Macroeconomic equilibrium based on the priority of the sphere of circulation. Classical and Keynesian macroeconomic equilibrium models Extraction-injection equilibrium model

The classical (and neoclassical) model of economic equilibrium considers, first of all, the relationship between savings and investment at the macro level. An increase in income stimulates an increase in savings; converting savings into investment increases output and employment. As a result, incomes increase again, and at the same time savings and investments. The correspondence between aggregate demand (AD) and aggregate supply (AS) is ensured through flexible prices, a free pricing mechanism. According to the classics, price not only regulates the distribution of resources, but also provides a “resolution” of nonequilibrium (critical) situations.

According to classical theory, in each market there is one key variable (price P, interest r, wage W/P) that ensures market equilibrium. Equilibrium in the goods market (through the demand and supply of investments) is determined by the interest rate. In the money market, the determining variable is the price level. The correspondence between supply and demand in the labor market is regulated by the value of real wages.

Classicists saw little problem in converting household savings into firm investment spending. They considered government intervention unnecessary. But a gap can and does arise between the deferred expenses (savings) of some and the use of these funds by others. If part of the income is set aside in the form of savings, it means that it is not consumed. But for consumption to grow, savings must not lie idle; they must be transformed into investments. If this does not happen, then the growth of the gross product slows down, which means that incomes decrease and demand shrinks.

The picture of the interaction between savings and investment is not so simple and unambiguous. Savings disrupt the macroequilibrium between aggregate demand and aggregate supply. Relying on the mechanism of competition and flexible prices does not work under certain conditions.

As a result, if investments are greater than savings, there is a risk of inflation. If investments lag behind savings; then the growth of the gross product is inhibited.

Keynesian model

Unlike the classics, D. Keynes substantiated the position according to which savings are a function not of interest, but of income. Prices (including wages) are not flexible, but fixed; the equilibrium point AD and AS is characterized by effective demand. The commodity market is becoming key. The balancing of supply and demand occurs not as a result of an increase or decrease in prices, but as a result of changes in inventories.

The Keynesian AD-AS model is the basis for analyzing the processes of production of goods and services and the price level in the economy. It allows you to identify factors (causes) of fluctuations and consequences.

The aggregate demand curve AD is the quantity of goods and services that consumers are able to purchase at the current price level. The points on the curve represent combinations of output (Y) and the general price level (P) at which the goods and money markets are in equilibrium (Figure 1).

Fig.1.

Aggregate demand (AD) changes under the influence of price movements. The higher the price level, the smaller the consumers' reserves of money and, accordingly, the smaller the quantity of goods and services for which there is effective demand.

There is also an inverse relationship between the size of aggregate demand and the price level: an increase in the demand for money entails an increase in the interest rate. The aggregate supply (AS) curve demonstrates how much goods and services can be produced and released to the market by producers at different average price levels (Figure 2).

Rice. 2.

In the short term (two to three years), the aggregate supply curve, according to the Keynesian model, will have a positive slope close to the horizontal curve (AS 1).

In the long run, with full capacity utilization and labor employment, the aggregate supply curve can be represented as a vertical straight line (AS 2). Output is approximately the same at different price levels. Changes in the size of production and aggregate supply will occur under the influence of shifts in production factors and technological progress.

Rice. 3.

The intersection of the AD and AS curves at point N reflects the correspondence between the equilibrium price and the equilibrium production volume (Fig. 3). If the equilibrium is disturbed, the market mechanism will equalize aggregate demand and aggregate supply; First of all, the price mechanism will work.

The following options are possible in this model:

1) aggregate supply exceeds aggregate demand. Sales of goods are difficult, inventories are building up, production growth is slowing down, and a decline is possible;

2) aggregate demand exceeds aggregate supply. The picture on the market is different: inventories are decreasing, unsatisfied demand is stimulating production growth.

Economic equilibrium presupposes a state of the economy when all the economic resources of the country are used (with a reserve capacity and a “normal” level of employment). In an equilibrium economy there should be neither an abundance of idle capacity, nor excess production, nor excessive overextension in the use of resources.

Equilibrium means that the overall structure of production is brought into line with the structure of consumption. The condition for market equilibrium is the balance of supply and demand in all major markets.

Let us recall that, according to Keynesian views, the market does not have an internal mechanism capable of ensuring equilibrium at the macro level. State participation in this process is necessary. To analyze the equilibrium situation under underemployment, a simplified Keynesian model was proposed. To study the relationship between the interest rate and national income in the goods market and the money market, another scheme was developed that combined the analysis of these two markets.

Rice. 4.

Aggregate demand is a model, represented in Figure 4 as a curve, which shows the various volumes of goods and services, that is, the real volume of national output that consumers, businesses and the government are willing to buy at any possible price level. Other things being equal, the lower the price level, the greater the share of real national output that domestic consumers, businesses, the government, and foreign buyers will want to purchase. And vice versa, the higher the price level, the less volume of the national product they will want to buy. Thus, the relationship between the price level and the real volume of national production that is in demand is inverse, or negative.

The inverse, or negative, relationship between the price level and the volume of national production is clearly expressed in the figure.

The reasons for this deviation are various.

This nature of the aggregate demand curve is determined primarily by three factors:

1) the effect of interest rates;

2) the effect of material assets, or real cash balances;

3) the effect of import purchases.

Interest rate effect. The interest rate effect suggests that the path of the aggregate demand curve is determined by the effect of a changing price level on the interest rate, and hence on consumer spending and investment. More precisely, when the price level rises, interest rates rise, and increased interest rates, in turn, lead to a reduction in consumer spending and investment. When looking at the aggregate demand curve, we assume that the amount of money supply in the economy remains constant.

This leads to the following conclusion: a higher price level, increasing the demand for money and raising the interest rate, causes a reduction in demand for the real volume of the national product.

Wealth effect. The second reason that determines the downward trajectory of the aggregate demand curve is the wealth effect, or the effect of real cash balances. The point is that at a higher price level, the real value, or purchasing power, of the accumulated financial assets - particularly assets with a fixed monetary value, such as time accounts or bonds - held by the public will decrease. In this case, the population will actually become poorer, and therefore we can expect them to reduce their spending. And, conversely, when the price level decreases, the real value, or purchasing power, of material assets will increase and expenses will increase.

The effect of import purchases. When the price level rises, the effect of import purchases leads to a decrease in aggregate demand for domestic goods and services. Conversely, a comparative decrease in the price level in our country helps to reduce our imports and increase our exports and thereby increase the net volume of exports in aggregate demand.

We have seen that changes in the price level lead to such changes in the level of spending by consumers within the country, enterprises, government, and foreign buyers, which make it possible to predict changes in the real volume of national production. This means that an increase in the price level, other things being equal, will lead to a decrease in demand for real output. Conversely, a decrease in the price level will cause an increase in output. This relationship is represented on the graph as a movement from one point to another along a stable aggregate demand curve. However, if one or more of the “other conditions” changes, the entire aggregate demand curve shifts. These "other conditions" are called non-price factors of aggregate demand.

To understand what leads to changes in the volume of national output, it is necessary to distinguish changes in the volume of demand for a national product, caused by changes in the price level, from changes in aggregate demand, caused by changes in one or more non-price determinants of aggregate demand.

As shown in Figure 5, an increase in aggregate demand is represented by a shift of the curve to the right - from AD1 to AD2. This shift shows that at different price levels, the desired quantity of goods and services will increase.

Rice. 5.

