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5 % increase due to Q increase of 2.5 % Capital stock Labour force Technology CS/CS (Investment)
Strategies for Closing Gaps Between Y and Q Actual GNP (Y) Government Expenditure (G)
Y=C+I+G+X-Z
U = f (Q - Y) U = 5% Full employment Only frictional, struc tural and seasonal unemployment Full employment rate of unemployment INF Can be!
Increase in money supply should at least comprise last year's ination and government expenditure (increase in GNP)
M = f (Y, INFt-1, R) Taxrate * Y + Consumption Tax * C G Expenditure + Trans(U) + Trans(W) Transfers to the unemployed Welfare payments: transfers to the old, sick, ... Trans(U) Government outlay Trans(W)
Government income
Unemployment (U)
Y>Q
Over-full employment
Overtime working, ... Lower frictional, structural and seasonal unemploy ment than expected INF Can be!
Budget (BUD)
Y<Q Unemployment
Trans(U) and Trans(W) increases at the same rate like Q BUD = G income - G outlay DEP / APP = f (ER) ER = f (BOP) Balance of Payments BOP = (X - Z) + Capital Flows BOP > 0: Appreciation of currency BOP = 0: No change BOP < 0: Depreciation of currency Capital Flows = f (R, Expectations) Rd > Rf: Capital inows Rd < Rf: Capital outows Major component (not X and Z) -> determines ER Interest rate domestic Interest rate foreign Rd Rf Capital Flows BOP
Demand-decient unemployment
Economics Functions
C = f (Yd, R)
C = f (Yd, R, VAT)
Yd = Y - Taxes + Transfers
Consumption (C)
Yd
Yd R C
Investment (I)
Expectations
X = f (Yf, PLd, PLf, ER) X/X (t) = f (Yf/Yf (t), INFd/INFf (t-1), DEPd/APPd (t-1)) National income foreign Yf Yf X
Z = f (Y, PLd/PLf, ER) Z/Z (t) = f (Y/Y, INFd/INFf (t-1), DEPd/APPd (t-1)) Z National Income Y
Ination domestic
Imports (Z)
INFd
PLd
Exports (X)
PLf
INFf