Lecture 4: Basics Of Macroeconomics & Macroeconomic Model Given to the EMBA 8400 Class January 19, 2008 Dr. Rajeev Dhawan Director.

Lecture 4: Basics Of Macroeconomics & Macroeconomic Model

Given to theGiven to theEMBA 8400 ClassEMBA 8400 Class

January 19, 2008January 19, 2008

Dr. Rajeev DhawanDr. Rajeev DhawanDirectorDirector

Chapter 26

Saving, Investment

and the Financial System

Savings And National Income Math GDP (as the sum of expenditures) has been defined as:

Y = C + I + G + NX In a closed economy:

Y = C + I + G

Rearranging terms gives: Y - C - G = I

The left-hand side, which is the nation's income (GDP) leftover after consumption and government spending, is defined as National Savings. Since Y - C - G is defined as being equal to "S":

S = I

Continued..

This relationship must hold for the economy as a whole (when the economy is closed). Now, with

S = Y - C - G

Add and subtract the government's tax revenue (T) to the right-hand side

S = Y - C - G + T - T

Then rearrange terms on the right hand side to get S = (Y - T - C) + (T - G)

Continued.. This expression breaks down national savings into

two components: private savings and public savings.

Private savings (Y - T - C) is the income left in the economy after taxes and consumption have each been paid for.

Public savings (T - G) is equal to the taxes collected by the government, minus government spending. This is also an expression for the government surplus/deficit (surplus if T > G, deficit if T < G).

Market For Loanable Funds

Loanable Funds(in billions of dollars)

0

InterestRate Supply

Demand

5%

$1,200

Increase in Supply of Loanable Funds

Loanable Funds(in billions of dollars)

0

InterestRate

Supply, S1 S2

2. . . . whichreduces theequilibriuminterest rate . . .

3. . . . and raises the equilibriumquantity of loanable funds.

Demand

1. Tax incentives forsaving increase thesupply of loanablefunds . . .

5%

$1,200

4%

$1,600

Policy 1: Saving IncentivesPolicy 1: Saving Incentives

Increase in Demand of Loanable Funds

Loanable Funds(in billions of dollars)

0

InterestRate

1. An investmenttax creditincreases thedemand for loanable funds . . .

2. . . . whichraises theequilibriuminterest rate . . .

3. . . . and raises the equilibriumquantity of loanable funds.

Supply

Demand, D1

D2

5%

$1,200

6%

$1,400

Policy 2: Investment IncentivesPolicy 2: Investment Incentives

Effect Of A Government Budget Deficit

Loanable Funds(in billions of dollars)

0

InterestRate

3. . . . and reduces the equilibriumquantity of loanable funds.

S2

2. . . . whichraises theequilibriuminterest rate . . .

Supply, S1

Demand

$1,200

5%

$800

6% 1. A budget deficitdecreases thesupply of loanablefunds . . .

Policy 3: Budget DeficitPolicy 3: Budget Deficit

The U.S. Government DebtThe U.S. Government Debt

Percentof GDP

1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990

RevolutionaryWar

2010

CivilWar World War I

World War II

0

20

40

60

80

100

120

Copyright©2004 South-Western

Chapter 28

Unemployment & Its Natural Rate

How Is Unemployment Measured?

Based on the answers to the survey questions, the Bureau of Labor Statistics (BLS) places each adult into one of three categories:– Employed– Unemployed– Not in the labor force

Labor Force– The labor force is the total number of workers, including

both the employed and the unemployed.– The BLS defines the labor force as the sum of the

employed and the unemployed.

Breakdown Of The Population In 2004

AdultPopulation

(223.4 million)

Labor Force(147.4 million)

Employed(139.3 million)

Not in labor force(76.0 million)

Unemployed (8.1 million)

Unemployment - What is it? The unemployment rate is calculated as the

percentage of the labor force that is unemployed.

U n em p lo y m en t ra te =N u m b er u n e m p lo y ed

L ab o r fo rce 1 0 0

L ab o r fo rce p artic ip a tio n ra te

L ab o r fo rce

A d u lt p o p u la tio n 1 0 0

Labor Force Participation Rate

Example

In 2001, 135.1 million people were employed and 6.7 million people were unemployed.