Conversely, a decrease in aggregate demand is shown as a shift of the curve to the left - from AD1 to AD3. This shift suggests that people will buy less of a product than before at different price levels.

In other words, the changes in aggregate demand shown in Figure 5 occur when one or more factors that were previously considered constant change. These nonprice factors, or levers, that shift aggregate demand are listed in Table 1.

Table 1. Non-price factors of aggregate demand: levers that shift the aggregate demand curve

Consumer spending. Consumers can change their purchase patterns of domestic goods regardless of changes in the price level. In this case, the entire aggregate demand curve will shift. It will shift to the left from AD1 to AD3, as shown in the figure, when consumers decide to buy fewer goods than before at a given price level. Conversely, the curve will shift to the right from AD1 to AD2 when consumers decide to increase their purchases at a given price level.

Changes in one or more nonprice factors can change the pattern of consumer spending and thereby shift the aggregate demand curve. As indicated in the table, these factors are: consumer wealth, consumer expectations, consumer debt, and taxes.

Consumer welfare. A sharp decrease in the real value of consumers' assets leads to an increase in their savings (to a decrease in purchases of goods), as a means of restoring their well-being. As a result of a reduction in consumer spending, aggregate demand decreases and the aggregate demand curve shifts to the left. And, conversely, as a result of an increase in the real value of material assets, consumer spending at a given price level increases. Therefore, the aggregate demand curve shifts to the right.

Consumer expectation. Changes in consumer spending patterns depend on the forecasts consumers make. For example, when people believe that their real income will increase in the future, they are willing to spend a larger portion of their current income. Therefore, at this time, consumer spending increases (savings decreases during this time) and the aggregate demand curve shifts to the right. Conversely, if people believe that their real income will decrease in the future, then their consumption spending, and therefore aggregate demand, will decrease.

Likewise, mass anticipation of binge drinking, full of inflation, will increase today's aggregate demand. Because the consumer may decide to buy goods before the price increases. Conversely, the expectation of a price decline in the near future will lead to a decrease in today's consumption, that is, people will give up some purchases in order to benefit from future price declines.

Consumer debt. High level of consumer debt. Formed as a result of previous purchases on credit, it may force her to reduce today's expenses in order to pay off existing debts. As a result, consumer spending will decrease and the aggregate demand curve will shift to the left. Conversely, when consumer debt is relatively low, they are willing to increase their current spending, which leads to an increase in aggregate demand.

Taxes. A decrease in income tax rates entails an increase in net income and the number of purchases at a given price level. This means that a tax cut will shift the aggregate demand curve to the right. On the other hand, an increase in taxes will cause a decrease in consumer spending and a shift of the aggregate demand curve to the left.

Investment costs. Investment expenses, that is, purchases of capital goods, are the second non-price factor of aggregate demand. A decrease in the volume of new means of production that enterprises are willing to purchase at a given price level will lead to a shift of the aggregate demand curve to the left. And, conversely, an increase in the volume of investment goods that enterprises are willing to buy will lead to an increase in aggregate demand.

Interest rate. All other things being equal, an increase in the interest rate caused by any factor other than a change in the price level will lead to a decrease in investment spending and a decrease in aggregate demand. In this case, we do not mean the so-called interest rate effect, which arises as a result of changes in the price level. We are talking about changes in the interest rate due, for example, to changes in the volume of money supply in the country. An increase in the money supply helps to reduce the interest rate and thereby increase investment. Conversely, a decrease in the money supply leads to an increase in interest rates and a decrease in investment.

Expected return on investment. More optimistic forecasts for returns on invested capital increase the demand for investment goods and thereby shift the aggregate demand curve to the right. For example, a perceived increase in consumer spending may in turn stimulate investment in hopes of future profits. Conversely, if the prospects for profit from future investment programs are rather dim due to an expected decline in consumer spending, then investment costs tend to fall. Consequently, aggregate demand will also decrease.

Business taxes. An increase in corporate taxes will reduce the after-tax profits of corporations from capital investment, and, consequently, reduce investment spending and aggregate demand. Conversely, a tax cut will increase after-tax returns on investment and possibly increase investment spending, as well as push the aggregate demand curve to the right.

Technologies. New and improved technologies tend to stimulate investment spending and thereby increase aggregate demand. Example: Recent advances in the highly technological fields of microbiology and electronics have led to the creation of new laboratories and manufacturing facilities to utilize new technologies.

Excess capacity. An increase in excess capacity, that is, unused capital on hand, restrains the demand for new investment goods and therefore reduces aggregate demand. Simply put, firms operating below capacity have little incentive to build new plants. Conversely, if all firms find that their excess capacity is decreasing, they are willing to build new plants and buy more equipment. Consequently, investment spending increases and the aggregate demand curve shifts to the right.

Government spending. The government's desire to buy goods and services constitutes the third non-price factor of aggregate demand. An increase in government purchases of national products at a given price level will lead to an increase in aggregate demand as long as tax revenues and interest rates remain unchanged. Conversely, a decrease in government spending will lead to a decrease in aggregate demand. Example: cutting government spending on new highways.

Net Export Expenses. The last non-price factor of aggregate demand is net export expenditures. The aggregate demand curve also shifts when changes occur in the purchase of goods by foreign consumers, regardless of the price level in our country. When we talk about levers that shift aggregate demand, we mean changes in net exports caused not by changes in the price level, but by other factors. The increase in net exports (exports minus imports) resulting from these “other” factors shifts the aggregate demand curve to the right. The logic of this statement is as follows. First, higher levels of exports create higher demand for goods abroad. Secondly, the reduction in our imports implies an increase in domestic demand for domestically produced goods.

National income of other countries. An increase in the national income of a foreign country increases the demand for our goods and therefore increases the aggregate demand in our country. When income levels in foreign countries increase, their citizens have the opportunity to buy more goods, both domestic and foreign. Consequently, our exports increase along with the rise in national income levels of our trading partners. A decrease in national income abroad has the opposite effect: our net exports decline, shifting the aggregate demand curve to the left.

Exchange rates. Changes in the exchange rate of the national currency in relation to other currencies are the second factor that affects net exports, and, consequently, aggregate demand. Suppose that the price of the yen in domestic currency increases. This means that the ruble will depreciate against the yen. That is, if the price of the ruble in yen falls, this means that the yen exchange rate is rising. As a result of the new ruble-yen ratio, Japanese consumers will be able to get more rubles for a given amount of yen. And consumers in our country will receive less yen for every ruble. Under such circumstances, we can expect our exports to increase and our imports to decrease. This means an increase in net exports, which, in turn, will lead to an increase in aggregate demand in the Republic of Belarus.

