A policy experiment: quantitative analysis

• E.g., U.S. GDP, 2010:

expected changes:
∆𝒀 = ?
∆𝑪 = ?

∆𝑰 = 𝟎 (assumption)

∆𝑮 = 𝟏𝟎𝟎

∆ 𝑿 − 𝑰𝑴 = 𝟎
(assumption)

∆𝑰 = 𝟎 (assumption)

Dr Matteo De Tina ES10002 - Introductory Macroeconomics - week 20 (I) 1

 A policy experiment: quantitative analysis

 exogenous change: ∆𝑮 = 𝟏𝟎𝟎

 to derive the change in income (∆𝑌) we make use of the expression for the equilibrium
level of income:

1
𝑌∗ = 𝑐 − 𝑐1 𝑇 + 𝑐1 𝑇𝑅 + 𝐼 + 𝐺
1 − 𝑐1 0

1
coeteris paribus : ∆𝑌 = ∆𝐺
1−𝑐1

let’s assume: 𝑐1 = 0.7 (marginal propensity to consume)

∆𝑌 = 3.33 × 100 = 333

1
where: 𝑚 = = 3.33 > 1 (keynesian multiplier)
1−𝑐1

Dr Matteo De Tina ES10002 - Introductory Macroeconomics - week 20 (I) 2

 A policy experiment: quantitative analysis

 exogenous change: ∆𝑮 = 𝟏𝟎𝟎

 Endogenous change in income: ∆𝒀 = 𝟑𝟑𝟑

 To derive the change in aggregate consumption (∆𝐶) we make use of the consumption
function:

𝐶 = 𝑐0 + 𝑐1 𝑌 − 𝑇 − 𝑇𝑅

∆𝐶 = 𝑐1 ∆𝑌 (coeteris paribus)

given 𝑐1 = 0.7:

∆𝑪 = 0.7 × 333 = 𝟐𝟑𝟑. 𝟏

Dr Matteo De Tina ES10002 - Introductory Macroeconomics - week 20 (I) 3

 A policy experiment: quantitative analysis
• E.g., U.S. GDP, 2010:

expected changes:
∆𝒀 = 𝟑𝟑𝟑

∆𝑪 = 𝟐𝟑𝟑. 𝟏

∆𝑰 = 𝟎 (assumption)

∆𝑮 = 𝟏𝟎𝟎

∆ 𝑿 − 𝑰𝑴 = 𝟎
(assumption)

∆𝑰 = 𝟎 (assumption)

What happens to these numbers if the government decides to increase to the level of public
expenditure (e.g., buying more cars for an extra expenditure of ∆𝑮 = 𝟏𝟎𝟎)?

𝒀𝟐𝟎𝟏𝟏 = 𝑌2010 + ∆𝑌 = 14,660 + 333 = 𝟏𝟒, 𝟗𝟗𝟑 (under the constant prices assumption)
𝑪𝟐𝟎𝟏𝟏 = 𝐶2010 + ∆𝐶 = 10,348 + 233.1 = 𝟏𝟎, 𝟓𝟖𝟐. 𝟏 (under the constant prices assumption)

Dr Matteo De Tina ES10002 - Introductory Macroeconomics - week 20 (I) 4

 A policy experiment: quantitative analysis
• E.g., U.S. GDP, 2010:

expected values (2011)

𝒀𝟐𝟎𝟏𝟏 = 𝟏𝟒, 𝟗𝟗𝟑
𝑪𝟐𝟎𝟏𝟏 = 𝟏𝟒, 𝟗𝟗𝟑

𝑰𝟐𝟎𝟏𝟏 = 𝟏, 𝟕𝟓𝟔

𝑮𝟐𝟎𝟏𝟏 = 𝟑, 𝟏𝟎𝟏

𝑿𝟐𝟎𝟏𝟏 − 𝑰𝑴𝟐𝟎𝟏𝟏 = −𝟓𝟏𝟔

e
𝒊𝒏𝒗𝟐𝟎𝟏𝟏 = 𝟕𝟏

• This is an example about how we can form a quantitative forecast.

• We are implicitly assuming prices are constant , therefore dealing with real values.

Dr Matteo De Tina ES10002 - Introductory Macroeconomics - week 20 (I) 5