– Labor Force = 135.1 + 6.7 = 141.8 million

– Unemployment Rate = (6.7 / 141.8) X 100

= 4.7 percent

– Labor Force Participation Rate =

(141.8 / 211.9) X 100 = 66.9 percent

The Labor-Market Experiences of Various The Labor-Market Experiences of Various Demographic Groups (2004)Demographic Groups (2004)

Copyright©2004 South-Western

Unemployment Rate Since 1960Unemployment Rate Since 1960

Copyright©2003 Southwestern/Thomson Learning

10

8

6

4

2

0

1970 19751960 1965 1980 1985 1990 2005

Percent ofLabor Force

1995 2000

Natural rate ofunemployment

Unemployment rate

Identifying Unemployment Natural Rate of Unemployment

– The natural rate of unemployment is unemployment that does not go away on its own even in the long run.

– It is the amount of unemployment that the economy normally experiences.

Cyclical Unemployment– Cyclical unemployment refers to the year-to-year

fluctuations in unemployment around its natural rate.– It is associated with short-term ups and downs of the

business cycle.

Questions About Unemployment

Does the Unemployment Rate Measure What We Want It To?

How Long Are the Unemployed without Work?

Why Are There Always Some People Unemployed?

Article: Why do Americans Work More Than Europeans?WSJ; by: Edward Prescott

Americans aged 15-64, on a per-person basis, work 50% more than French. The French, for example, prefer leisure more than do Americans or on the other side of the coin, that Americans like to work more. This is silliness !!

Germans and Americans spend the same amount time working, but the proportion of taxable market time vs. nontaxable home work time is different

But marginal tax rates explain virtually all of this difference. Labor supply is not fixed. People be they European or American, respond to taxed on their income. – Spanish labor supply increased by 12% in 1988

when taxes were cut

Article: The $366 Billion OutrageFortune Magazine; by: Janice Revell

Pension plans of 16 million state and local government workers are taking up a huge share of the budgets. In the 90’s elected officials allowed workers to dramatically spike their pre-retirement compensation, to retire on more than 100% of their pay, and to draw both their salaries and pensions, with guaranteed market returns, simultaneously.

San Diego deferred retirement option plan, or DROP allows pension, deposited into a special account earn a guaranteed 8% annual rate of interest, plus a 2% annual cost-of-living adjustment. When the employee actually decides to retire he can either collect the amount that has accumulated in his special pension account or let it keep compounding at that generous rate or return indefinitely.

Result:

The pension fund is short by billions and counting ($366 Billion so far!). The generosity of the plan means workers (e.g. in Houston 44% of the city workforce) can quit without taking a major financial hit => early retirement by qualified employees.

SolutionSolution: Raise property tax (is happening)Cut in city services (is happening)Cut benefits (?)

Chapter 29

The Monetary System

Money–What is it and what does it do?

Money is the set of assets in an economy that people regularly use to buy goods and services from one another

Medium of Exchange –what sellers accept from buyers as payment for goods and services. Eliminates inefficiencies of barter.

Unit of Account – When there is one unit of account, like the ($) in the United States, you don't have to think in relative terms when valuing goods and services.

Store of Value – people have the option to hold money over time as one way of storing their assets. Money is an important store of value, because it is the most liquid asset in the economy

Types of Money

Commodity Money money that takes the form of a commodity with intrinsic value.

Fiat Money money without intrinsic value that is used as money because of government decree 

How to Measure Money

Money Stock: The quantity of money circulating in the economy

Q: Suppose you want to know the size of the U.S. money stock. What should you count as money?

A: Currency and demand deposits, and a few other items (detailed below) but not credit cards.

Currency - the paper bills and coins in the hands of the public

Demand Deposits - balances in bank accounts that depositors can access on demand by writing a check (or by using a debit card)

Two Measures of the Money Stock for the U.S. Economy (2004)

Billionsof Dollars

• Currency($699 billion)

• Demand deposits• Traveler’s checks• Other checkable deposits ($664 billion)

• Everything in M1($1,363 billion)

• Savings deposits• Small time deposits• Money market mutual funds• A few minor categories ($5,035 billion)

0

M1$1,363

M2$6,398

Banks & Money Supply

Q: How do banks operate?A: Banks accept deposits from people. That money is in an

account until the depositor makes a withdrawal or writes a check on their account.

