Transparency Masters for Essentials of Economics

TRANSPARENCY MASTERS for

ESSENTIALS OF ECONOMICS GWARTNEY · STROUP · CLARK

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Manufactured in the United States of America

EXHIBIT AND PAGE NUMBERS

CORRESPONDING TEXT PAGE

Exh ib i t Exh ib i t Exhib i t Exh ib i t Exhib i t Exhib i t Exhib i t Exh ib i t Exhib i t Exh ib i t Exh ib i t Exh ib i t Exhib i t Exh ib i t Exh ib i t Exh ib i t Exh ib i t Exhib i t Exh ib i t Exh i b i t Exh i b i t Exh ib i t Exh ib i t Exh ib i t Exh i b i t Exhib i t Exh ib i t Exh ib i t Exhib i t Exh ib i t Exh ib i t Exhib i t Exh ib i t Exh ib i t Exh ib i t Exh ib i t Exhib i t Exh ib i t Exh i b i t Exh ib i t Exh i b i t Exhib i t Exh i b i t Exh i b i t Exh ib i t Exh i b i t Exh ib i t Exhib i t Exh i b i t Exh ib i t

1 page 1 2 page 2 3 page 3 1 page 4 2 page 5 3 page 6 4 page 7 5 page 8 6 page 9 7 page 10 9 page 11

10 page 12 1 page 13 2 page 1 4 3 page 15 1 page 16 2 page 17 6 page 18 7 page 1 9 8 page 20

11 page 2 1 1 2 page 22 1 page 23 2 page 24 4 page 25 5 page 26 6 page 2 7 7 page 28 8 page 29 9 page 30 10 page 31 11 page 32 1 2 page 33 1 page 34 2 page 35 3 page 36 4 page 37 5 page 38 7 page 39 8 page 40 9 page 4 1 3 page 4 2 4 page 4 3 5 page 44 1 page 45 2 page 46 3 page 47 4 page 48 5 page 49 6 page 50

24 2 4 25 42 42 4 5 47 49 49 51 5 3 54 6 7 68 70 9 0 9 1

100 10 2 102 107 108 117 118 120 124 1 2 5 126 127 129 130 131 133 1 4 1 1 4 3 1 4 4 149 155 160 161 162 172 173 1 7 4 188 189 190 1 9 2 1 9 5 19 7



Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exh ib i t Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit

7 8 9 1 2 3 4 5 6 7 1 2 3 4 5 6 8 1 2 3 4 6 7 8 9 10 1 2 4 5 6 7 8 9 10 1 2 3 4 5 6 7 1 3 4 5 1 2 3

page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page page

51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

199 202 206 212 214 216 217 218 221 230 236 239 240 242 245 246 249 258 263 265 266 268 268 270 271 272 280 281 282 283 284 289 290 291 293 302 303 304 307 309 310 312 325 329 333 335 341 342 345



Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit

4 5 6 2 3 4 4 1 5 6 8 9

page page page page page page page page page page page page

100 101 102 103 104 105 106 107 108 109 110 111

346 347 349 362 367 368 404 416 421 421 422 427

Entire study time spent on econom

ics

vStudy time = eight hours

f per w

eek

Study time = six hours

per week

Entire study time

spent on English D

C

B

A

Expected grade in English

EXHIBIT 1

The Production P

ossibilities Curve for Grades in

English and E

conomics

CopyrightQ1981 Academic Press, Inc. 1

Expected grade in economics

Only clothing is produced

• D

All output possibilities

v ~~^= on the frontier curve

oi

-*"/ a

re efficient

C*

Inefficiency O

nly food is i /p

rod

uced

Food

EXHIB

IT 2 The C

oncept of the Production Possibilities Curve for an Econom

y

CopyrightQ1981 Academic Press, Inc.

Clothing

2

Future production possibilities if current investm

ent = 1Λ

Future production possibilities if current investm

ent = l2

Initial production possibilities

C2

C/-J B

Current consum

ption

EXHIBIT 3 Investm

ent and Production Possibilities in the Future


Current investment

Copyright ©1981 Academic Press, Inc.

40 h

* - > c <D O^ <D Ü

1973 Demand

Per Capita Consumption of Sugar (pounds per year)

EXHIBIT 1 The Law of Demand

As the price of sugar rose in 1974-1975, consumers substituted artificial sweeteners, honey, and less sweetened foods for sugar. Sugar consumption fell. In contrast, when the price of sugar declined in 1976, consumption increased. The consumption level of sugar (and other products) is negatively related to its price. Source: The numerical data used in this example are from The Statistical Abstract of the United Stetes-1 977, pp. 119 and 475.

4

90 95 100 105

30

20

10

m

Po H

Physician service

/

15 percent price increase

Florida vacation

D,

5 percent reduction in quantity dem

anded 0

2 O

iO0

Quantity/tim

e

EXHIBIT 2 Responsiveness of Dem

and to a Price Change

Copyright @ 1981 Academic Press, Inc.

Price

v£>

p3

yS

~/\

/

!

Qi

Q2

Q3

Quantity/tim

e

EXHIB

IT 3 The Supply C

urve


Price

Price of sm

oos (dollars) Q

uantity supplied (per m

onth) 13 12 11 9 8 7

625 600 575

""'52?' 500 475

* siti«

CO 03 0) U

1 a) Ό

co υ < oo t-l

Θ si 00

Excess supply

EXHIBIT 4 Supply and Dem

and


Upw

ardU

pward

Upw

ard

Excessdem

andExcess

demand

Excessdem

and

600650700

Quantity

demand

Condition

Direction

of(per

month)

inthe

market

pressureofprice

400Excess

supplyD

ownw

ard450

Excesssupply

Dow

nward

500Excess

supplyD

ownw

ard!t.:.r""::l:~.~

..~r~

,)tr~

........

