2. LAST TIME
Whether wage reductions stimulate output depends on changes in
effective demand and the ratio of levels of rK: wN: rL Changing wN
dents domestic consumption and probably won’t increase
competitiveness in short run.
It’s clear we want to change effective demand to increase X/Y.
What changes effective demand (again, determined by Factor Cost
+User Cost)
MEC (sort of) + Liq. Preferences + changes in User cost.
Support people with no money but a good idea, you change User
cost.
6. TODAY AL US
N
C UL
IS M
IO
FI
NT
U T
S
SU TAT
LT
ME
IP
L
RE
EA EN
IE
RS
& M EM
PL
IM
7. IRISH GOVT 25%
39%
SPENDING
79bn on:
35%
Public Sector Pay & Pensions
Transfers
Other Stuff
8. IN TODAY’S NEWS
• NESC (see website) have written a report on our 5 fold crisis:
1.A banking crisis
2.A fiscal crisis
3.An economic crisis
4.A social crisis
5.A reputational crisis
10. RECALL
The multiplier is the number that relates the initial increase in
expenditure to the final change in GNP (when all rounds have been
taken into account).
Size of the multiplier depends on the following 3 leakages: savings,
taxation and imports.
Ignore the tax and import leakages for the moment.
11. RECALL
Consumption function: C = MPC × NI
MPC = marginal propensity to consume.
0 < MPC ≤ 1
Savings function: S = MPS × NI
MPS = marginal propensity to save.
0 ≤ MPS < 1.
The MPC and MPS must add up to one.
1 = MPC + MPS
12. RECALL
Can be shown:
Multiplier = 1/(1 - MPC) or 1/MPS
MPC Multiplier
Example:
0.9
10
0.8
5
Final change
in GNP = Multiplier x Initial Expenditure
€5b
=
5 €1b
×
13. AND FINALLY…
Define:
T = MPT × NI
Where T = taxation and MPT is the marginal propensity to tax.
M = MPM × NI
Where M = imports and MPM is the marginal propensity to
import.
Can be shown:
Multiplier = 1/(MPS + MPT + MPM)
14. IRELAND’S MULTIPLIER
Estimates for the Irish economy are
MPS = 0.2 and rising
MPT = 0.3
MPM = 0.4
Multiplier = 1.11
Small due to the relatively high combined tax and import
leakages.
For the UK and US economies the multiplier is closer to 3.5.
Due to low taxes and relatively “closed” economies.
17. BUDGET PROBLEM: ACCOUNTING
METHODS
Irish budgets are cash flow budgets, a budget
where revenues and expenses are counted only
when cash is received and spent.
18. BUDGET PROBLEM: ACCOUNTING
METHODS
Irish budgets are cash flow budgets, a budget
where revenues and expenses are counted only
when cash is received and spent.
An obligation budget includes the expected value of
future expenditures and revenues.
19. BUDGET PROBLEM: ACCOUNTING
METHODS
Irish budgets are cash flow budgets, a budget
where revenues and expenses are counted only
when cash is received and spent.
An obligation budget includes the expected value of
future expenditures and revenues.
Which one is more appropriate for considering the
fiscal impact of the deficit?
20. BUDGET PROBLEM: ACCOUNTING
METHODS
Irish budgets are cash flow budgets, a budget
where revenues and expenses are counted only
when cash is received and spent.
An obligation budget includes the expected value of
future expenditures and revenues.
Which one is more appropriate for considering the
fiscal impact of the deficit?
Predicting revenues and expenses.
22. UNCERTAINTY ABOUT POTENTIAL
OUTPUT
One macroeconomic policy goal is to keep output
as close to potential as possible. But, what is
potential output?
23. UNCERTAINTY ABOUT POTENTIAL
OUTPUT
One macroeconomic policy goal is to keep output
as close to potential as possible. But, what is
potential output?
If policymakers use contractionary policy when
the economy is actually below potential, they
create ‘unnecessary’ unemployment.
24. UNCERTAINTY ABOUT POTENTIAL
OUTPUT
One macroeconomic policy goal is to keep output
as close to potential as possible. But, what is
potential output?
If policymakers use contractionary policy when
the economy is actually below potential, they
create ‘unnecessary’ unemployment.
Using expansionary policy above potential output
will cause inflation.
26. POLICY IMPLEMENTATION LAG
The policy implementation lag is the delay between the
time policy makers recognize the need for a policy
action and when the policy is instituted.
27. POLICY IMPLEMENTATION LAG
The policy implementation lag is the delay between the
time policy makers recognize the need for a policy
action and when the policy is instituted.
Irish fiscal policy has a long implementation lag relative
to other OECD countries.
28. POLICY IMPLEMENTATION LAG
The policy implementation lag is the delay between the
time policy makers recognize the need for a policy
action and when the policy is instituted.
Irish fiscal policy has a long implementation lag relative
to other OECD countries.
Monetary policy has a much shorter implementation lag
because the ECB decides monetary policy and
implements it immediately.