Q: Do banks keep all of your money in their vault?A: No. Our banking system is called fractional reserve

banking. Bankers understand that it is not necessary to keep 100 percent of a depositors money on hand at all times. As a result, bankers take some of your money and loan it out to other people.

Continued..

Fractional reserve banking - a banking system in which banks hold only a fraction of deposits as reserves

Reserve ratio - the fraction of deposits that banks hold as reserves. Minimum reserve ratios are set by the Fed.

Money Creation with Fractional-Reserve Banking

When a bank makes a loan from its reserves, the money supply increases.

The money supply is affected by the amount deposited in banks and the amount that the bank loans.– Deposits into a bank are recorded as both assets and

liabilities.– The fraction of total deposits that a bank has to keep

as reserves is called the reserve ratio.– Loans become an asset to the bank.

Money Creation with Fractional-Reserve Banking

This T-Account shows a bank that…– accepts deposits,– keeps a portion

as reserves, – and lends out

the rest. – It assumes a

reserve ratio of 10%.

Assets Liabilities

First National Bank

Reserves$10.00

Loans$90.00

Deposits$100.00

Total Assets$100.00

Total Liabilities$100.00

Money Creation with Fractional-Reserve Banking

When one bank loans money, that money is generally deposited into another bank.

This creates more deposits and more reserves to be lent out.

When a bank makes a loan from its reserves, the money supply increases.

The Money MultiplierSuppose that the Fed requires banks to keep 10 percent of their

demand deposits on reserve. 

Q: What happens when somebody brings in $100 and deposits it in a bank?

A: The bank is required to keep $10 (10 percent) on reserve.

Q: What does the bank do with the remaining $90? A: The bank will turn around and lend it to somebody else,

earning interest income for the bank.Q: What did that $90 loan do to the size of the money supply?A: The money supply increased by $90 when the loan was made.

Here's how:

Continued… When the first depositor arrived with $100 in cash, the money

supply included that $100 of currency in the depositor's wallet After the deposit, the currency was in the bank vault and not

circulating (so out of the money supply) However, demand deposits increased by $100, so the money

supply was unchanged (currency fell by $100, deposits increased by $100)

When the bank made the $90 loan, $90 in currency reentered the money supply

Added to the $100 demand deposit, that original $100 has grown to $190.

Continued… Now suppose that the person who received the $90 loan

deposits that money into their checking account.

Q: What does the bank have to do with the $90? A: Keep 10 percent on reserve (10 percent of $90 = $9).

  Q: What does the second bank do with the remaining 81? A: They can lend that out to somebody else

The Money Multiplier

Assets Liabilities

First National Bank

Reserves$10.00

Loans$90.00

Deposits$100.00

Total Assets$100.00

Total Liabilities$100.00

Assets Liabilities

Second National Bank

Reserves$9.00

Loans$81.00

Deposits$90.00

Total Assets$90.00

Total Liabilities$90.00

Money Supply = $190.00!

Money MultiplierQ: How far does this process of money creation go?A: The process of bank money creation continues until there are no more

excess reserves to be lent out. Money multiplier - the amount of money the banking system generates with

each dollar of reserves. The money multiplier is the reciprocal of the reserve ratio:

M = 1/RWith a reserve requirement, R = 10% or 1/10,The multiplier is 10. Therefore, the original $100 deposit will eventually turn into $1000 of deposits. 

Q: The banking system can create money, but can it also create real wealth?A: No. Each loan has two parts. Recall that the first $90 loan generated $90 in

new money. At the same time, that $90 loan also created a new $90 liability for the person borrowing the money. The banking system cannot create real wealth.

The Federal Reserve System

The Federal Reserve (Fed) serves as the nation’s central bank.– It is designed to oversee the banking system.– It regulates the quantity of money in the economy.