13121110987IE

xcess,d

em

an

d

,I

II

II

II

II

I350

450550

650750

Qu

an

tity/time

Price of smoos (dollars)

EXHIB

IT 5 The D

ifference between a C

hange in Dem

and and a C

hange in Quantity D

emanded


01

O2

03

Qu

an

tityo

fd

oo

rkno

bs

pe

ru

nit

time

Price (dollars)

8

σ\ o co co φ

u a cu

•o (0 υ <: 00 O

N

ιΗ

Θ 00

•H

a o

4800

4500

I 5

6

Millions of com

pact cars per year

EXHIB

IT 6 A

Shift in Dem

and


Price (dollars)

100

New

price reflecting the decline in production costs

Oo Q

i Q

uantity of electronic calculators per unit time

EXHIB

IT 7 Im

proved Technology and a Shift in the Supply C

urve

1 Copyright ©1981 Academic Press, Inc.

Price (dollars)

υ CO CO

cu U

§ Ό

0) Ο

00

Θ J2

•Η

ο ο

S's

Passage of time

fi = one month

t2 = six months

f3 = one year

Quantity per w

eek

EXHIBIT 9 An Expansion in Dem

and and Price


Price (dollars)

= first month

= first year = after three years

Initial response

Q3

O2 Q

i G

allons of gasoline consumed w

eekly

EXHIBIT 10 Tim

e and the Buyer Response to a Price Change


Reductiori

in:

qu

an

titydem

andedth

reeyears

later

Price (dollars)

12

G CO

co cu u § CO O

< CO

σ>

Θ J2

00

o C

J

■a p e G

ain of buyers /a

nd sellers

^S

*D

0 C

heeseburgers per unit time

EXHIBIT 1

What Is G

ood about Idealized Market E

xchange?


S2 (restricted supply)

S-, (competitive

supply)

Q2

Qi

Quantity/tim

e

EXHIB

IT 2 Rigging the M

arket


Price

14

PP

U-

ΡΛ

S2 (includes

external costs) Si

Actual price

and output

O2 Q

^ Q

uantity/time

(a) External C

osts

0)

Ideal \

\ O

Utputy

1 D

i Actual price

and output

\ D

2 (includes external benefits)

Q^ O

2 Q

uantity/time

(b) External B

enefits

EXHIB

IT 3 Externalities and Problem

s for the Market


Price

15

Goods and services «►

$Business receipts$

Goods and services $Consum

ption expenditures$

Product m

arkets

o CO CO (1) U

Pu

& <υ «3 o <: 00

Û0

•H

M

>% CL O

Business firm

s Households

il

$Factor costs$ ^

SHousehold incomes$

Productive resources-Resource m

arkets Productive resources

EXHIBIT 1 Circular Flow—

A Tw

o-Sector Model


co 0) <υ M

a 0) «0 O

«S

CX)

00 «H

U

eu o

EXHIB

IT 2 The Tw

o Ways of M

easuring GN

P Even though m

odern economies are far m

ore complicated than the tw

o-sector circular flow m

odel of Exhibit 2, there are still tw

o methods of calculating G

NP

. It can be calculated either by summ

ing the expenditures on the "final product" goods and services of each sector (left, below

) or by sum

ming the costs associated w

ith the production of these goods and services (right, below).

Expenditure approach

Household

sector (personal consum

ption expenditures) +

Business sector (gross private investm

ent expenditures) +

Governm

ent sector

(government

purchases of goods and services)

+ International

sector (net exports of goods and services)

Resource cost-income

approach

C Incom

e payments

to resources (at factor cost)

Wages

Self-employm

ent income

Rents

Profits Interest

+ Nonincom

e cost item

s Indirect business taxes D

epreciation


Copyright © 1981 Academic Press, Inc.

1 1 I I I I I I L_ 1949 1951 1955 1959 19631967 19711975 1979

Year

EXHIBIT 6 Five Measures of Productive Activity GNP and the other four related aggregate income measures tend to move together.


700 National income

I ,,+2400

2200

2000

1800

1600

1400

E 1200~

~ 1100

'"E81000.S~

'"~ 900~

<l:BOO

600

500

400

GNP

Net national product

Personal income

Disposable income

18

Boom

Long-run growth rate

(3.5 percent)

Boom

Boom

Recession"

1935 1940

1945 1950

1955 1960

1965 1970

1975 1980

EXHIB

IT 7 Instability in the G

rowth of Real G

NP


+20

+16+12+

8+4

I

0-4_

8-

-12

·

Annual rate of changein the real GNP

Recession

Recession

Recession

Recession

Boom

Boom

Boom

Boom

en

PL.

Full em

ployment

(natural rate ό|

unemploym

ent!

B ω cri o < 00

Q>

bû •H

U

CL O

EXHIB

IT 8 U

nemploym

ent and Instability in the Aggregate Labor M

arket Shaded areas represent periods of business recessions as defined by the N

ational Bureau of Econom

ic Research. The natural rate of unem

ployment is from

Robert J. G

ordon, M

acroeconomics (B

oston: Little, Brow

n, 1978).


19801975

19701965

19601955

19501945

1940

20,

181614121082oI

•I

I'

~I

,!

I'!

I~

I'II'

II

I

1935

Percent unemployedPercent unemployed

20

_—,_ e 0

) α 0

) Ω

. ■

—'

e o ω

Γ o 0)

4-J

ÛC _̂̂

8> ω

0

)

> «Ό O)

C

> O

F CO

0}

> O s

12

11

10 9 R

7 6 5 4 3 2 1

Inflation rate

Nixon

price controls (1971-1972)

kjilrmm

l

300 r-

o o co -2

00

h

■σ e S 100 E </> C

o o

253.9

217.4 200.4

100.0 79.5

1955 1960

1965 1970

1975

(a)

1980 1950

1967 1978 (O

ct.) 1979

1980 (O

ct.) (b)

EXHIB

IT 11 Inflation In O

ur Tim

·· D

uring the period from 1952 to 1965, the annual rate of inflation never exceeded 3 percent.

Since 1966, the annual rate of inflation has never fallen below 3 percent, even for a single year.

