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Week 2 Macro2
Week 2 Macro2
Week 2 Macro2
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint® Slides
by Ron Cronovich
work
Labor Market hiring
Financial Market
saving borrowing borrowing
government production
spending
consumption investment
Goods Market
1) Goods market:
Supply: firms produce the goods
Demand: by households for consumption,
government spending, and other firms demand
them for investment
3) Financial market
Supply: households supply private savings:
income less consumption
Demand: firms borrow funds for investment;
government borrows funds to finance
expenditures.
Where
K = capital: tools, machines, and structures
used in production
b) F (K , L ) 2 K 15 L
a) Suppose F (K , L ) 2K 15L
F (zK , zL ) 2 zK 15 zL
z (2K 15L )
zF (K , L )
b) Suppose F (K , L ) 2 K 15 L
F (zK , zL ) 2 zK 15 zL
2 z K 15 z L
z 2 K 15 L
z F (K , L )
zF (K , L )
No, decreasing returns to scale
Y F (K , L )
10
50
8
40
6
30
20 4
10 2
0 0
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Labor (L) Labor (L)
Intuition:
L while holding K fixed
fewer machines per worker
lower productivity
L
L
labor
CHAPTER 3 National Income slide 29
A brief calculus review: Derivatives
Y
1) Y F (L ) 2L 3
Slope = 2
Y
fL 2 Intercept at 3
L 3
9
1
Y 1 2 1
fL 3 L 6
L 2
1 3
3 2 3
L
2 2 L
1 4 9 L
L: 1 4 9
F(L): 3 6 9
fL: 1.5 0.75 0.5
CHAPTER 3 National Income slide 31
Calculus: More rules of derivatives
3) Sums:
1
Y 3L 2L 3
2
1
Y 3 2
L 2
L 2
4 ) Chain rule:
3
Y 3x 1 4
Y 3 3
9 1
3 x 1 4 3 3x 1 4
1
L 4 4
5) Product rule:
3
Y 2L 3 3L 1 4
Y 3 3
2L 3 3L 1 3
1
4
L 4
3
3L 1 2
4
So if Y ln 2L 3
Y 1
2
L 2L 3
note: ln L K ln L ln K
CHAPTER 3 National Income slide 34
Calculus: Partial derivatives
Suppose a function of two variables:
1
Y 3L2 4K 2
if Y K 2L3
Y Y
2KL3 3K 2L2
K L
3
Y 2KL K 3K L L 2 2
2
1 1 P
K L
0.25 W 2
demand P
L 0.25K
W
So a rise in wage want to hire less labor;
rise in capital stock want to hire more labor
CHAPTER 3 National Income slide 41
Labor market equilibrium
Take this firm as representative, and sum
over all firms to derive aggregate labor demand.
Combine with labor supply to find equilibrium wage:
W
L
0.5
0.5 demand
demand: 0.5K
P
supply: Lsupply L
W 0.5
0.5
equilibrium: 0.5K L
P
So rise in labor supply fall in equlibrium
real wage
CHAPTER 3 National Income slide 42
MPL and the demand for labor
labor supply
Units of
output Each firm hires labor
up to the point where
MPL = W/P
Real
wage
MPL, Labor
demand
L Units of labor, L
W
total labor income = L MPL L
P
R MPK K
total capital income = K
P
Y MPL L MPK K
C ( Y –T )
I (r )
G G and T T
Agg. demand: C (Y T ) I (r ) G
Agg. supply: Y F (K , L )
Equilibrium: Y = C (Y T ) I (r ) G
The real interest rate adjusts
to equate demand with supply.
We can get more intuition for how this works
by looking at the loanable funds market
I (r )
public saving = T –G
national saving, S
= private saving + public saving
= ( Y –T ) – C + T–G
= Y – C – G
a. S 100
b. S 0.8 100 80
c. S 0.2 100 20
d. Y MPL L 20 10 200,
S 0.2 Y 0.2 200 40.
• When T < G ,
budget deficit = (G –T )
and public saving is negative.
• When T = G ,
budget is balanced and public saving = 0.
0
% of GDP
-4
-8 (T -G ) as a % of GDP
-12
1940 1950 1960 1970 1980 1990 2000
60
40
20
0
1940 1950 1960 1970 1980 1990 2000
National saving
does not
depend on r,
so the supply
curve is
vertical.
S, I
Equilibrium real
interest rate
I (r )
Equilibrium level S, I
of investment
G S T C S
1. The increase in r S1
S2
the deficit
reduces saving…
r2
2. …which causes
the real interest
r1
rate to rise…
3. …which reduces I (r )
the level of I2 I1 S, I
investment.
r1