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Q = f (CS, LF) Q = f (CS, LF, T) Q/Q = f (CS/CS, LF/LF, T) CS LF T G +, Taxrate -, M = G =, Taxrate --, M + G =, Taxrate =, M +++ G should be at least 2.

5 % increase due to Q increase of 2.5 % Capital stock Labour force Technology CS/CS (Investment)

??? Different W functions ???

C^0.6 * (I+X-Z)^0.2 * G^0.2 Y is part of the welfare function

Potential GNP (Q) Welfare Function (W)

CS and LF given for the current period

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)

Y=Q INFt-1 + G (%)

Money Supply (M)

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

It = f (R, Expectations, INVt-1)

Exchange Rate (ER)


INVt-1

Inventory previous period INVt-1 It It It

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

Price level domestic Price level foreign Ination domestic

Exports (X)

PLf

Appreciation (therefore depreciation) INFd

Domestic ination increasing compared to foreign ination Ination foreign

INFf

Appreciation (therefore depreciation)

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