During 1952 —

1965. the average annual rate of inflation was 1.4 percent; during 1967—

1978. it w

as 6 8 percent As graph (b) illustrates, consum

er prices doubled in just 12 years during the latter period



EXHIBIT 12 Worldwide Inflation

Compound annual rate of change in consumer prices

Country Chile Argentina Brazil Colombia Ecuador Peru France West Germany Italy Japan Switzerland United Kingdom Canada United States

J955-J968 28 27 38 10 2 9 5 2 3 4 2 3 2 2

J 969-J 974 225 32 21 15 11 9 7 6 8

10 7 9 5 6

180 244 36 23 13 38 10 4

15 7 2

15 8 7

Source: International Monetary Fund and United Nations, Monthly Bulletin of Statistics, May 1979, Table 61.


1975-1978

Business receipts

Product m

arkets C

onsumption

Business

firms

expendTturesXV

Financial capital

Loanable funds m

arket

Household« Saving

Factor costs R

esource m

arkets -H

ousehold income

EXHIBIT 1 The Circular Flow

with Saving and Investm

ent


Copyright @ 19 81 Academic Press, Inc. 2 4

30,000

22,500

15,000

7,500

Zero

0 7,500 15,000 22,500 30,000 Family income level -United States,

1978 after taxes (dollars)

EXHIBIT 2 The Estimated Consumption Function in the Short Run The percentage of income saved in the short run increases with income level. Source: US. Department of Agriculture. The 1973 data were inflated to account for the change in the value of the dollar during the period.

Co

nsu

mp

tion

and

savi

ng,1

978

(do

llars

)

-Dissaving

Consumption

Copy

righ

t© 1981 Academic Press, Inc.

Savi

ng

(bill

ions

of

dolla

rs)

Cons

umpt

ion

(trill

ions

of d

olla

rs) I C - Y

1.5 -

1.4 -

1.1 1.2 1.3 1.4 1.5 1.6 Disposable income (trillions of dollars)

300 1 n

I cn L Ca = 200

.I - O O

- 100

-

Disposable income (trillions of dollars)

EXHIBIT 4 The Consumption and Saving Schedules

lJ"')

N

Saving ==billion

Dissaving ==$50 billion

Dissaving$50 billion Saving ==

billion

EXHIBIT 5 Equilibrium

Level of Income, O

utput, and Employm

ent

Possible levels of

employm

ent (m

illions of persons)

(1) 60 70 80 90

100

Aggregate supply (output

and income)

(NN

P = Dl)

(billions of dollars)

(2) 1800 1850 1900 1950 2000

Planned consum

ption (billions

of dollars) (3)

1750 1775 1800 1825 1850

Planned saving


(4) 50 75

100 125 150

Planned investm

ent (billions

of dollars) (*) 100 100 100 100 100

Planned aggregate dem

and, C+l


(6) 1850 1875 1900 1925 1950

Tendency of em

ployment,

output, and incom

e (7)

Increase Increase Equilibrium

D

ecrease D

ecrease


Total income, Y

EXHIBIT 6

Aggregate E

quilibrium


Planned aggregate demand, C-l I

Ag

gre

ga

te/s

up

ply

Equilibrium

level of incom

e

Excess

aggregate dem

and

Aggregate

supply

Insufficient dem

and

C + / (aggregate

demand)

C

1850 1900

1950 T

otal income (billions of dollars)

EXHIBIT 7

Graphic P

resentation of Equilibrium


Planned aggregate demand

I 1

Equilibrium

y^

income *

A ^

^^r^s 1

^^^^ ^

^r

/ \

^^

r 1

Aggregate

/su

pp

ly c + n

G

^(aggregate dem

and) ^C

x i

! /

t" L7

1

Ve Vf

Total income

EX

HIB

IT 8 E

quilibrium for a M

ixed Econom

y



Copyright 01981 Academic Press, Inc. 30

EX

HIB

IT9

The

Mu

ltiplie

rP

rinciple

Additional

Additional

Expenditureincom

econsum

ptionstage

(dollarsl____((lQllars)

Marginal

propensityto

consume

3/43/43/43/43/43/4

3,000,0004,000,000

Total

Round

11,000,000

750,000R

ound2

750,000562,500

Round

3562,500

421,875R

ound4

421,875316,406

Round

5316,406

237,305A

llothers949,219

711,914

EXHIBIT 10 The Relationship between

MPS, M

PC, and the M

ultiplier

MPS

1/10 1/5 1/4 1/3 1/2 2/3

MPC

9/10 4/5 3/4 2/3 1/2 1/3

Multipl 10 5 4 3 2 1.5

A higher M

PC (low

er MPS) m

eans a larger m

ultiplier.


Copyright © 1981 Academic Press, Inc. 32

Planned aggregate demand (trillions of dollars)

= 0)

Si II

w «» - ° S g Φ II = g II co g cf ω +

to

+

Ag

gre

ga

tesu

pp

ly

Ne

we

qu

ilibriu

m

1~Initial

Ie

qu

ilibriu

mIII!

$150b

illion

•I

~l

·--2:2

02.35

Na

tion

al

inco

me

(trillion

so

fd

olla

rs)

c+

/1+

G

MPC

=2/3

Mu

ltiplie

r=

3/2

-/1

=$50

billio

n6.Y

=$150

billio

n

EX

HIB

IT11

Gra

ph

icIllu

stratio

no

fth

eM

ultip

lier

Th

ird

rOU

nd

\S

econdround

\

All

oth

er

First

round

$50b

illion

Copyright 01981 Academic Press, Inc. 33

Ag

gre

ga

tesu

pp

ly

C1 +

I+G

III!""

tC

2 +I+

G

MP

C==

2/3~s

==$25b

illion

~Y

=$75

billio

n

Initialequilibrium

~

2.500

Total

income

(trillionso

fdollars)

New

equilibrium

EX

HIB

IT12

Th

eP

ara

do

xo

fT

hrift

Planned aggregate demand(trillions of dollars)

/

zz

Aggregate

supply /

C + l+

G2

yO^""(new

aggregate demand)

Full employm

ent —~yfZS^

C + l + G

^ ^

^>

F\

(initial aggregate demand)

^^^S^ !

Recessionary gap

vX

^"

/^ !

jMnitial equilibrium

'S

'/

j |

MPC

= 3/4 /^

i |

AG

= $30 billion /

i *.'

