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May 8th, 2018, 02:29 AM   #1
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Macro-economics

Hello

Can you help me please about two questions which I'm not sure about my answers:

1. An economy in which proportional tax is customary is found in equilibrium in unemployment.
As a result of the pessimistic expectations of the entrepreneurs, The investment has fallen (decreased/reduced) to every level of product.
The Finance Minister claimed that this change will also reduce private consumption and will increase the government budget deficit. Is his claim correct? Explain.

My answer:
The investment has fallen (decreased/reduced) to every level of private consumption, which means that product didn't necessarily decrease, so that the private consumption didn't necessarily decrease too, as a result, the amount of tax has not changed, which means that the budget deficit of government has not changed too.
Therefore, his claim isn't correct.


2. An economy is in equilibrium in full employment and the government has a large deficit in its budget.
The government is considering reducing transfer payments so that it can reduce the amount of bonds it sells to the public.
Explain what will happen to product, employment, private consumption and investment.

My answer:
Nothing will happen, because the economy is in equilibrium in full employment, which means that the economy in max situation.
The saving and disposable income of public will increase and the deficit budget will increase too (but these weren't asked in a question).



I'm not sure about my answers and sorry if my english is bad, and of course if you didn't understand something, then tell me please.


Oh, there is another something (it's not question), our lecturer said:
As a result of expectations of households recession, the saving is increased to every level of disposable income.
Keynes's saving paradox predicts that the result of this behavior, there will be a reduction in the level of saving.

I didn't understand why it's correct, can you explain me please?



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May 8th, 2018, 06:02 AM   #2
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I am afraid that I do not understand the first question at all. What change? And what does it mean when you say that investment has fallen to every level of product?

I have said now in several posts that you cannot reasonably ask us to explain the workings of a model, which is just a set of equations and definitions, if you do not tell us what the model is. This is not an unreasonable request. There are probably not more than seven or eight variables and equations involved.

Informally, Keynes' paradox is that if everyone increases his or her level of savings by a single penny without an immediate and equal offsetting increase in aggregate investment or government expenditure, aggregate production must fall and thus aggregate income must fall and thus aggregate savings must fall. These events discourage everyone so they will all try to save more and thereby reduce production, income, and savings yet further. This process will continue unchecked until everyone is so impoverished that no one will even attempt to increase their savings because they are all living on rice and beans. Pigou pointed out that the argument in that crude a form is nonsense about 1938. However, Harrod (I think) came up with a much more persuasive version involving dual or triple equilibria, at least one of which is unstable. In any case, these are really arguments in dynamics, not comparative equilibria which seems to be what you are studying.

The basic idea is that planned saving and actual saving will differ if the attempt to effect the plan changes the economic environment.

EDIT: The above may sound as though I view Keynes as an idiot. He was far from being such and was capable of writing very good English prose. I think that he is wrong theoretically in the assertion that a free market system can be at equilibrium with involuntary unemployment, but he made clear that finding a full employment equilibrium may be a very slow process and proposing a model that indicates policies that are likely to make a full employment equilibrium easier and faster to achieve. He was rightfully the most influential economist of the 20th century despite his fascist flirtation and virulent anti-semitism.
Thanks from IlanSherer

Last edited by JeffM1; May 8th, 2018 at 06:31 AM.
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May 8th, 2018, 07:19 AM   #3
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Quote:
Originally Posted by JeffM1 View Post
I am afraid that I do not understand the first question at all. What change? And what does it mean when you say that investment has fallen to every level of product?

I have said now in several posts that you cannot reasonably ask us to explain the workings of a model, which is just a set of equations and definitions, if you do not tell us what the model is. This is not an unreasonable request. There are probably not more than seven or eight variables and equations involved.

Informally, Keynes' paradox is that if everyone increases his or her level of savings by a single penny without an immediate and equal offsetting increase in aggregate investment or government expenditure, aggregate production must fall and thus aggregate income must fall and thus aggregate savings must fall. These events discourage everyone so they will all try to save more and thereby reduce production, income, and savings yet further. This process will continue unchecked until everyone is so impoverished that no one will even attempt to increase their savings because they are all living on rice and beans. Pigou pointed out that the argument in that crude a form is nonsense about 1938. However, Harrod (I think) came up with a much more persuasive version involving dual or triple equilibria, at least one of which is unstable. In any case, these are really arguments in dynamics, not comparative equilibria which seems to be what you are studying.

The basic idea is that planned saving and actual saving will differ if the attempt to effect the plan changes the economic environment.

EDIT: The above may sound as though I view Keynes as an idiot. He was far from being such and was capable of writing very good English prose. I think that he is wrong theoretically in the assertion that a free market system can be at equilibrium with involuntary unemployment, but he made clear that finding a full employment equilibrium may be a very slow process and proposing a model that indicates policies that are likely to make a full employment equilibrium easier and faster to achieve. He was rightfully the most influential economist of the 20th century despite his fascist flirtation and virulent anti-semitism.
Oh I'm sorry, I thought in theory the models aren't relevant, the model is same as our previous post. We didn't learn new models or subjects yet.

"And what does it mean when you say that investment has fallen to every level of product?" - I mean that the value of investment (I) decreases in every value of Y (product).

"What change?" - do you talk about a claim by the Finance Minister? if yes, so the change is this: As a result of the pessimistic expectations of the entrepreneurs, The investment has fallen (decreased/reduced) to every level of product.

About your answer on my lecturer claim and last paragraph (it was interesting) - Thanks!

If you have more questions, you can ask anytime

Last edited by IlanSherer; May 8th, 2018 at 07:32 AM.
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