The primary elements in the Federal Reserve System:

1) The Board of Governors2) The Regional Federal Reserve Banks3) The Federal Open Market Committee

The Federal Reserve SystemThe Federal Reserve System

Copyright©2003 Southwestern/Thomson Learning

The Fed’s Tools of Monetary Control

The Fed has three tools in its monetary toolbox:

– Open-market operations– Changing the reserve requirement– Changing the discount rate

Open-Market Operations– The Fed conducts open-market operations when it

buys government bonds from or sells government bonds to the public:

– When the Fed buys bonds, the money supply is increased. Here is why: The Fed pays for the bonds it buys with money that was not currently a part of the money supply, hence, when the Fed buys bonds it simply increases the total amount of money in circulation.

– When the Fed sells bonds, the money supply is decreased. Here is why: The Fed sells bonds in the market and receives cash in return for the bonds it sells. Once the Fed receives the cash, this cash is taken out of circulation – therefore, the size of the money supply is decreased.

The Fed’s Tools of Monetary Control

Changing the Discount Rate

– The discount rate is the interest rate the Fed charges banks for loans.

Increasing the discount rate decreases the money supply.

Decreasing the discount rate increases the money supply.

The Fed’s Tools of Monetary Control

Chapter 30

Money Growth and Inflation

The Classical Theory of Inflation Inflation is an increase in the overall level of prices. Hyperinflation is an extraordinarily high rate of

inflation. Historical Aspects

– Over the past 60 years, prices have risen on average about 5 percent per year.

– In the 1970s prices rose by 7 percent per year. – During the 1990s, prices rose at an average rate of 2

percent per year.– Deflation, meaning decreasing average prices, occurred in

the U.S. in the nineteenth century.– Hyperinflation refers to high rates of inflation such as

Germany experienced in the 1920s.

Money Supply, Money Demand and Monetary Equilibrium

The money supply is a policy variable that is controlled by the Fed.– Through instruments such as open-market operations,

the Fed directly controls the quantity of money supplied.

Money demand has several determinants, including interest rates and the average level of prices in the economy.

People hold money because it is the medium of exchange.– The amount of money people choose to hold depends

on the prices of goods and services. In the long run, the overall level of prices adjusts to the

level at which the demand for money equals the supply.

Money Supply, Money Demand, and the Equilibrium Money Supply, Money Demand, and the Equilibrium Price LevelPrice Level

Copyright © 2004 South-Western

Quantity ofMoney

Value ofMoney, 1/P

Price Level, P

Quantity fixedby the Fed

Money supply

0

1

(Low)

(High)

(High)

(Low)

1/2

1/4

3/4

1

1.33

2

4

Equilibriumvalue ofmoney

Equilibriumprice level

Moneydemand

A

Figure 2 The Effects of Monetary InjectionFigure 2 The Effects of Monetary Injection

Copyright © 2004 South-Western

Quantity ofMoney

Value ofMoney, 1/P

Price Level, P

Moneydemand

0

1

(Low)

(High)

(High)

(Low)

1/2

1/4

3/4

1

1.33

2

4

M1

MS1

M2

MS2

2. . . . decreasesthe value ofmoney . . .

3. . . . andincreasesthe pricelevel.

1. An increasein the moneysupply . . .

A

B

The Classical Theory of Inflation

The Quantity Theory of Money– How the price level is determined and why it

might change over time is called the quantity theory of money.

The quantity of money available in the economy determines the value of money.

The primary cause of inflation is the growth in the quantity of money.

Velocity and the Quantity Equation

The velocity of money refers to the speed at which the typical dollar bill travels around the economy from wallet to wallet.

V = (P Y)/MWhere: V = velocity

P = the price level

Y = the quantity of output

M = the quantity of money

Velocity & Quantity Equation

Velocity ( V ) = Nominal GDP/ Money Supply = ( P x Y ) / M

Example: V = ($10 x 100 ) / $ 50 = 20

Velocity & Quantity Equation Rewriting the equation gives the quantity

equation:M V = P Y

The quantity equation relates the quantity of money (M) to the nominal value of output (P Y).

The quantity equation shows that an increase in the quantity of money in an economy must be reflected in one of three other variables:– the price level must rise,– the quantity of output must rise, or– the velocity of money must fall.

Nominal GDP, the Quantity of Money, and the Velocity of Money

Indexes(1960 = 100)

2,000

1,000

500

0

1,500

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Velocity

M2

Nominal GDP

Velocity and the Quantity Equation

The Equilibrium Price Level, Inflation Rate, and the Quantity Theory of Money – The velocity of money is relatively stable over

time.– When the Fed changes the quantity of money, it

causes proportionate changes in the nominal value of output (P Y).