ΔΥ = $1?0 billion !

I G

\

! "' } $30 billion

"—"

I J

GM )

2.20 2.32

Total income (trillions of dollars)

EXHIB

IT 1 G

overnment Expenditures as a Route to Full-Em

ployment Equilibrium



Aggregate

supply 1

/^C2

+ I + G 1

^S

(new aggregate dem

and) Full em

ployment —

'?*

\^^

^\

C1 + ' + G

^^

^^

r^^

C

2 ) (initial aggregate dem

and) Initial e

qu

ilibriu

m^

^^

Oj

/^'

ci ' X$30 billion

!

' M

PC = 3/4

|

' Δ

/ = $120 billion

! I

Ta

x reduction = $40 billion

Z. I

i I

2.20 2.32 Total incom

e (trillions of dollars)

EX

HIB

IT 2 Tax R

eduction as a Route to Full E

mploym

ent



Aggregate supply

^01 +ΙΛ +Θ

Λ

^^

C2 +

l2 +G2

Inflationary ~/j^^ Full em

ployment,

stable prices

y< 1

Total income

EXHIBIT 3 Restrictive Fiscal Policy to Com

bat Inflation



a.

Initial income

Aggregate

supply C1+

/1+G

1 C2 + /2 + G

2

Income after decline

in aggregate demand

Y2 Yi

Vf Total incom

e

EXHIB

IT 4 Trying to B

alance the Budget C

an Make Things

Worse




EXHIBIT 5 Real-World Fiscal Policy

Both the actual and fuil-employment budget deficits relative to GNP are presented here. Note that the full-employment budget exerted restraint before and during the recessions of 1958 and 1961. It was also more restrictive during the 1970 and 1974-1975 recessions than during the periods preceding and following those recessions. On the other hand, fiscal policy was highly expansionary during the inflation of the late 1960s. Clearly this evidence does not indicate that fiscal policy has had a consistent stabilizing influence. Source: The actual budget and GNP data are from the Department of Commerce. The full-employment budget data are from Robert Gordon, Macroeconomics (Boston: Little, Brown, 1978), Appendix B.

38

t+oJ

0 4.0 Full-employment't- budgetrna.. Q)

~z 0 3.0e-C' Actual:J-.- 2.0 ~ budgetrno'- Q)

1.000>==nso+J.- c:'t-Q) 0(l) 0"0,-+JQ)

1.0 tQ)O-O>ns Stimuluseo 2.0 Restraint:J rncons rn

+:J0- 3.0'-:Jen

l 1957 1960 1965 1970 1975

Year

2

·5

2.0

1.5

LO

0.5

o —

J ^^m

mm^

—

I

Ì954 1958

I I

I I

1962 1966

1970 1974

Year

I I

1978

EXHIB

IT 7 Interest Paym

ents as a Percentage of Gross

National Product

During the period from

1954 to 1973, the interest payments

on the portion of the national debt held by the public com

prised approximately 1.5 percent of G

NP. In recent

years, the percentage has risen. The interest on the national debt now

totals a little more than 2 percent of G

NP.

Source: Budget of the United States—

annual.


Interest on national debt heldby public as percentage of GNP

Copyright@ 1981 Academic Press, Inc. 40

2600

Federal debt

Private debt

1953 1978

EXHIBIT 8 Private and Public Debt, 1953 and 1978 Private debt has increased much more rapidly than the national debt. Source; Federal Reserve Board.

2400

2200

2000

1800

en 1600'-~-0 1400-0

'+-0 1200enc::0 1000m

800

600

400

200

2500

en 20.0 e

c/i ìn

m

CD

Ξ &

15.0 I formatior gè of total

o ò

Capita percentai

b 19 I

67

Private investment as a

percentage of private spending

Federal government

' capital expenditures as a percentage of federal spending

i I

i i

i i

I i

i

1970 1975

Year 1979

EX

HIB

IT 9 C

apital Formation in the P

rivate and Federal G

overnment S

ectors

Betw

een 18 and 20 percent of the spending in the private sector has generally been allocated to capital form

ation. The capital form

ation rate of the federal government is substantially low

er, and it has been steadily declining as a percentage of federal spending. C

apital outlays for defense and space are included in the total for the federal governm

ent. Source: U

.S. Departm

ent of C

omm

erce and The Statistical Abstract of the U

nited States, 1978. Table 461.


EXHIBIT 3

Creating M

oney from N

ew R

eserves W

hen banks are required to maintain 20 percent reserves against dem

and deposits, the creation of $1000 of new reserves w

ill potentially increase the supply of m

oney by $5000.

Bank Initial deposit Second stage Third stage Fourth stage Fifth stage Sixth stage Seventh stage A

ll others

New cash deposits (actual reserves)

(dollars) 1000.00 800.00 640.00 512.00 409.60 327.68 262.14

1048.58

New required reserves (dollars)

200.00 160.00 128.00 102.40 81.92 65.54 52.43

209.71

Potential demand deposits

created by extending new loans (dollars)

800.00 640.00 512.00 409.60 327.68 262.14 209.71 838.87

Total 5000.00

1000.00 4000.00


EXHIBIT 4

Banking and Excess R

eserves Profit-m

aximizing banks use their excess reserves to extend loans

and other forms of credit. Thus, excess reserves are very sm

all, less than 1 percent of the total in recent years.


Excess

reserves5432101954

19581962

19661970

19741978

Excess reserves as apercentage of total

Open

Board Federal

Market

—►

of

-^—

Advisory

Comm

ittee G

overnors Council

*

Twelve Federal Reserve

Banks (24 branches)

14,000 comm

ercial banks

EXHIBIT 5 The Structure of the Federal Reserve System


EXHIBIT 1

The Dem

and and Supply of M

oney The dem

and for money is inversely related to the interest rate (a). The supply of m

oney is determ

ined by the monetary authorities (the Fed) through their open m

arket operations, discount rate policy, and reserve requirem

ents (b).