The classical equilibrium model is based on the assumption that the economy always tends to the natural level of output. This level itself is determined by the production capabilities of society, i.e., the availability of resources, production technology and labor force. In a market economy, there are mechanisms that bring it to an optimal state of equilibrium, that is, a state where there is neither forced unemployment nor inflation.
This conclusion is based on the law of J.-B. Say and the assumption of price and wage flexibility. Say's Law is based on the simple idea that the supply of goods and services creates exactly equal aggregate demand for them. Say argued that products are bought for products, and therefore in the market there is always equality between supply and demand, and money serves only as a simple intermediary in exchange. The essence of Say's law is easier to imagine using the example of barter trade. If, for example, a grain producer offers his goods in exchange for clothing, then in this case the supply of grain will be equal to the grain producer's demand for clothing. The same can be said about a clothing manufacturer exchanging its product for grain.
Since the supply of some goods creates, as it were, an automatic demand for other goods, a general overproduction of goods, according to classical economists, is impossible.
In its most general form, the economy can be represented as a collection of enterprises and households. Enterprises, as you know, incur expenses (costs) associated with the production of products. However, enterprise expenses simultaneously constitute cash income of households in the form of wages, profits, rent and interest. In turn, households, buying goods and services produced by enterprises, spend their income, which is returned to enterprises in the form of their cash proceeds from the sale of these goods and services (Fig. 18.1).
If households fully use their income for consumer needs, then all produced products will be sold. From this, the classics concluded that the level of production of the national product is limited only by the production capabilities of society. This conclusion, in their opinion, is also valid when

Savings occur, that is, when households do not spend all the income they receive on consumption, but save some of it. If you follow the logic, then in this case, due to insufficient consumer spending, a part of the produced products, equal in monetary terms to household savings, will not be able to be sold. This will force producers to reduce the size of their products to the level of household consumer spending. But classical economists believed that this should not happen, since household savings will necessarily be invested by producers. Therefore, total expenses in this situation will be sufficient to realize the entire volume of the national product with full use of all available resources of society (Fig. 18.2).

those who want to buy investment goods, i.e. means of production. Therefore, the reduction in aggregate demand due to consumer goods (by the amount of household savings) will be compensated by an increase in demand due to investment goods (by the same amount).
If we assume that in the money market, household savings reflect the supply of money, and the investment plans of entrepreneurs reflect the demand for money, then the equilibrium interest rate (the price paid for the use of money) will equalize the amounts that households intend to save and entrepreneurs want to invest. In other words, the equilibrium level of interest rate ensures equality of savings and investments (Fig. 18.3).

The figure shows that an increase in savings at the existing interest rate R leads to a shift to the right of the money supply curve (to position Si). The consequence of this will be a decrease in the equilibrium interest rate from R to Ri (inverse relationship) and, in connection with this, an increase in investment from Q TO Ql
(also inversely dependent, but on the interest rate). At point Q: the amounts of savings and investment will again be equal, and therefore, equilibrium will again be established between aggregate supply and demand, but at a new point Ei. Thus, the levels of savings and investment in the classical model depend on the same independent variable - the interest rate (R). At the same time, savings are a direct function of the interest rate (with an increase in the interest rate, savings also increase), and investments are an inverse function (with a decrease in the interest rate, they increase and fall with its increase).
The interest rate itself is not constant. It is established as a result of the interaction between the supply of money from households (savings) and the demand for it from producers (investments). The equilibrium level of interest rate ensures equality of savings and investments. Thus, the mechanism by which equality of savings and investments is ensured is none other than the money market. The supply of money is represented here by household savings, and the demand for money is represented by borrowed investments of entrepreneurs. The role of price is played by a percentage, reflecting fluctuations in supply and demand in the money market. Its equilibrium level means that the amount of savings coincides with the amount of borrowed investment, i.e., this is the payment for borrowing savings that suits both savers (households) and investors (enterprises).
Representatives of the classical theory, however, saw that the economy develops unevenly: periods of expansion are followed by periods of recession and crises. They associated these phenomena with a violation of proportionality between various branches of production, which is restored by the very course of the movement of the market economy towards a self-regulating system.
If for some reason there is a discrepancy between the level of savings and investment, then in this case, according to the classics, the level of production will not decrease and unemployment will not appear, since prices and wages are absolutely elastic, i.e. very flexible . They decrease, but not the level of production, ensure
working full time. A short-term recession as a temporary deviation from the equilibrium level of production is possible, but it will end as soon as prices and wages reach their equilibrium level.
For example, if prices fall and the production of goods becomes less profitable, then it will be compensated by lower prices for capital goods and lower wages, and real output, employment and real income will remain the same (Fig. 18.4).
p AS

A reduction in aggregate demand leads to a shift in the demand curve from position AD to position ADi. As a result, the aggregate supply curve, following the demand curve, will also shift down (from position AS to position ASi). Reducing prices from the Pi level to the P2 level while simultaneously reducing wages will allow maintaining the real volume of production (Qi) at full employment™, but the new equilibrium price (Pg) will be lower than the initial one (Pi). Consequently, the economy will return to its normal state again.

Thus, the perfect elasticity of prices for factors of production allows the economy to remain in a state of equilibrium, when real profit and output remain constant. Therefore, the aggregate supply curve will be a vertical line.
From here the classics concluded that in a market economy, capable of achieving both full production and full employment, government intervention can only harm its effective functioning. Therefore, the most acceptable economic policy is state non-intervention.
Summarizing the above, we can conclude that the classical model of equilibrium production volume, based on Say's law, assumes the following:

1. Emphasizing aggregate supply as the engine of economic growth.
2. Equality of savings and investments achieved through free pricing in the money market.
3. Absolute elasticity of wages and prices (for factors of production and finished products).
4. A constant tendency for the volume of aggregate supply to coincide with the potential capabilities of the economy (the aggregate supply curve is therefore illustrated by a vertical line).
5. The ability of a market economy, with the help of internal mechanisms, to balance aggregate demand and aggregate supply at full employment and full use of other factors of production.

The classical model is based on the law of the French economist J.B. Say, according to which the production of goods itself creates income equal to the cost of the goods produced. Supply creates its own demand.

The classical model describes the behavior of the economy in the long term. The analysis of aggregate supply is based on the following conditions:

§ the volume of output depends only on the number of production factors and technology and does not depend on the price level;

§ changes in factors of production and technology occur slowly;

§ the economy operates under conditions of full employment of production factors, therefore, the output volume is equal to the potential;

§ prices and nominal wages are flexible, their changes maintain equilibrium in the markets.

According to the views of classical supporters, aggregate demand is predetermined by the money supply, i.e. amount of money and its purchasing power. The value of AS has a fixed character, predetermined by the scale of resources available in society. It does not depend on prices or demand. The goal is to maintain a stable level of money supply.

Fig.9. Classical general equilibrium theory

At a given level of aggregate demand (AD), an increase in the supply of money will cause inflation and cause the AD curve to shift to the right to AD'. Equilibrium will be established at point P. An increase in money will lead to an increase in AD at a given price level (Pk), which will exceed AS by the value of the segment KN. An insufficient supply of goods will cause prices to rise, their level will shift upward (from Pk to Pp) to the point of a new equilibrium.

If, at a given level of aggregate demand (curve AD), the amount of money decreases, then AD decreases by the amount of the segment KM, and the AD curve shifts to position AD.” Since supply exceeds demand, prices will begin to decline to the level PL, which will correspond to the new macroeconomic equilibrium (point L).

Thus, among modern representatives of the classical school (primarily monetarists), the supply of money is the main factor determining both aggregate demand and the price level. Moreover, any changes occurring on the AD side do not affect either employment or output.

The mechanism for regulating equilibrium is prices. Later it was noted that households save, and firms invest. The equilibrium of AD and AS required an equilibrium of saving and investment. It, in turn, was regulated by the money market mechanism, and primarily by the % rate. It is a reward tool for thrift. The higher the level of interest rates, the more funds will be saved, and conversely, a decrease in their level leads to a reduction in savings and an increase in consumption.

70. Keynesian model of general macroeconomic equilibrium

The Keynesian model of macroeconomic equilibrium, as we already know in very general terms, is built on the assumption of fixed prices. Therefore, the graphical interpretation of the equilibrium in this paragraph will be different than in the AD-AS model. .