– Because money is neutral, money does not affect output.

world interest

rateworld GDP

IMPORTS

price level lag 1

worldprice

money

government

tax rate

capital stock lag 1

EXCHANGE RATE

INTEREST RATE

INVESTMENT

TAX REVENUES

investmentlag 1

EXPORTS

NETEXPORTS

REAL GDP

CONSUMPTION

DISPOSABLE INCOME

CAPITAL STOCK

inflationlag 1

PRICE LEVEL

INFLATION

EXPECTED INFLATION

UNEMPLOYMENT

POTENTIAL GDP

labor force

~~Typical Macro-ModelTypical Macro-Model~~

Macroeconomic Model

The Macroeconomic Model simulates the working of the US Economy using explicit equations to model consumption, investment, exports, imports, exchange rate, price level and inflation rate.

Classification and Listing of Equations

1. Accounting Identities: Real GDP (GDP); Tax Revenues (T) Disposable Income (YDP), Net Exports (NETEX) Price Level (P)

Example: Disposable Income (YDP) = GDP – Tax Revenues (T)

Accounting Identities have the following properties: As forecasting equations, they are PERFECT! Don’t have parameters to be fitted No error term No theoretical disputes about their truth, only about their

relevance

2. Behavioral Equations: Consumption (C), Real Interest Rate (R), Investment (I), Exchange Rate (EXCH), Exports (EX), Imports (IM), Inflation (P%)

Example: Consumption (C) = α0 * Disposable income (YDP)

(Where α0 = marginal propensity to consume = 0.9215686)

Behavioral Equations have the following properties:Estimated parameter values change as behavior changesSource of all forecasting errorsTheoretical disputes concerning these equations, e.g., are consumers myopic or forward looking?

Endogenous and Exogenous Variables

Define: A = B + C ……………………(1) Where B = A/2 ………………..…..(2) and C = 5 (given) Then equation (1) becomes A = B +5 which

using definition of B becomes the following: A = (A/2) + 5 Thus, A/2 = 5 or A = 10 and using (2) B=5 In the above example, A & B are endogenous

variables and C is an exogenous variable

Accounting Identity

Behavioral Equation

Macroeconomic Model

The Exogenous Factors in the model are:– GDP Potential (GDP@FULL) which is GDP value

at full employment level– Domestic Policy Variables:

Money Supply (M) Government Spending (G) Tax Policy (T%)

– Rest-of-the-World (ROW) factors such as Foreign Interest Rate (R@ROW) Foreign Price Level (P@ROW) ROW GDP Potential (GDP@ROW)

Model Simulation Approach 1. State macroeconomic theory as a complete set of algebraic

equations.

2. Estimate/postulate numerical values of all parameters.

3. Assume initial conditions for the history of all lagged variables.

4. Assume “base case” values over future time periods for all exogenous variables.

5. Solve the model under base case assumptions.

6. Change some of the exogenous variable assumptions.

7. Solve the model again under alternative assumptions.

8. Compare model solutions

1. Base Case and the alternative policy Simulation.

1. Integrates short run and long run analysis into one coherent story of the dynamic reactions of an economy to macroeconomic policy.

2. Traces the complete logic of the model, step-by-step, instead of trying to condense model into a two-dimensional diagram, such as IS-LM diagram.

3. Extends to real-world macroeconomic policy issues.

4. Same process applies to realistic models of actual economies, such as U.S. forecasting models, oil shocks, or world slowdown.

Advantages of the Model Simulation Approach

12 Endogenous Variables – GDP, C, I, EX, IM, NETEX, R, P, YDP, T, EXCH, P% (requires 12 equations in 12 unknowns)

7 Exogenous Variables– 3 Policy Variables: M, G, TAX%– 3 ROW Variables: P@ROW, R@ROW, GDP@ROW– 1 Other Variable: GDP@FULL

