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Chapter 10 macroeconomic equilibrium

1. Key terms – matching and translation.

Read aloud the key term and its definition so that they make up a single sentence. (Remember about the agreement between the subject and the predicate!). Translate the sentences you have arrived at from English into Russian.

Keynesian equilibrium	The reciprocal of the marginal propensity to save.
withdrawals	Difference between what GDP currently is and what it would be at full employment.
GPD gap	Planned investment adjusted for unintended inventory changes.
recessionary gap	Aggregate Output and Income equal planned Aggregate Expenditures.
inflationary gap	Condition for a private economy macroequilibrium.
paradox of thrift	Deficiency in autonomous expenditures needed to reach full employment.
potential GDP	Attempts to save more actually yield less saving.
actual investment	Occur when income is not spent on domestic output.
planned investment equals planned savings	Amount that autonomous spending exceeds that needed to achieve full-employment equilibrium with price level stability.
autonomous spending multiplier	National output when resources are fully employed.

2 Text translation.

Translate the text from English into Russian in writing paying particular attention to the translation of the economic terms in bold as well as words and phrases relevant to the subject of the text. Read out your translation in class and introduce the necessary corrections.

Macroeconomic equilibrium

Chapter Objectives

After you have read and studied this chapter you should be able to explain equilibrium income and employment using the Aggregate Expenditures – National Income approach, and why Keynesians differ from classical economists by emphasizing demand over supply forces; explain macroequilibrium with the savings-investment approach; explain the differences between potential and actual GDP and the concepts of recessionary and inflationary gaps; and explain the relationships between Keynesian Aggregate Supply and Demand and the average level of prices in the economy.

Chapter Review: Key Points.

1. Keynesian theory suggests that erratic changes in business investment spending (especially inventories) play a major role in causing fluctuations in aggregate income and employment.

2. Equilibrium income and employment occur at the output level at which Aggregate Spending equals National Output; firms desire to produce and sell exactly the amounts consumers and investors want to purchase. Any deviation from equilibrium income sets forces in motion to drive the economy towards a new equilibrium.

3. When planned saving equals planned investment (S = I), the economy will be in equilibrium. Actual saving and investment are equal at all times because inventory adjustments and similar mechanisms ensure this balance.

4. When autonomous spending in the economy increases by $1, income rises by an amount equal to the autonomous spending multiplier times the original $I. The multiplier exists because the original $1 in new spending becomes $1 in new income, parts of which are then spent by successive consumers and businesses. The simple autonomous spending multiplier equals: ∆Y/∆A = 1/mps = 1/(1 - mpc), where A represents some form of autonomous spending.

5. Investment spending fell precipitously during the 1929-33 period. The effect of this decline was to reduce equilibrium income sharply. This may have been a principal cause of the Great Depression.

6. The paradox of thrift appears to be an important challenge to our conventional wisdom. If more consumers decide to increase their saving, the result might be declining income, consumption, and saving.

7. Potential GDP is an estimate of the output the economy could produce at full employment. The GDP gap is the difference between potential and actual GDP.

8. The recessionary gap is the amount by which autonomous spending falls short of that necessary to achieve a full employment level of income; it is measured on the vertical axis. An inflationary gap is the amount that autonomous spending exceeds what is necessary for a full employment equilibrium and is a measure of upward pressure on the price level.

9. Aggregate Expenditure curves are constructed for a given (fixed) price level. If the price level rises, Aggregate Expenditures fall, and vice versa. This leads to a unique relationship that allows us to derive an Aggregate Demand curve from specific levels of Aggregate Spending at various price levels.

10. If the price level is constant, higher autonomous spending increases Aggregate Demand by shifting the Aggregate Demand curve to the right, and vice versa.

11. Keynes thought that raising Aggregate Demand will boost output during a depression without raising the price level. Simple Keynesian theory suggests that the Aggregate Supply curve is horizontal up to the point of full employment. Once full-employment GDP is reached, classical reasoning reigns: The Aggregate Supply curve is vertical, and increases in Aggregate Demand cannot generate extra output. In a fully-employed economy, additions to Aggregate Demand simply bid up prices and result in inflation.

3 Vocabulary practice: switching.

Get ready for an oral (written) translation exercise based on the economic terms in bold, as well as other relevant words and phrases from the text.

Inventory; играть главную роль; to set forces in motion; происходить на к-л уровне; output level; давление на уровень цен; vice versa; кривая совокупных расходов; to construct curves; to boost output; ВВП при полной занятости; classical reasoning; главенствовать; aggregate supply curve; увеличение совокупного спроса; inflationary gap; обеспечивать равновесие\баланс; autonomous spending multiplier; увеличиться на 1 доллар; autonomous spending multiplier; ч-л помноженное на ч-л; GDP gap; исходный 1 доллар; to be spent by successive consumers; снижающиеся сбережения; investment spending; стремительно упасть; снижающийся доход; paradox of thrift; отмерять по вертикальной оси; a challenge to conventional wisdom; снижающееся потребление; to produce at full employment; на определенную величину; to fall short of sth; уровень дохода, соответствующий полной занятости; to exceed sth; to be a measure of upward pressure on sth; вызывать колебания; еquilibrium income; занятость; Aggregate Expenditures-National Income approach; подчеркивать главенство формирующих спрос сил над силами, формирующими предложение; in a fully-employed economy; приращение совокупного спроса; to bid up prices; приводить в результате к инфляции; средний уровень цен; deviation from equilibrium income; вести\толкать экономику к ч-л; находиться в равновесии; at all times; inventory adjustments; savings-investment approach; потенциальный ВВП; actual GDP; виды соотношения\взаимодействия; in the economy; erratic changes; затраты на производственные капиталовложения; фиксированный уровень цен; to derive a curve from sth; производить дополнительный объем продукции; specific levels of sth; на разных ценовых уровнях; unique relationship; постоянный уровень цен, рецессионный разрыв.