Let us note the main provisions of Keynesian theory, which revolutionized economic science in the mid-1930s. and gave impetus to the development of macroeconomics. Firstly, Keynes, unlike the classics, put forward the position that it is not aggregate supply that determines aggregate demand, but, on the contrary, aggregate demand determines the level of economic activity, i.e., the maximum possible level of output (aggregate supply) and, accordingly, employment. Second, Keynes assumed that wages and prices were not perfectly flexible. Thirdly, the interest rate does not equalize the volumes of investment and savings, as it is represented in the classic model. Fourthly, full employment is not achieved automatically in the economy, and this provides grounds for government intervention in economic processes.

Aggregate demand in the Keynesian model depends on such important categories as the consumption and saving functions. Both consumption and savings are, according to Keynes, a function of income. The consumption and savings function have the following form:

C = C 0 + MPC Y (2.1)

S = - C 0 + MPS Y (2.2)

Where, C – expected consumption costs;

S – desired level of savings;

Y – total income;

C 0 – autonomous consumption;

MPC and MPS are the marginal propensities to consume and save, respectively.

Keynes put forward a proposition that is commonly called the basic psychological law: “The psychology of society is such that with the growth of total real income, total consumption also increases, but not to the same extent as income grows.” And if so, then part of the created products will not be able to be sold, entrepreneurs will suffer losses and will curtail production volumes. Insufficient propensity to consume can lead to a chronic lag of aggregate demand from the level that ensures full employment.

Empirical studies have shown that the marginal propensity to consume and the marginal propensity to save do not change in the short term and often remain the same value even over a long period.

Keynes introduces the concept of autonomous consumption, which does not depend on income level. Graphically, the consumption and savings functions are presented in Appendix 1.

The most important component of planned total expenditures is investment. The level of investment has a significant impact on the volume of national income of a society; Many macro-proportions in the national economy will depend on its dynamics. Keynesian theory emphasizes the fact that the level of investment and the level of savings (i.e., the source or reservoir of investment) are determined by largely different processes and circumstances. Investments (capital investments) on a national scale determine the process of expanded reproduction. The construction of new enterprises, the construction of residential buildings, the construction of roads, and, consequently, the creation of new jobs depend on the investment process, or real capital formation.

Keynes introduces a new concept - autonomous investment, i.e. investments that do not depend on the level of income and constitute a certain constant value at any level.

Autonomous investment and an investment function that depends on the level of the interest rate will shift the equilibrium point on the graphs, as shown in Figures 2.3a and 2.3b.

Autonomous investment is an important assumption, or abstraction. In reality, a situation can and does develop when a growing amount of income leads to an increase in investment. We are talking about the mutual influence of investment and income. Autonomous investments made in the form of an initial “injection” lead to an increase in national income.

Fig. 2.2 Equilibrium level of income taking into account autonomous investments on the graph of total expenses (a) and savings (b)

The greater the autonomous investment, the higher the aggregate expenditure schedule rises and the closer the “cherished” level of full employment is. A graphical interpretation of Keynes's equilibrium model, which in economic theory is also known as the Keynesian cross. presented in Appendix 1 in Figure 2.

The “Keynesian cross” is a clear graphic illustration of the beneficial role of government spending and stimulating investment in the private sector, to which Keynes attached great importance.

An increase in any of the components of autonomous spending leads to an increase in national income and contributes to the achievement of full employment also due to a certain effect, which is known in economic theory as the multiplier effect.

Let us once again emphasize the differences in the Keynesian and neoclassical approaches to determining macroeconomic equilibrium.

First, in the classical model, long-term unemployment seemed impossible. The flexible response of prices and interest rates restored the disturbed balance. In the model proposed by Keynes, equality of investment and savings can be achieved even with part-time employment.

Secondly, the classical model assumed the existence of a flexible price mechanism organically inherent in the market. Keynes questioned this postulate: entrepreneurs, faced with a drop in demand for their products, do not reduce prices. They reduce production and fire workers, hence unemployment with all the attendant socio-economic conflicts, and the “invisible hand” of the market mechanism cannot ensure stable full employment.

Third, savings are primarily a function of income, and not just the level of interest, as was stated in the classical theory.

71. Model of joint equilibrium in the market of goods and financial assets. Effective demand

Joint equilibrium is a situation in which the real expenses of economic entities are equal to the planned ones, the demand for real money is equal to the supply of money, and equilibrium exists at the same time in the markets of goods and financial assets.

Equilibrium in the goods market is achieved under the condition that investments are equal to savings, and the amount of investment is inversely related to the interest rate. This dependence reflects the downward nature of the investment curve. Since investments are part of total expenses, with an increase in investments caused by a fall in interest rates, there is also an increase in expenses, with a multiplier effect. Consequently, there is also a connection between the change in income and the change in the interest rate, reflected by the IS curve, each point of which characterizes the situation when planned expenditures are equal to the volume of national production.

Equilibrium in the money market occurs when demand and supply for money are equal. According to Keynesian theory, the supply of money is an exogenous quantity and equilibrium will depend on the demand for money. The demand for money, in turn, is determined by liquidity preference, i.e. the higher the interest rate, the lower the demand for money, since the interest rate represents the opportunity cost of holding personal money. A reduction in the money supply predetermines an increase in interest rates and a reduction in the demand for money, and vice versa. In turn, the demand for money increases as income increases. At the same time, in order to maintain equilibrium, the interest rate also increases. Consequently, there is a relationship between the growth of the income level and the interest rate, which is reflected by the SM curve (Fig. 16.18).

Relationship between income level and interest rate

Rice. 16.18. Relationship between income level and interest rate

The LM curve is a set of hypothetically introduced equilibrium states in the money and securities markets.

The process of adaptation to joint equilibrium itself depends on what specific situation of disequilibrium has developed in the money and commodity markets.

In a model with fixed prices, the IS and LM curves cut the economic space into 4 areas, each of which characterizes its own state of the money and commodity markets:

I. Excess of goods and money on the market.

II. Excess of goods, shortage of money.

III. Shortage of goods and money.

IV. Shortage of goods and excess of money.

Economic equilibrium IS – LM is the point of intersection of the curves that determines the equilibrium interest rate and effective demand.

Effective demand is a level of planned expenditures that ensures a joint equilibrium in the markets for goods and financial assets. These markets are closely interconnected; changes affecting one market inevitably affect the other.

Changes in the goods market

1. The growth of autonomous investments (ia) will lead, with a multiplier effect, to an increase in total expenses (IS0 → IS1) (Fig. 16.19).

2. In the money market, the demand for money increases, which leads to an increase in i (i0 →i0).

3. From the growth of z follows a fall in I. Equilibrium moves to point E1, where the level of income and interest rate are higher (Y1 > Y0, i1 >i0)

Changes in the financial asset market

The money supply (M) increases, the interest rate (i) will fall. Since the amount of money for speculative purposes will increase at a given level of income, then LM0 → LM1.

Growth of autonomous investments

Rice. 16.19. Growth of autonomous investments

Change in money supply

Rice. 16.20. Change in money supply

Schematically, the analysis of the figure can be represented by the following logical chains.

Equilibrium is achieved at point E2.

The IS – LM model made it possible to overcome the classical dichotomy (division into the real and money sectors), since changes in the money market affect real income.