\

^k ^ \ \ \

\

^D

Quantity of m

oney

(a) Dem

and for Money

CO

i_

m

Φ

k-Φ

c

L D

etermined

by the Fed

s

Quantity of m

oney

(b) Supply of Money


Interest rate

10h

5l·

0

Excess supply of m

oney balances

At the lower interest rate,

the public is willing to

hold the larger amount of

money (Μ

')

M

M'

Quantity of m

oney

EXHIBIT 2 The Determ

ination of Interest Rate—

Keynesian M

odel


Interest rate (percent)

Copyright ©1981 Academic Press, Inc. 47

m X x CD H 00

:> ZT (D 3

OD c (/) D' CD C/) C/)

3

^^ 0) >—" TI -̂ 3 >

Expected rate of return on investment projects (percent)

en

CD D 5" < CD (/)

^ > (D & co 3 s> o ■a D

I m o 5? "Π □ r

en —r

N> O

Expected rate of return (percent)

m o o D O 3

> s

< Φ C/>

3 CD

3 C/>

M Μ

'

C + G

+ l2 C

+ G + L

C + G

γ^ γ*

(a) Quantity of M

oney (b) Q

uantity of Investment

(c) Aggregate Incom

e

EXHIBIT 4

How

Monetary Policy C

an Stimulate D

emand


Interest rate

Planned aggregatedemand

Copyright 0 1 9 8 1 Academic Press , Inc. 49

Interest rate

^ _<s_ S~S ^

p

I** o*'

|

1 ^ ^ ^ 1 ^y^ — J ^ — co

,^5> ° * ^ / \ ^ ) \ co \

ω m -e C χ j u

-σ o .. ■σ CD V

Price level "0 t )

O j

1 1 |

^> S^

\s^S , ^ ^ i >

.^^ .^^

^ ro

^ ^^ ^^^ ^

' ^S y^^ ^ν^

i _^r

^ îs CD ( Û

II o *< 3 CD 3

EX

HIB

IT5

Mo

ne

ya

nd

Exp

an

din

gA

gg

reg

ate

De

ma

nd

00

01

O2

Qu

an

tity/time

(b)C

urre

nt

Go

od

sa

nd

Se

rvices

Lo

ng

-run

full-e

mp

loym

en

t

Qu

an

tityo

fm

on

ey

(a)M

on

ey

Ba

lan

ces

Copyright (c)1981 Academic Press, Inc.

Interest rate

21 o D CD

OD

0) O CO C/>

Price level

EX

HIB

IT6

AR

ed

uctio

nin

theS

up

ply

of

Mo

ne

y

Q1

Qo

Qu

an

tity/time

(b)C

urrentGoods

andS

ervices

I

Qu

an

tityo

fm

oney

Excess

demand

50

Money supply (billions of dollars)

350

300

250

200

150 f

First quarter, 1978 _J

7.8

%//^

^^

^^

Third quarter, 1976 6

.9

%^

>^

4 9°/ y^l^^^

F

ÌrSt q

Ua

rter'

19

73

7.

4%

^^

^^

^^

Jh^X—

* 00000^ Fourth quarter, 1970

~

Fourth quarter, 1968

I I

I I

I I

I I

I I

I 1968

1970 1972

1974 1976

1978

EX

HIB

IT 7 T

he M

oney Supply an

d Econom

ic Instability, 1967-1978

Rapid grow

th in the money supply during 1967-1 968 w

as followed by an acceleration in the

rate of inflation in 1969-1970 S

imilarly, the m

ore rapid monetary grow

th of 1971-1972 was

followed by an inflationary outburst during 1

9/3

-19

74

How

did the monetary grow

th of 1976-1977 affect the rate of inflation'? Just as m

onetarists predicted the inflation rate

accelerated during 1978-1979


EXHIB

IT 8 Interest R

ates and Monetary Policy


Money rate of interest

Copyright (p1981 Academic Press, Inc. 53

CO

D — co — ^ JD o c

Ό a) :.~ "M » 2 ■o _ ■M A3 0) 3

"5 c 3 CT3 co —-

60

45

30

15

0

~~

—

$17.0 m

CD CO o> T—.

/ CO O) r*·

$0.2 o fs O)

τ-»

oi CO O) r» .

$23.1

c\ rs 0>

r*.

/ /s, σ>

Time

$8.9

^ rs O) *—. oi AS

σ>

period

$62.2

CO rs O)

r—.

/ to /N

σ>

$39.0

00 rs O)

r-.

rs O r-»

$43.4

p 00 O) *—. /

O) ^ °> *"—

EXHIBIT 9 Budget Deficits and Economic Instability

During the period from 196Mo 1980. fiscal policy followed a pattern Large deficits were incurred during each two-year period before a presidential election, and this was followed by a surplus or smaller deficit during the two years after the election This pattern suggests that fiscal policy has been motivated more by political considerations than by the pursuit ot economic stabilization Source U S Department of CorTimerce Data are for fiscal year budgets from the national income accounts

1 V \r-—Phillips curve

\^ X

4 8

Unem

ployment rate (percent)

EXHIB

IT 1 A

Hypothetical Phillips Curve


Rate of inflation (percent)

0 ~ (X)

Stable price anticipated

12

Γ-

8

Long-run rate of unem

ployment

8 percent inflation anticipated

A percent

inflation anticipated

3 5

7

Rate of unem

ployment (percent)

EX

HIB

IT 2 A

daptive Expectations and the S

hifting Phillips C

urve



Copyright@1981 Academic Press, Inc. 56

12

e o

10

e CD

§ 8 Q.