Listing Of Variables in the Model

Listing of 12 Equations in the Model 12 Endogenous Variables

– One GDP Equation/Accounting Identity

– Three Consumption Related Equations

– Two Interest Rate and Investment Equations

Accounting Identity

Accounting Identity

Behavioral Equation

Behavioral Equation

Behavioral Equation

Accounting Identity

– Four Exchange Rate, Export, Import and Net Export Equations

– Two Price Inflation Equations

Accounting Identity

Accounting Identity

Behavioral Equation

Behavioral Equation

Behavioral Equation

Behavioral Equation

Glossary of Variables Type Variable Meaning Units

Endogenous C Consumption Billions of $

Endogenous EX Exports Billions of $

Endogenous EXCH Exchange Rate Index

Exogenous G Government Purchases Billions of $

Endogenous GDP Gross Domestic Product Billions of $

Exogenous GDP@FULL GDP @ Full Employment Billions of $

Exogenous GDP@ROW GDP in Rest of the World Billions of $

Endogenous I Investment Billions of $

Endogenous IM Imports Billions of $

Exogenous M Money supply Billions of $

Endogenous NETEX Net Exports Billions of $

Endogenous P Price Level Index

Endogenous P% Inflation Percent

Exogenous P@ROW Price Level, Rest of the

World

Index

Endogenous R Real Interest Rate Percent

Exogenous R@ROW Real Interest Rate, Rest of

the World

Percent

Endogenous T Tax Revenues Billions of $

Exogenous TAX% Tax Rate Fraction

Endogenous YDP Disposable Income Billions of $

Additional Definitions

The model variables are in real terms (except of course the price variable). We need three other variables in nominal terms to complete our understanding. These are like “derived” accounting identities.

Econ 101 Rule

ENDOGENOUS VARIABLES

2006Gross Domestic Product GDP 7,000.00$ Tax Revenues T 1,050.00$ Disposable Income YDP 5,950.00$ Net Exports NETEX (248.25)$ Price Level P 1.000

BEHAVIORAL EQUATIONSConsumption Expenditure C 5,483.33$ Real Interest Rate R 4.00Investment I 999.99$ Real Exchange Rate EXCH 1.000Exports EX 1,764.29$ Imports IM 2,012.53$ Inflation P% 0.000Nominal Exchange Rate EXCH(N) 1.000EXOGENOUS VARIABLES

POLICY VARIABLES

Money M 3,500.00$

Government Purchases G 764.92$

Tax Rate TAX% 0.15

REST-OF-WORLD VARIABLESPrice Level, ROW P@ROW 1.00Real Interest Rate, ROW R@ROW 4.00GDP @ Rest of World GDP@ROW 7,000.00$

OTHERSPrice Level % (t-1) P%(t-1) 0.00Price Level (t-1) P(t-1) 1.00Potential GDP GDP@FULL 7,000.00$

ACCOUNTING IDENTITIES

Econ 101 Rule

“Given the values of exogenous variables for a given economy, if the values of inflation (P%) = 0.00% & nominal exchange rate (EXCH) = 1.00, then the economy is in equilibrium or steady state in such a way that actual GDP is exactly equal to potential GDP”.

Equal

Base Case

The Base Case is the state of the economy where for the given values of exogenous variables, the ECON 101 rule applies and the values of endogenous variables solved in the first year remain constant for all subsequent years

Base CaseThis means that GDP will be equal to its potential value for all the years in the base case.

Inflation will be equal to ZERO percent

And the exchange rate will be at one for all the years

Cont…

This also implies that values of all other endogenous variables will also be constant for the subsequent years.Why? Endogenous variables P and P% from today become the exogenous variables for subsequent years’ endogenous value calculations as seen from equations 11 and 12.

Data Table 1

Name of Experiment:

History * * * * * * * * * * * * * * * *2006 2007 2008 2009 2010 2017 2022 2027 2032

Gross Domestic Product (GDP) New Sim $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0

Base Case $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0

Diff $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Taxes (T) New Sim $1,050.0 $1,050.0 $1,050.0 $1,050.0 $1,050.0 $1,050.0 $1,050.0 $1,050.0 $1,050.0

Base Case $1,050.0 $1,050.0 $1,050.0 $1,050.0 $1,050.0 $1,050.0 $1,050.0 $1,050.0 $1,050.0

Diff $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Disposable Income (YDP) New Sim $5,950.0 $5,950.0 $5,950.0 $5,950.0 $5,950.0 $5,950.0 $5,950.0 $5,950.0 $5,950.0