72. General macroeconomic equilibrium in the concept of neoclassical synthesis

Neoclassical model of macroeconomic equilibrium by L. Walras and D. Patinkin The first neoclassical model of macroeconomic equilibrium based on the principle of maximum utility was built by the largest economist-mathematician of the 19th century, the founder of the Lausanne school, L. Walras. In his work “Elements of Pure Political Economy”, he formalized and translated into strict mathematical language A. Smith’s theory of the “invisible hand” of the market of free (perfect) competition, in which an individual consumer of a product (buyer) or an individual producer (seller) cannot directly influence market prices. L. Walras, like other neoclassicists, uncritically borrowed some provisions of the French economist J.B. Say, who strengthened the erroneous elements of A. Smith's theory. Say argued that the level of income is always sufficient to buy the goods created under full employment. This provision is based on the so-called Say’s law, according to which, during the production process itself, income is created equal to the cost of the goods produced, i.e. the supply of goods generates its own demand. However, Say's law contains fundamental flaws, since there is no guarantee that all income is completely spent

Part of the income may be saved, which will negatively affect demand and consumption. After all, some goods will not be sold, production will decrease, unemployment will increase and incomes will decrease. Thus, the problem of achieving macroeconomic equilibrium depends on saving. Equality of savings and investments, according to neoclassics, is guaranteed by the money market. Consumers will save if they are paid a high percentage for thrifting. Moreover, the higher the interest rate, the greater the savings. This percentage will be paid by entrepreneurs-investors who use the saved money for production development. According to neoclassical economists, an equilibrium interest rate is established in the money market, implying an equilibrium price for money. In this case, the amount of money saved will be equal to the amount invested.

If savings exceed investment, then the interest rate will decrease and a new equilibrium will be established. Hence the conclusion is drawn that a change in the interest level does not violate the operation of Say’s law even with significant savings. If overall spending decreases, then a market economy, according to neoclassical economists, can provide the required level of production and full employment. If savings exceed investment, then a decrease in total spending on products will lead to a decrease in product prices. When demand for products decreases, competitors will reduce prices, which will allow those without savings to increase their purchases of goods. Savings will therefore lead to lower prices rather than lower production and employment. It is also argued that a decrease in the demand for goods leads to a decrease in the demand for resources, including labor. Since this leads to a decrease in wages, everyone who wants to work at this wage rate will be able to have employment, i.e. there will be no unemployment. In other words, from the point of view of neoclassics, the market mechanism, through flexible interest rates, elasticity of prices and wages, brings costs and income into line, maintains the required volume of production, full employment and equilibrium in the macroeconomy in accordance with Say’s law. The merit of L. Walras in the development of the theory of economic equilibrium lies, first of all, in the fact that he substantiated the need for an approach to analyzing the economy as a single macroeconomic whole, and connected the markets of various goods into a single system. The basis of the general equilibrium model of L. Walras is the provision that contracts are conditional and can be renegotiated during a certain period even before receiving goods and paying money, if demand exceeds supply or supply exceeds demand. The latter, with a constant budget of the participants in transactions, will stimulate an increase in relative prices, in which the price of one product is expressed in natural units of another product, and the excess of supply over demand will cause a decrease in prices. The interaction of relative prices, supply and demand leads to the fact that a change in demand is accompanied by a change in the relative prices of goods. Moreover, buyers will purchase goods at a higher price in order to satisfy their demand when their supply is low. Manufacturers will not sell goods at a lower price if demand is lower than supply, so as not to lose income. Similar dynamics of prices, supply and demand are observed in markets if buyers seek to maximize utility from purchasing goods, and sellers seek to minimize their costs and maximize their income. Based on this, we can define L. Walras's law, according to which the amount of excess demand and the amount of excess supply in all markets under consideration coincide. The general equilibrium model of L. Walras, based on the analysis of supply and demand, includes a whole system of equations. Among them, the leading role belongs to the system of equations characterizing the equilibrium of two markets: productive services and consumer products. In the market for productive services, the sellers are the owners of production factors (land, labor, capital, mainly money). Buyers are entrepreneurs producing consumer goods. In the market for consumer products, owners of factors of production and entrepreneurs change places. It turns out that these prices are determined by the aggregate values ​​of supply and demand when they become equal to each other. It is these prices that provide each rational member of the economic system with maximum utility. Consequently, according to the general equilibrium model of L. Walras, in the process of concluding contracts for the sale and purchase of goods in markets, such relative prices are established at which all desired goods are sold and bought and there is no excess demand or excess supply. In its final form, L. Walras's system of equations will look like this: L. Walras's general equilibrium model had a great influence on the development of economic science. However, it is in many respects at odds with the real state of bourgeois society. It is enough to note that it allows for the possibility of zero unemployment, full utilization of the production apparatus, the absence of cyclical fluctuations in production, and does not take into account technical progress and capital accumulation. L. Walras, like his predecessors, could not explain the nature of prices, moving in a vicious circle when prices depend on supply and demand, and the latter on prices. L. Walras's model is inherently contradictory with the practice of the movement of money and prices. Thus, according to L. Walras, no changes in the supply and demand of goods will occur if, in the presence of equilibrium in all markets, relative prices remain the same, and absolute prices for all goods increase. However, it does not show that an increase in absolute prices leads to an increase in the demand for money. This contradiction was resolved by the American scientist D. Patinkin in the book “Money, Interest and Prices” (1965). He introduced into L. Walras's model such an additional component as the money market and real cash balances, which represent the real value of the amounts of money remaining in the hands of sellers and buyers. D. Patinkin created a macroeconomic general equilibrium model that included not only goods markets, but also a money market with real cash balances. At the same time, D. Patinkin proceeded from the fact that the real value of cash balances affects not only commodity demand, but also money demand. Let us assume that the amount of money remaining in the hands of buyers and sellers has not changed in nominal terms. However, the general increase in prices led to the fact that their purchasing power decreased, and therefore the demand for goods in all markets decreased. Therefore, the balance will be disrupted, which will cause an excess supply of goods, which will lead, according to L. Walras’ law, to an excess demand for money. The latter does not mean that the supply of money on the market is less than the demand. In conditions of shortage of money, which is not enough to purchase a given quantity of goods, absolute prices will decrease while relative prices remain unchanged. As a result of a decrease in absolute prices, the real value of cash balances will increase. The general equilibrium will be restored, which indicates the system’s ability to self-regulate. However, it should be borne in mind that the general equilibrium of the economy is carried out more efficiently on the basis of self-regulation in conditions of perfect competition. Ideal conditions for general equilibrium exist in an economy free from monopoly, with a quick and flexible response of prices to changes in supply and demand, with a flow of capital and labor as a result of intersectoral competition. Naturally, in this case there should not be such phenomena that disturb the general balance of the economy, such as errors in economic policy and government regulation of the economy, social and natural shocks.

73 real cash balances and their role in ensuring general equilibrium

The effect of real cash balances acts as a necessary link in the mechanism of adaptation to general equilibrium in both neoclassical and Keynesian concepts. Without it, there will be no equalization of aggregate demand and aggregate supply after an exogenous imbalance. However, the essence of this effect is interpreted in different ways.

Neoclassical (Cambridge) effect. In the neoclassical concept, an increase in real cash balances has a transitory effect. Households exchange additional money for goods; Since the supply of goods cannot increase due to full employment, the price level rises. If some of the additional money is exchanged for securities, then their exchange rate increases and the interest rate decreases, which can reduce the supply of labor, exacerbating shortages in the goods market. As the price level rises, real cash balances decrease, reducing the demand for goods and securities until the original equilibrium at an increased price level is restored in the real sector of the economy.