•ε e o O) ♦-» CO

tr

^

h-

^

—

I I I

ι

[•69

Y 68

6 6 K 6 7 \

65

I

• 79

C

7 4 · \

7 8 · \

B

\ · 7 3 Y 70

\ # 7 1

7 2 · \ ^

^ S . ·60 6 4 ^ * 6 3

62 MS 1 L

• 80 H

75· Ί

X 7 7

• 76

—

—'

•61

.. J I 3 4 5 6 7 Unemployment (percent)

EXHIBIT 3 The Inflation-Unemployment Trade-off, 1959-1980

Between 1959 and 1969, the annual rates of inflation and unemployment map out the Phillips curve A The inflation,—unemployment trade-off during the period from 1970 to 1973 was consistent with Phillips curve B. suggesting that the curve shifted after three or four years of significant inflation during the period from 1966 to 1969 Still higher rates of inflation «luring the first half of the 1970s apparently caused the Phillips curve to shift outward agam(C) during the last half of the decade

10 r\

8 o 6 4 2

Long-run normal

rate of

Β$·ζ^

°2·^^

•̂C I

1 l

1 r>J •

y unemploym

ent

c3

[Χ^ Α

Λ

\c2

Γ*Α3

ί° 1

Liu i

i i

2 4

6 8

10

Unem

ployment (percent)

EXHIB

IT 4 S

top-Go Policy w

ith an Inflationary Bias



Copyright© 1981 Academic Press, Inc.

12l·

■M

c CD ü l _ CD Ω.

C o +-» CD

H—

tc M—

o CD - M

ω OC

10

8

6

4

0

—

—

I

.*80

/ 478 ^ > 7 5

69·—"""TOY. 76

684 i V 1

6 6 \ 6 4 fin \ \ fc>U ß o

62^59 61

I I I I I I I I

—I

—

—

2 4 6 8 Unemployment (percent)

EXHIBIT 5 The Ratchet Effect and Accelerating Inflation, 1959-1980 Actual inflation—unemployment has followed the clockwise pattern outlined in Exhibit 4. Macropolicy has switched from restraint to acceleration at successively higher rates of inflation, causing the corresponding rates of inflation in the pattern to ratchet upward.

58

EXHIBIT 6 Hypothetical M

onetary and Fiscal Rules That Provide for an Automatic Counter

cyclical Policy Current rate

unemploym

ent 1 long-run rate of

ninus of

unemploym

ent* (percent)

3.0 2.0 1.0 0.0

-1.0 -2.0 -3.0

Annual rate of change in the m

oney supply (percent)

6.0 5.0 4.0 3.0 2.0 1.0 0.0

Deficit as a percentage

ofGN

P -3.0 -2.0 -1.0

0.0 1.0 2.0 3.0

°A five-year m

oving average might be used as the long-run rate of unem

ployment.


100 I

Οι

\ c

\

Ay<

|

max

Tax revenue

EXHIB

IT7 The Latter Curve


Tax rate (percent)

Percentage of total, 1978

Other

Religious and w

elfare

Personal care

Tobacco

Alcoholic beverages

Personal business

Recreation

Medical care

Clothing

Transportation

Household operations

Housing

Food

Total

1.9

1.3

1.4

1.3

2.3

5.3

6.7

9.7

8.0

14.2

14.4

15.7

17.8

100

1978

1950

5 10

15 20

Percentage of total consumer expenditures

25

EXHIBIT 1

How

Consum

ers Spent Their Income, 1950 and 1978


$1.00|

•e 0.75|

û.

0.5

0—

MU

3 >M

U2 >

MU

i

MU

i

16 18

20 W

eekly gasoline consumption of

Sam Jones (gallons)

EXHIB

IT 2 G

as Prices, C

onsumption, and M

arginal Utility


$1.00 Φ

Ü

0.50

Sam Jones

Harvey Smith

$1.00

0.50l· h—

$1.00

0.50

i *d

Two-person m

arket

16 20 12

20 W

eekly gasoline consumption (gallons)

EXHIBIT 3 Individual and M

arket Demand Curves


Price

Di

Quantity/tim

e

EXHIB

IT 4 Price is Not All That M

atters



CD O

0)

a.

0) -

Ü \— CL

Q) O

a.

Demand for heroin

Quantity/time

\ _̂ Demand \ for cigarettes

Quantity/time

\ Demand curve of \ / unitary elasticity

\ ^

Quantity/time

Demand for portable television sets

Quantity/time

Demand for farmer Jones' wheat

Quantity/time

EXHIBIT 5 Picturing Demand Elasticity

21 1

Elasticity = (-)7.0

20

-10

/ $10 -

$11 _

/_\

70

($10 + $11) v

' '

Elasticity = (-)0.14

110 - 100

/ $1 -

$2 V

a(110 + 100)/ 1/2 ($1

= (-)0.14 + $2)

10 20

60 100 110

Quantity dem

anded/time

EXHIBIT 6

The Slope of a Dem

and Curve Is N

ot the Same as the Price Elasticity


Price (dollars)

EXHIBIT 8 Dem

and Elasticity, Change in Price, and Change in Total Expenditures

Price elasticity

of demand

Elastic

Unitary

Inelastic

Num

erical elasticity

coefficient" 1 to oo

1 O

tol

The impact of a change

in price on total expenditures (and sales revenues)

Price and total expenditures change in opposite directions

Total expenditures remain constant as price changes

Price and total expenditures change in the same

direction aThe sign of the elasticity coefficient is negative.


EXHIBIT 1

How Βι

Proprietorship Partnership C

orporation

jsiness Firms Are O

rganized

Num

ber (thousands)

10,882 1,073 2,024

Percentage of all firm

s 78 8 14

Percentage of all business receipts

9 4 87

Source: The Statistical Abstract of the United States-\97S,

Table 915. The data are for 1975.


EXHIBIT 2 Factor Costs and Cost Schedules for the Production of Coffee Tables

Output

(tables) 1 2 3 4

_s

Total paym

ent for lum

ber and

materials

$30 60 90

120 150

Implicit

opportunity cost of the craftsm

an and his tools $50 90

120 148 125

Total cost $80 150 210 268 ?2?

Average total cost

$80 75 70 67 65

Marginal cost $80 70 60 58 57


(0 +-> o o

V—

Average fixed cost

V Output

(a)

<0 +>* (0 o Ü

Marginal cost

\ /

\ Dim

inishing returns beyond this point

Output

(b)

EXHIBIT 3 G

eneral Characteristics of the Short-Run Average Fixed and Marginal Cost

Curves


to "co o ü

■ .· L . -

Λ M

C

High AFC m

eans /

high ATC

/ M

inimum

ATC for

^^^^^^^^ ' J

/ plant of this size

/ y

ATC

/ >

Â

VC

^y^ !