Base Case $5,950.0 $5,950.0 $5,950.0 $5,950.0 $5,950.0 $5,950.0 $5,950.0 $5,950.0 $5,950.0

Diff $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Net Exports (NETEX) New Sim ($248.2) ($248.2) ($248.2) ($248.2) ($248.2) ($248.3) ($248.2) ($248.2) ($248.2)

Base Case ($248.2) ($248.2) ($248.2) ($248.2) ($248.2) ($248.2) ($248.2) ($248.2) ($248.2)

Diff $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Price Level (P) New Sim 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Base Case 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00Diff 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

BEHAVIORAL EQUATIONS

Consumption Expenditure ( C) New Sim $5,483.3 $5,483.3 $5,483.3 $5,483.3 $5,483.3 $5,483.3 $5,483.4 $5,483.3 $5,483.3

Base Case $5,483.3 $5,483.3 $5,483.3 $5,483.3 $5,483.3 $5,483.3 $5,483.3 $5,483.3 $5,483.3

Diff $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Real Interest Rate ( R) New Sim 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

Base Case 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

Diff 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Investment (I) New Sim $1,000.0 $1,000.0 $1,000.0 $1,000.0 $1,000.0 $1,000.0 $1,000.0 $1,000.0 $1,000.0

Base Case $1,000.0 $1,000.0 $1,000.0 $1,000.0 $1,000.0 $1,000.0 $1,000.0 $1,000.0 $1,000.0

Diff $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Real Exchange Rate (EXCH) New Sim 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Base Case 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Diff 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Exports (EX) New Sim $1,764.3 $1,764.3 $1,764.3 $1,764.3 $1,764.3 $1,764.3 $1,764.3 $1,764.3 $1,764.3

Base Case $1,764.3 $1,764.3 $1,764.3 $1,764.3 $1,764.3 $1,764.3 $1,764.3 $1,764.3 $1,764.3

Diff $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Imports (IM) New Sim $2,012.5 $2,012.5 $2,012.5 $2,012.5 $2,012.5 $2,012.5 $2,012.5 $2,012.5 $2,012.5

Base Case $2,012.5 $2,012.5 $2,012.5 $2,012.5 $2,012.5 $2,012.5 $2,012.5 $2,012.5 $2,012.5

Diff $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Inflation (P%) New Sim 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Base Case 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Diff 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

ACCOUNTING IDENTITIES

Base Case

Long RunShort RunENDOGENOUS VARIABLES

Second half of the data Table 1

EXOGENOUS VARIABLES

POLICY VARIABLES

Money Supply (M) New Sim $3,500.0 $3,500.0 $3,500.0 $3,500.0 $3,500.0 $3,500.0 $3,500.0 $3,500.0 $3,500.0

Base Case $3,500.0 $3,500.0 $3,500.0 $3,500.0 $3,500.0 $3,500.0 $3,500.0 $3,500.0 $3,500.0

Diff $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Government Purchases (G) New Sim $764.9 $764.9 $764.9 $764.9 $764.9 $764.9 $764.9 $764.9 $764.9

Base Case $764.9 $764.9 $764.9 $764.9 $764.9 $764.9 $764.9 $764.9 $764.9

Diff $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Tax Rate (TAX%) New Sim 15% 15% 15% 15% 15% 15% 15% 15% 15%

Base Case 15% 15% 15% 15% 15% 15% 15% 15% 15%Diff 0% 0% 0% 0% 0% 0% 0% 0% 0%

REST-OF-WORLD VARIABLES

Price Level, ROW New Sim 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

Base Case 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

Diff 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Real Interest Rate, ROW New Sim 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

Base Case 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

Diff 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

GDP @ Rest of World New Sim $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0

Base Case $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0Diff $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

OTHERS

Potential GDP (GDP@FULL) New Sim $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0

Base Case $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0 $7,000.0Diff $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

4 Important Guidelines to Use the Model

1. Tools/Options/Calculations/Iterations=100

2. Use Graph Button to Generate New Graphs for the experiment performed

3. Use Print Button for Printing the Results

4. To Reset the Model, Press the Base Case Button, and run the model once using the Calculations Button