Keynes effect. Since in the Keynesian concept the interest rate is determined not in the real, but in the monetary sector, an increase in the supply of money is the direct cause of its decrease if the economy is not in a liquidity or investment trap. In a state of underemployment, this leads to an increase in real national income due to an increase in demand, first for investment and then for consumer goods.

Pigou effect. A. Pigou 11 included real cash balances among the arguments for the Keynesian functions of saving and consumption of households, justifying it as follows. When there is equilibrium in the money market, then economic entities have an optimal size of real cash balances. As the money supply increases, real cash balances will exceed the optimal volume; this will lead to households reducing the saving portion of their income and increasing the consumed portion of it

In this way, A. Pigou substantiated the impossibility of the existence of liquidity and investment traps, which, according to Keynes, explain market unemployment by insufficient aggregate demand. If demand in the goods market is less than supply, then the price level decreases, real cash balances increase and consumer demand increases, shifting the curve IS to the right, increasing effective demand even when the line is perpendicular IS.

The Pigou effect is an element of neoclassical synthesis, since it combines the Cambridge effect and the model IS-L.M..

However, the possibility of the effect of real cash balances occurring when the economy is in a liquidity and investment trap is not indisputable. Thus, I. Fisher 12 drew attention to the fact that a decrease in the price level may be accompanied by a decrease in aggregate demand (the Fisher effect) for the following reasons.

Firstly, during deflation there is a redistribution of property from debtors to creditors, since the debt is repaid with money that has increased its purchasing power. Since creditors have a lower marginal propensity to consume than debtors (which is why the former agree to lend and the latter want to borrow), then with the redistribution of property in favor of creditors, aggregate consumption will decrease. In algebraic presentation it looks like this. If the marginal propensity to consume from property for creditors is equal to , and for debtors - , and< , и перераспределенная в результате дефляции часть имущества равна , то потребление сократится на ( < ).

Secondly, some of the debtors will not be able to repay the “heavier” debts and will go bankrupt; therefore aggregate demand will decrease.

Thirdly, the ongoing process of price reduction may make consumers want to postpone purchases for the future if possible, thereby reducing current consumption.

74 Violation of general proportions in the national economy. Ways to overcome disequilibrium in the process of functioning of the national economy.

The unevenness of socio-economic development is the objective basis for the emergence of various types of reproductive imbalances. Other objective factors include differences in the organic structure of capital in different industries (for intersectoral disproportions), territorial differences in the provision of natural and labor resources, natural and climatic features (for interregional disproportions), cyclical fluctuations, changes in the ratio of supply and demand (for general economic functional and elemental disproportions). Along with objective factors, subjective factors can also be identified - errors in economic policy, in the strategy and tactics of reforms, miscalculations in economic policy at different levels of the hierarchical management system (national, regional, sectoral).

State power structures, as a rule, objectively, strive to achieve the complexity of the national economy, both in sectoral and regional aspects. However, as world experience shows, such complexity is the exception rather than the rule. The most important characteristic feature of any national economy is uneven development. This applies to countries where the complex nature of the economy is weakly expressed (the majority are such), and to states that have managed to form relatively integral and complex economies (USA, Germany, Japan, a number of countries of the former USSR), since their history was dominated by periods of uneven development individual economic links and elements. Suffice it to recall post-war Japan, when the emphasis was on the development of only a few industries, socialist industrialization in the USSR with the predominant development of heavy industry, etc.

Even in those few countries whose economies are relatively complex, economic dynamics indicate uneven development of individual segments, industries and regions. Therefore, we can talk about complexity only with a certain degree of convention.

As examples, we can cite examples of disproportions in the development of such European states as Belgium (a rather exaggerated contradiction between the regions of Flanders and Wallonia already in our century led to situations that threatened the political unity of the country - the government crisis of 2006); Italy, where there is a North-South confrontation similar to Belgium, which has given rise to a largely specific political culture of this country, when politicians often speculate on regional imbalances in economic and social development (S. Berlusconi is a striking example of a northern politician); Great Britain - where approximately 12.00% of the population lives in relatively underdeveloped Scotland, which occupies 1/3 of the territory (here, however, the political aspect is less pronounced).

In addition to objective natural and economic differences, a significant factor in the emergence of disproportions is the cyclical nature of economic development.

In the economic literature, cycles of varying lengths are named after their researchers. So, cycles last 3-4 years. are referred to as Kitchik cycles, 10-year cycles as Juglar cycles or Marx cycles, 15-20 year cycles as Kuznets cycles, 40-60 year cycles as Kondratiev cycles. The works of such outstanding economists as D. M. Keynes and I. Schumpetter are also largely based on the cyclical nature of economic processes. It is necessary to dwell in more detail on the phenomenon of cyclicity and its manifestation in the formation of disproportions. The economic cycle is based on periodically occurring economic crises. The movement of production from one economic crisis to the beginning of another is called the economic cycle.

The economic cycle includes four phases: crisis, depression, recovery and recovery. The main phase of the economic cycle is the crisis. It contains the main features of the cycle.

With it, one period of development ends and a new one begins. Without a crisis there would be no cycle, and the periodic repetition of a crisis gives a market economy a cyclical character.

Every crisis matures in phases of revival and recovery. These are phases of sustainable expansion of production. Growing consumer demand encourages entrepreneurs to expand production capacity and increase capital investment. Consequently, the demand for means of production increases. The increase in total aggregate demand begins to outpace the growth rate of social production. The circulation of individual capital flows unhindered, and the severity of competition is reduced. The economic crisis reveals overaccumulation of capital, which appears in three forms: overproduction of commodity capital (increase in unsold products), overaccumulation of productive capital (increasing underutilization of production capacity, rising unemployment), overaccumulation of money capital (increase in the amount of money not invested in production). The general result of the overaccumulation of capital is an increase in production costs, a fall in prices and, consequently, profits.

The cyclical nature of economic development determines the development of imbalances in the economy over time. It should be noted that cyclicality, in itself, does not cause imbalances in the economy, but only manifests in a complex manner the influence of existing factors that cause imbalances and crises. Let’s take a closer look at some of the most important ones, in our opinion.

Disproportions between supply and demand prices are expressed in the fact that at current prices there is a shortage of goods or, conversely, a surplus relative to demand . The possibility of such imbalances existing in the Russian economy after 10 years of reforms seems implausible. After all, it was precisely these imbalances that the “invisible hand” of Adam Smith had to eliminate at the initial stage of reforms. However, the Russian economy still maintains a tendency to reproduce them, causing demand inflation in both open and hidden forms. Let us recall that in its open form, demand inflation manifests itself in an increase in the level of prices for goods, and in its hidden form, it manifests itself in the inability to buy goods at current prices. In both cases, the cause of inflation is a shortage of goods relative to effective demand. It is generally accepted that hidden inflation is characteristic of an administrative-command economy, but not a market economy. At the same time, in a modified form, this form of inflation also occurs in a market economy if the income of certain layers of consumers is insufficient to purchase necessary goods at current prices. The shortage of such goods exists in a hidden form. The growth of incomes of low-income groups translates this deficit into open form and causes open inflation. For this reason, in particular, many countries have abandoned indexation in proportion to the rate of inflation of cash social payments to low-income categories of citizens. The potential for hidden inflation in a market economy is higher, the wider the low-income segments of the population and the more urgent their need to purchase necessary goods.

Inflation interacts with the cyclical movement of the economy. This affects primarily the change in the cycle mechanism, in which cyclical patterns of price movements are now intertwined (their fall in the crisis phase and growth in the recovery phase) with price-forming factors of government regulation (causing price increases), causing inter-industry price imbalances.