\ High M

C m

eans ^

\ high ATC

^~

AFC

Q^

Q2

Q3

Output

EXHIBIT 4

The Firm's S

hort-Run C

ost Curves


EXHIB

IT 6 The Long-R

un Average Cost


Costs

Representative short-run average cost curves

LRA

TC

EXHIB

IT 7 The Planning Curve


Costs

Copyright 0 1 9 8 1 Academic Press , Inc. 74

CO co o Ü

CO CO

o Ü

Plant of ideal size

(a)

Plant of ideal size

<7i

(b)

LRATC

Output

LRATC

<72 Output

Biggest plant would have the lowest AC

(c)

LRATC

9 Output

EXHIBIT 8 Three Different Types of Long-Run Average Cost Curves

Ψ

(fi 00 o O

PS

. 2

00

^**^

^ι

^^

^T

MC

2 /

MC

i

/ V

Â

TC

2

/^f^ yrA

TC

ì

Output

EXHIB

IT 9 Taxes and Costs


MC

i

Initial Minim

um cost after

technological improvem

ent

Output

EXHIBIT 10 Egg Production, Costs, and Technological

Change


Costs


m x I CD

H or CD TI

o CD 3 0) D a O c < CD C D a a> "D C - n CD O o 3 CD

o

^—V

0)

T l - T

3

-*-"N. s s 0) -* *" CD

o c I —*

T3 C *"■*>.

3 CD

o £ ■6" c «—*· 3 a>

Price ~p

Q.

Price 13

\L NJ/ /x > ^ \ ^/^ X ^ >

D

/

V Co

MC

ATC

d, P = MR

(Production P

<MC

°*tn

es

e u

n' ts

would reduce

profits)

Output/tim

e

EXHIBIT 2 Profit M

aximization and the Purely Com

petitive Firm


Price

Econom

icprofit

c

Ρ2

0 S^

Loss

MC

/ A

TC

^/

Â

VC

^lß

9 Output/tim

e

-d P

= MR

EXHIB

IT 4 O

perating with Short-R

un Losses


Price

MC

Qi

Q2 Q

3

Output/tim

e

υ

Ssr(IM

Cf)

Qi

02 03

Output /tim

e

(a) Representative Firm

(b) Market

EXHIBIT 5 The Supply Curve for the Firm

and the Market


Price

Price

0) P2 υ

Short-run price

Si 'S

2

New

long-run equilibrium

Sir

Qi

Q2 O

utput (toothpicks)

(a) Firm

Qi

02 03

Output (toothpicks)

(b) Market

EXHIB

IT 6 H

ow the M

arket Responds to an Increase in D

emand


Price

EXHIBIT 7 The Short-Run Price and O

utput of a Monopolist


Price

o C

' c P

û. r | Loss\

\ |N M

R

0 Output /tim

e

MC

1-^ ATC

EXHIB

IT 8 W

hen a Monopolist Incurs Losses


Monopoly

price S

(ZMC

)

Competitive

price

Oc O

utput/time

EXHIBIT 9 Com

paring Competition and M

onopoly


Price

Poh Average cost pricing

P2I

Marginal

cost pricing LRATC

M

C

Qo Q

i Q

2 O

utput/time

EXHIBIT 10 Regulation of a M

onopolist


Price

00

EXHIBIT 1 The Price-Searcher's M

arginal Revenue Curve


Price

10002000

Ha

mb

urg

ers/d

ay

α> ρ

£ C

Economic

profit ^

^

1

^Α

^^

^

â

MC

\ M

R

j

ATC

^d

Q

S Q

uantity/time

EXHIB

IT 2 The M

onopolistic Com

petitor's Price and Output


i p

MC

^ M

R

Quantity/tim

e

EXHIB

IT 3 M

onopolistic Competition and Long-Run

Normal Profit


οο

Price \

LRAC

\ >s

1 y

\

! 1

D

1 1

1 1.

12

3 4

Typewriters (m

illions annually)

EXHIB

IT 4 Econom

ies of Scale and Oligopoly


Price and output w

hen the firms collude

Price and output when

the firms com

pete

LRA

C

D

Om

Oc

Quantity/tim

e

EXHIB

IT 5 The R

ange of Price and Output under O

ligopoly


Price

Of Q

\ Q

uantity/time

EXHIBIT 6 G

aining from Cheating


Price

S No response by rivals

MC

2

MC

i

Rivals also change prices

Quantity/tim

e

EXHIBIT 7 The Kinked Dem

and Curve


Price

PlY

Pi

O3

Q2 Q

i Q

uantity of steel per unit time

EXHIBIT 1 Tim

e and the Demand Elasticity of Resources


Price

Pih

?2 οΛ M

RP at Q^ < Q

uantity/time

EXHIBIT 3 M

arginal Productivity and Demand


Price

In the short run, quantity supplied increases this m

uch.

P2

Pi

Sir

Given m

ore time,

quantity supplied increases this m

uch

Q1O

2 Q3

Quantity of nursing services per unit tim

e

EXHIBIT 4 Tim

e and the Elasticity of Supply for Resources


Price

co co cu u

W2 \ I * V s" /s" —

\ÊH

\

II

I1

II

I Q

l 02 03 I

Quantity/tim

e

EXHIB

IT 5 Adjusting to Dynam

ic Change


Resource price


18,000

F 15,000 —

- 12,000

•E

Mea

n ea

rn

σ>

co

o o

o o

o o

3,000

0

Completed college

/ \ / Completed high \ school \

^ ^ ^ C o m p l e t e a X \ eighth grade \ \

I I I I I 25-34 35-44 45-54 55-64 65 and over

Age group (years)

EXHIBIT 1 Education and Earnings, 1976

Investment in education leads to a higher income. On average, individuals with more years of schooling earn more during their lifetimes. Source: U.S. Department of Commerce, Current Population Reports, P-60 Series.

$21,215

s ν

/

V A

/ \ °

I

Q

Quantity/tim

e

(a) Engineers

CD h

-CD

03 5

~Ô5 13

c$10,104 <

v \ /

\y I D

Q

Quantity/tim

e

(b) Laborers (Except Farm

)

EXHIB

IT 2 Supply, D

emand, and W

age Differentials

The mean num

ber of years of education for engineers is 16.5 compared to 10.4 for laborers.

