced. This is shown at point D on the graph of the demand for labor. The labor demand curve is downward-sloping due to the law of diminishing returns. Profits will be increased by hiring additional units of labor. At a quantity of labor below 3. The payment to labor exceeds the real product of the mar- ginal worker.

The condition for profit maximization in equation 3. If the real wage is 8. For each real wage. Each vertical intercept is the real wage multiplied by 24 hours in the day. The higher the real wage. The labor demand curve is downward sloping due to the law of diminishing returns. The slope of the budget line is the real wage. Real income is measured on the vertical axis and is equal to the real wage. The straight-line rays originating at the point of 24 hours on the horizontal axis give the budget lines facing the individual.

Starting from 24 hours no work. In addition. The level of utility depends positively on both real income. The maximum. On the horizontal axis. Clas- sical economists assumed that the individual attempts to maximize utility or satisfaction. The number of hours worked are. The horizontal intercept.

In Figure Output and Employment 57 demand depends inversely on the level of the real wage.

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Labor services are supplied by individual workers. The curved lines in the graph labeled U1. Figure illus- trates the choice facing the individual. Points along one of these curves are combinations of income and leisure that give equal satisfaction to the individual. The slope of the indifference curve gives the rate at which the individual is willing to trade off leisure for income—that is.

Buying Options

U3 are indifference curves. There is. Notice that at a higher real wage. This is shown at point B on the labor supply curve. At a real wage of 4. This is shown at point A on the labor supply curve. Three budget lines. At a real wage of 3. The individual will supply labor N js up to the point where the rate at which labor may be traded for leisure in the marketplace. This is shown at point C on the labor supply curve.

At a real wage of 2. As the real wage increases. Almost certainly. With successive increases in the real wage. The individual will now select point A on the income—leisure trade-off graph.

The worker receives utility ultimately from consumption. At higher levels of real income. At this higher price. N aggregate production function 3. This sup- ply curve consists of points such as A. Output and Employment 59 In Figure b.

Although the empirical evidence on this question is incon- clusive. This relation reflects the fact that a higher real wage rate means a higher price for leisure in terms of foregone income. Hours of work decrease to 6 Labor supply is determined by the real wage. There is another effect: This is the signifi- cance of equation 3. This effect is analogous to the substitution effect in the theory of consumer demand.

A common feature of the factors determining output in the classical model is that all are variables affecting the supply side of the market for output—the amount firms choose to produce. In common terminology. From the derivation of the labor supply curve. This equilibrium level of labor input N0 results in an equilibrium level of output Y0 given by the production function.

For labor supply. What are the exogenous variables that. For a given money wage each price level will mean a different real wage and. At a price level of 2P1. As graphed in Figure b. Figure a reproduces the aggregate supply and demand curves for labor. The curve is upward-sloping because at the given price level a higher money wage is a higher real wage.

Workers are interested in the real wage. To do so. The production function is shifted by technical change that alters the amount of output forthcoming for given input levels. Popula- tion growth would. Because the supply-determined nature of output and employment is a crucial fea- ture of the classical system. The labor demand curve is the MPN curve.

Equilibrium within the classical model is illustrated in Figure U3 in Figure a. We first consider the form of each of the latter relationships. Figure b plots labor supply and labor demand as functions of the money wage W.

Substitution of equilibrium employment into the production function in part b determines equilibrium aggregate output. Y0 at point A. In the aggregate. Equilibrium employment is N0. A rise in the price level shifts the labor supply sched- ule plotted against the money wage upward to the left.General Topic. The GDP measure that changes only when quantities. What determines the cyclical behavior of output and employment? Please try again later. Also note that investment refers to expenditure by firms on plant.

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