Inter-industry price imbalances are expressed in the fact that prices for the products of individual industries do not cover production costs.

That in general, not all economies can set prices that ensure expanded or at least simple reproduction in all industries, regardless of whether these prices are set by the market or by an administrative body (Figure 1).

Direct L 1, L 2 displays the maximum permissible price values ​​for industries 1 and 2 P 1, P 2. On a straight line L 1, price values ​​are found that ensure simple reproduction in industry 1 , on L 2 - in industry 2. Region D contains price values ​​that ensure expanded reproduction in both industries, and the area N- putting them into the mode of “eating up” fixed capital. Let the price values ​​“inherited” from the command economy be in the region N. Then, to switch to simple reproduction mode, it is necessary to raise prices to the level P 1", P 2" (the point of inter-industry price equilibrium). Under conditions of price liberalization, this is exactly what will happen. “The price war will end at the equilibrium point P 1", P 2". Moreover, as it approaches this point, inflation will fade. Having reached the equilibrium point, inflation will eliminate the cause that gave rise to it - inter-industry disproportionality of prices. Further price increases will be determined by other reasons, including the transition to economic

The classical model is based on the law of the French economist J.B. Say, according to which the production of goods itself creates income equal to the cost of the goods produced. Supply creates its own demand.

The classical model describes the behavior of the economy in the long term. The analysis of aggregate supply is based on the following conditions:

§ the volume of output depends only on the number of production factors and technology and does not depend on the price level;

§ changes in factors of production and technology occur slowly;

§ the economy operates under conditions of full employment of production factors, therefore, the output volume is equal to the potential;

§ prices and nominal wages are flexible, their changes maintain equilibrium in the markets.

According to the views of classical supporters, aggregate demand is predetermined by the money supply, i.e. amount of money and its purchasing power. The value of AS has a fixed character, predetermined by the scale of resources available in society. It does not depend on prices or demand. The goal is to maintain a stable level of money supply.

At a given level of aggregate demand (AD), an increase in the supply of money will cause inflation and cause the AD curve to shift to the right to AD'. Equilibrium will be established at point P. An increase in money will lead to an increase in AD at a given price level (Pk), which will exceed AS by the value of the segment KN. An insufficient supply of goods will cause prices to rise, their level will shift upward (from Pk to Pp) to the point of a new equilibrium.

If, at a given level of aggregate demand (curve AD), the amount of money decreases, then AD decreases by the amount of the segment KM, and the AD curve shifts to position AD.” Since supply exceeds demand, prices will begin to decline to the level PL, which will correspond to the new macroeconomic equilibrium (point L).

Thus, among modern representatives of the classical school (primarily monetarists), the supply of money is the main factor determining both aggregate demand and the price level. Moreover, any changes occurring on the AD side do not affect either employment or output.

The mechanism for regulating equilibrium is prices. Later it was noted that households save, and firms invest. The equilibrium of AD and AS required an equilibrium of saving and investment. It, in turn, was regulated by the money market mechanism, and primarily by the % rate. It is a reward tool for thrift. The higher the level of interest rates, the more funds will be saved, and conversely, a decrease in their level leads to a reduction in savings and an increase in consumption.

4. Keynesian general equilibrium model

In the 30s 20th century English economist John Maynard Keynes (1883 - 1946) proposed his equilibrium model. He assumed AD priority.

The starting points of the Keynes model:

q recognition of the cyclical nature of economic development, the possibility and inevitability of moments of overproduction;

q a market economy does not have internal mechanisms of self-regulation, therefore government intervention is necessary (budgetary and tax policy);

q denial of automatism in the regulatory interaction of prices and wages;

q the level of savings depends little on the interest rate;

q The central element is the implementation of a policy of effective demand.

Fig. 10. Equilibrium on the Keynesian segment of the supply curve

The AS curve is horizontal, meaning the availability of free resources, which allows us to hope for an increase in production volume. The Keynesian segment of the AS curve extends from zero output to the output achieved at full employment, at which point the AS curve assumes a vertical position.

AD is not stable, it is subject to fluctuations, even if there is no change in the money supply, because one of the components of AD (investment) is subject to many variables. A reduction in AD leads to a shift in the AD curve to position AD’, which means a reduction in employment and national production with the same price level RK. This situation may last a long time.

Therefore, in order to get the economy out of depression, Keynes proposed expanding government spending, both of an investment nature and in the form of purchases and revenue stimulation, as well as reducing taxes and interest rates (expansion policy, i.e. expansion of AD).

As a result of these measures, the AD curve may return to its previous position or shift to the AD position when full employment is achieved. The AS curve is horizontal (in extreme cases, with fixed prices and nominal wages) or has a positive slope (with rigid nominal wages and relatively flexible prices). The reasons for the relative rigidity of nominal values ​​in the short term are:

¨ duration of employment contracts and other contracts;

¨ state regulation of the minimum wage and the actions of trade unions;

¨ stepwise nature of changes in prices and wages;

¨ monopolistic tendencies.

As demand increases, firms will hire workers for some time, increase output, and satisfy demand at the same price level. Therefore the AS curve will be horizontal. If nominal wages are rigid and prices are relatively flexible, then their increase caused by an increase in AD will lead to a fall in real wages and labor will become cheaper. This will contribute to an increase in the demand for labor from firms, and output will increase. The AS curve will have a positive slope.

In the world economic literature, two main directions of the mechanism for regulating national production in market conditions can be distinguished. First - the classical direction of automatic self-regulation of the market system. Its representatives are D. Ricardo, D. St. Mill, F. Edgeworth, A. Marshall, A. Pigou. Second - Keynesian, based on the need for mandatory government intervention in the market system, especially in conditions of depression. According to these directions, two models of macroeconomic equilibrium have emerged.

Classical macroeconomic equilibrium model dominated economic science for about 100 years, until the 30s of the 20th century. It is based on J. Say's law: the production of goods creates its own demand. For example, a tailor produces and offers a suit, and a shoemaker offers shoes. The supply of a suit to the tailor and the income he receives is his demand for shoes. In the same way, the supply of shoes is the shoemaker's demand for a suit. And so throughout the economy. Each manufacturer is at the same time a buyer - sooner or later he purchases goods produced by another person for the amount received from the sale of his own goods. Thus, macroeconomic equilibrium is ensured automatically: everything that is produced is sold. This one is similar the model assumes the fulfillment of three conditions:

1) every person is both a consumer and a producer;

2) all producers spend only their own income;

3) the income is spent completely.

But in the real economy, part of the income is saved by households. Therefore, aggregate demand decreases by the amount saved. Consumption expenditures are insufficient to purchase all products produced. As a result, unsold surpluses are created, which causes a decline in production, increased unemployment and a decrease in income.

In the classical model, the lack of funds for consumption caused by savings is compensated by investments. If entrepreneurs invest the same amount as households save, then J. Say’s law applies, i.e. the level of production and employment remains constant. The main task is to encourage entrepreneurs to invest as much money as they spend on savings. It is decided in the money market, where supply is represented by savings, demand by investments, and price by interest rates. The money market self-regulates savings and investments using the equilibrium interest rate (Figure 8.13).

The higher the interest rate, the more money is saved (because the owner of the capital receives more dividends). Therefore, the saving curve (S) will be upward sloping. The investment curve (I), on the other hand, is downward sloping because the interest rate affects costs and entrepreneurs will borrow and invest more money at a lower interest rate. The equilibrium interest rate (R 0) occurs at point A. Here, the amount of money saved equals the amount of money invested, or, in other words, the amount of money supplied equals the demand for money .