Because of their specialized skills, high-wage engineers are protected from

direct competition

with laborers and other persons w

ho do not possess such skills. Source: Earnings data are from

the U.S. Departm

ent of Com

merce, C

urrent Population Reports, P-60 Series.


Annual wage, 1976

99

EX

HIB

IT3

Pro

du

ctivityand

Em

ployeeC

om

pe

nsa

tion

,1

97

4-1

97

8

As

thediagram

illustrates,productivity

ofem

ployeesper

ma

n-h

ou

ris

closelyrelated

toearn

ings.S

ource:M

an

po

we

rR

ep

ort

of

the

President,

1974,T

ablesC

-3,G

-1,G

-2,and

Eco

no

mic

Re

po

rto

fthe

Pre

side

nt,

1979.

3.00

5.00

4.00

11

6.5

______H

ou

rlye

mp

loye

eco

mp

en

satio

n,

no

nfa

rm

Ou

tpu

tper

ma

n-h

ou

r--.

75

125

100

112.550

r/

-12.00

r--1

.94J

1"1

1I

II

II

1I

11

11

IIII

IIII

11

11

II

II

II

I1947

19

50

19551960

19651970

19751980

I


Output per hour, private nonfarm (1967 100)

Hourly employee compensation (constant 1972 dollars)

EXHIBIT 4 Investm

ent and the Rate of Grow

th in Employee Com

pensation, 1960-1976

Country

Gross fixed capital form

ation as a percentage of gross

national product

Growth rate of em

ployee com

pensation deflated by consum

er price index {percent)

United States

United K

ingdom

Italy C

anada France W

est Germ

any Japan

17.6 18.6 20.8 22.7 23.6 24.6 33.0

1.8 0.8 6.1 3.1 5.2 9.8 8.6

Source: Capital form

ation data are from International Financial Statistics, 1978 supplem

ent (W

ashington, D. C

: International Monetary Fund, 1978); the com

pensation data are from

Economic Report of the President, 1979 (Table B-105).


EXHIBIT 5 The Sagging G

rowth of Productivity In the United States

Period 1948-1955 1956-1965 1966-1973 1974-1978

Increase in output per hour. private business sector (average

annual rate) 3.5 3.1 2.3 0.9

Increase in real per hour com

pensation, private business sector (average annual rate)

3.1 3.0 2.7 1.4

Source: Derived from

Economic Report of the President, 1979 (Table B

-38).


80 h

60

40

20 0

82

1950 1980

Percentage to hum

an capital

Self-employed incom

e

Employee com

pensation

18

Interest incom

e Rental incom

e Corporate profit

1950 1980

Percentage to physical capital

EXHIB

IT 6 The Shares of Incom

e Going to Physical and

Hum

an Capital

Including self-employm

ent income, approxim

ately four-fifths of the national incom

e is earned by owners of hum

an capital.


Percentage of national income

Copyright © 1 9 8 1 Academic Press , Inc. 103

S3(ZMCS)

δ2(ΣΜ(3)

SìfZMCp)

Actual price and output

Demand

Q Q^ Quantity of good (tons of copper)

EXHIBIT 2 Supply, Externality, and Least-Cost Production

Ideal price,and output

P2 k\

"^

/]

yS(Z

MC

)

Χ^

> Total social benefits

^^

^ MB

(external benefits)

0i Os

I Q

uantity of education

EXHIBIT 3 Adding External Benefits


Totalsocial

benefitsD

MB

(externalb

en

efits)

Price


CO

_cö

"5 CO

CO o o

c 'σ) CO

100

Marginal external — damage cost Marginal control cost to the firm

17,100 50,000 100,000 150,000 190,000 Sulfur dioxide emitted

(tons per year)

EXHIBIT 4 Taxing a Smelter's Emissions The marginal control cost curve shows that the firm, if it pays no damage costs itself, will emit 190,000 tons per year while spending nothing on control costs. However, if taxed according to the marginal damages it imposes ($32.50 per ton), it will voluntarily cut back its emissions to 17,100 tons per year, which is the socially efficient level. Further control would cost more than its social benefit. Source: Richard L. Stroup, "The Economics of Air Pollution Control" (Ph.D. diss., Univ. of Washington, 1970).

Probable output and per unit cost

MC

2 (inefficient •operation) M

Ci (efficient

Operation)

Demand for

bureau's service Q

^ Q2

Quantity of output

EXHIB

IT! "ftœ

Demand for and Supply of Bureau Services


Price

Copyright 0 1981 Academic Press, Inc. 107

EXHIBIT 1 The Size of the Trade Sec-tor for Selected Countries

International trade as percentage of

Country GNP Netherlands 44 Sweden 26 Canada 21 West Germany 19 United Kingdom 16 Japan 12 United States 7 Source: U.S. Department of Commerce.

Φ

■i p

Û.

0 1

F L-r- M

Exported

<

SO

γν

/ Price and output

VN

^ /

^^ (w

ith trade)

^/

|\

^ Price and output

1 >

\ 1

>^ (w

ithout trade)

\ \

^0

f+

d

D< 1 \o

d 0

Wheat (bushels)

—1

' L Dom

estic consumption

EXHIBIT 5 Exporting to Foreigners



Price and output (without trade)

Sd+f

Price and output (with trade)

Bananas(pounds)

Dornest output

Imports

EXHIBIT 6 Importing Cheap Goods

Tariff

Price and output Sd

(with tariff) Sf2

Price and output (w

ithout tariff)

Q2 O

i Q

uantity/time

EXHIBIT 8 The Im

pact of a Tariff


Price

β'8 Q

uantity/time

Supply (w

ith tax on export of good)

Supply (w

ithout tax on export of good)

EXHIB

IT 9 G

ains from an Export Tax W

hen Demand Is Inelastic

Relative to Supply


Price

ABCoEf 1G 2H 3I 4J 5

Transparency Masters for Essentials of Economics

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