If savings increase, then the curve S will shift to the right and take position S 1. Although saving will exceed investment and cause unemployment, the excess saving implies a reduction in the interest rate to a new, lower equilibrium level (point B). A lower interest rate (R 1) will reduce investment spending until it equals saving, reducing full employment.

The second factor ensuring equilibrium is the elasticity of prices and wages. If for some reason the interest rate does not change at a constant ratio of savings and investment, then the increase in savings is compensated by a decrease in prices, as producers seek to get rid of surplus products. Lower prices allow fewer purchases to be made while maintaining the same level of output and employment.

In addition, a decrease in the demand for goods will lead to a decrease in the demand for labor. Unemployment will cause competition and workers will accept lower wages. Its rates will decrease so much that entrepreneurs will be able to hire all the unemployed. In such a situation, there is no need for government intervention in the economy.

Thus Classical economists assumed that prices and wages were flexible, interest rate, i.e., from the fact that wages and prices can move freely up and down, reflecting the balance between supply and demand. In their opinion, the aggregate supply curve AS has the form of a vertical straight line, reflecting the potential volume of GNP production. A decrease in price entails a decrease in wages, and therefore full employment is maintained. There is no reduction in the value of real GNP. Here all products will be sold at different prices. In other words, a decrease in aggregate demand does not lead to a decrease in GNP and employment, but only to a decrease in prices. Thus, classical theory believes that government economic policy can only affect the price level, and not output and employment. Therefore, its intervention in regulating production and employment is undesirable (Figure 8.14).

In the early 30s of the 20th century, economic processes no longer fit within the framework of the classical model of macroeconomic equilibrium. Thus, a decrease in wages did not lead to a decrease in unemployment, but to its increase. Prices did not decrease even when supply exceeded demand. It is not without reason that many economists criticized the positions of the classics. The most famous of them is the English economist J. Keynes, who in 1936 published the work “The General Theory of Employment, Interest and Money,” in which he criticized the main provisions of the classical model and developed his own provisions for macroeconomic regulation:

1) savings and investment, according to Keynes, are carried out by different groups of people (households and firms), guided by different motives, and therefore they may not coincide in time and in size;

2) the source of investment is not only household savings, but also funds from credit institutions. Moreover, not all current savings will end up in the money market, since households leave some money on hand, for example, to pay off bank debt. Therefore, the amount of current savings will exceed the amount of investment. This means that Say’s law does not apply and macroeconomic instability sets in: excess savings will lead to a reduction in aggregate demand. As a result, output and employment decline;

3) the interest rate is not the only factor influencing decisions about savings and investment;

4) lowering prices and wages does not eliminate unemployment. The fact is that the elasticity of the price-wage ratio does not exist, since the market under capitalism is not completely competitive. Monopolistic producers prevent price reductions, and trade unions prevent wages. The classic assertion that lowering wages in one firm would allow it to hire more workers turned out to be inapplicable to the economy as a whole. According to Keynes, a decrease in wages causes a decline in income for the population and entrepreneurs, which leads to a decrease in demand for both products and labor. Therefore, entrepreneurs will either not hire workers at all, or will hire a small number.

So, Keynesian theory of macroeconomic equilibrium is based on the following provisions. The growth of national income cannot cause an adequate increase in demand, since an increasing share of it will go to savings. Therefore, production is deprived of additional demand and is reduced, causing unemployment to rise. Therefore, an economic policy is needed that stimulates aggregate demand. In addition, in conditions of stagnation and depression of the economy, the price level is relatively stationary and cannot be an indicator of its dynamics. Therefore, instead of price, J. Keynes proposed introducing the “sales volume” indicator, which changes even at constant prices, because it depends on the quantity of goods sold.

When constructing the aggregate supply curve, Keynes proceeded from the assumption of a constant wage level. Since its value is constant, entrepreneurs cannot reduce production costs. This means that in this situation, price reductions are unlikely to occur. As a result, the supply curve AS has an L-shape (Figure 8.15).

This model reflects the inflexible nature of prices and wages in the short term and the presence of unemployed resources, in particular unemployment. The aggregate demand line intersects the aggregate supply line at point K, where the volume of GNP is equal to OB. If demand increases and the demand schedule moves to position A 1 D 1, then prices will hardly change, since production volume will increase, i.e. GNP will increase by the amount of BB 1.

The Keyesians believed that the government could promote GNP growth and employment growth by increasing government spending, which would increase demand to A 1 D 1, and prices would remain almost unchanged as output increased. The increase in GNP will be BB 1. With an increase in GNP, there will be an increase in employment. Consequently, in the model of J. Keynes, macroeconomic equilibrium does not coincide with the potential use of production factors and is compatible with a fall in production, the presence of inflation and unemployment. If a situation of full use of production factors is achieved, then the aggregate supply curve will take a vertical form, i.e. actually coincides with the long-term AS curve.

Thus, the volume of aggregate supply in the short run depends mainly on the amount of aggregate demand. In conditions of underemployment of production factors and price rigidity, fluctuations in aggregate demand primarily cause changes in the volume of output (supply) and only subsequently can be reflected in the price level. Empirical data confirms this position.

If the government wants to increase output in the economy, then, according to the Keynesian approach, it must stimulate aggregate demand through fiscal and monetary policies, for example, increase government spending, reduce taxes, expand the money supply, etc.

The question arises: which of the two considered concepts of achieving macroeconomic equilibrium - classical or Keynesian - is most acceptable for making management decisions in the field of economic development? It seems that none of them can be taken in a literal sense, since each of them simplifies real processes. It is hardly acceptable to say that the market itself will regulate everything without any government intervention. Keynes's merit is that he showed that the state can influence a market economy and has the tools for such influence. However, the entire economy cannot be entrusted to the state. We must remember that the state has never created and will never create a product. In this sense, you need to trust the market economy. As a result, the most pressing problem is the question of the optimal relationship between the market and the state.

Control questions

1. What forms does aggregate demand have and what do they reflect?

2. What non-price factors determine aggregate demand?

3. What non-price factors determine aggregate supply?

4. What factors influence aggregate supply in the short and long term and the consequences of these influences?

5. How does the behavior of the AD-AS model change in an inflationary economy?

6. What functions does aggregate consumption perform?

7. List the functions of aggregate savings.

8. How is income distributed between consumption and savings?

9. Give formulas for determining the marginal and average propensity to consume.

10. Give formulas for determining the average and marginal propensity to save.

11. What is the sum of the marginal propensity to consume and the marginal propensity to save? Give a mathematical derivation.

12. Construct graphs of the consumption function and the saving function. How does the consumption function graph account for the marginal propensity to consume?

13. Expand the content of the main directions and types of investments.

14. How do savings and investments affect the volume of GNP? Show the logic of this influence on the graph.

15. Is it possible to determine the optimal volume of GNP through the mechanism of consumption and investment? Present your arguments on a graph.

16. Give the formula for the function of planned expenses at the macroeconomic level.

17. Using the Keynes cross graph, explain the logic behind achieving macroeconomic equilibrium.

18. Under what conditions does the classical model of macroeconomic equilibrium operate?

19. What factors ensure classical macroeconomic equilibrium?

20. Give a graphical argument for the classical macroeconomic equilibrium model.

21. What is J. Keynes’s criticism of the provisions of the classical model of macroeconomic equilibrium?

22. What principles is the Keynesian model of macroeconomic equilibrium based on?