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supplysider
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7/9/2016 4:31:47 AM
Posted: 5 months ago
I am talking a macroeconomics course. One of the questions that was asked on a quiz was what would be affected by expansionary fiscal policy. The choices were aggregate demand, long run aggregate supply , short run aggregate supply, or all 3. The answer considered correct was only aggregate demand. This seems very odd to me. Isn't the whole point of supply-side economics to change the supply curves? Why else would one attempt supply side solutions to the economy when they were deemed necessary as in the 1980s, then as a means other than demand side measures?
bballcrook21
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7/9/2016 5:05:05 AM
Posted: 5 months ago
At 7/9/2016 4:31:47 AM, supplysider wrote:
I am talking a macroeconomics course. One of the questions that was asked on a quiz was what would be affected by expansionary fiscal policy. The choices were aggregate demand, long run aggregate supply , short run aggregate supply, or all 3. The answer considered correct was only aggregate demand. This seems very odd to me. Isn't the whole point of supply-side economics to change the supply curves? Why else would one attempt supply side solutions to the economy when they were deemed necessary as in the 1980s, then as a means other than demand side measures?

Expansionary fiscal policy is simply governments trying to increase aggregate demand. The reason for this is because the two facets of an expansionary fiscal policy is either the increasing of government spending to stimulate demand (through redistribution or stimulus) or through lowering taxes, which gives people more disposable income.

Either way, expanding fiscal policy has the goal/effect of higher aggregate demand.
If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand. - Friedman

Underlying most arguments against the free market is a lack of belief in freedom itself. -Friedman

Nothing is so permanent as a temporary government program. - Friedman

Society will never be free until the last Democrat is strangled with the entrails of the last Communist.
supplysider
Posts: 9
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7/9/2016 5:49:00 AM
Posted: 5 months ago
Thank you very much!
That is what one of my tutors said.

What I am not sure about is why aggregate supply is also not considered part of this.
Expansionary fiscal policy can also include tax cuts. Tax cuts would increase aggregate demand. Wouldn't tax cuts also increase aggregate supply?

The first tutor that I asked about this admitted that expansionary (fiscal) policy that reduced taxes would change aggregate supply. {Seems as though there might be a conspiracy against the supply side interpretation}

Wasn't tax reduction the centre of the expansionary fiscal policy of the 1980s?
The motivation for this was to increase aggregate supply?
Growth could be achieved without inflation.

I suppose on a site called debate.org there might be a few people who would be interested in debate.org supply side economics. Our textbook has a generally favorable interpretation of supply-side economics. It suggests that in the last round of expansionary fiscal stimulus in the US in 2008, the tax cuts (working through a supply of investment mechanism) had a greater relative benefit than did the spending measures which accounted for totaled approximately $500 billion.
Benshapiro
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7/9/2016 8:50:28 PM
Posted: 5 months ago
At 7/9/2016 5:49:00 AM, supplysider wrote:
Thank you very much!
That is what one of my tutors said.

What I am not sure about is why aggregate supply is also not considered part of this.
Expansionary fiscal policy can also include tax cuts. Tax cuts would increase aggregate demand. Wouldn't tax cuts also increase aggregate supply?

The first tutor that I asked about this admitted that expansionary (fiscal) policy that reduced taxes would change aggregate supply. {Seems as though there might be a conspiracy against the supply side interpretation}

Wasn't tax reduction the centre of the expansionary fiscal policy of the 1980s?
The motivation for this was to increase aggregate supply?
Growth could be achieved without inflation.

I suppose on a site called debate.org there might be a few people who would be interested in debate.org supply side economics. Our textbook has a generally favorable interpretation of supply-side economics. It suggests that in the last round of expansionary fiscal stimulus in the US in 2008, the tax cuts (working through a supply of investment mechanism) had a greater relative benefit than did the spending measures which accounted for totaled approximately $500 billion.

Most of the Keynesian crap they teach you is false. It's subverted under the philosophy of big-government Marxism.
bballcrook21
Posts: 4,468
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7/9/2016 8:51:28 PM
Posted: 5 months ago
At 7/9/2016 8:50:28 PM, Benshapiro wrote:
At 7/9/2016 5:49:00 AM, supplysider wrote:
Thank you very much!
That is what one of my tutors said.

What I am not sure about is why aggregate supply is also not considered part of this.
Expansionary fiscal policy can also include tax cuts. Tax cuts would increase aggregate demand. Wouldn't tax cuts also increase aggregate supply?

The first tutor that I asked about this admitted that expansionary (fiscal) policy that reduced taxes would change aggregate supply. {Seems as though there might be a conspiracy against the supply side interpretation}

Wasn't tax reduction the centre of the expansionary fiscal policy of the 1980s?
The motivation for this was to increase aggregate supply?
Growth could be achieved without inflation.

I suppose on a site called debate.org there might be a few people who would be interested in debate.org supply side economics. Our textbook has a generally favorable interpretation of supply-side economics. It suggests that in the last round of expansionary fiscal stimulus in the US in 2008, the tax cuts (working through a supply of investment mechanism) had a greater relative benefit than did the spending measures which accounted for totaled approximately $500 billion.

Most of the Keynesian crap they teach you is false. It's subverted under the philosophy of big-government Marxism.

Truth
If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand. - Friedman

Underlying most arguments against the free market is a lack of belief in freedom itself. -Friedman

Nothing is so permanent as a temporary government program. - Friedman

Society will never be free until the last Democrat is strangled with the entrails of the last Communist.
Mr.Wonderful
Posts: 98
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7/10/2016 1:17:15 AM
Posted: 5 months ago
At 7/9/2016 4:31:47 AM, supplysider wrote:
I am talking a macroeconomics course. One of the questions that was asked on a quiz was what would be affected by expansionary fiscal policy. The choices were aggregate demand, long run aggregate supply , short run aggregate supply, or all 3. The answer considered correct was only aggregate demand. This seems very odd to me. Isn't the whole point of supply-side economics to change the supply curves? Why else would one attempt supply side solutions to the economy when they were deemed necessary as in the 1980s, then as a means other than demand side measures?

Correct answer is "aggregate demand" because when the government creates an expansionary fiscal policy means they are loosening the reins on lending. A good example of this sort of policy is the housing crisis that resulted from sub-prime loans and junk-bond mortgages. See also Fannie Mae and Freddy Mac. Aggregate demand was created because more people could qualify for a mortgage than could when stricter lending regulations were in place so after these were relaxed the demand for homes skyrocketed while supply struggled to catch up until the point when the bubble burst and more stringent fiscal policy came back into play resulting in much higher supply than demand diminishing the value of homes considerably. Probably the most infamous recent example...
supplysider
Posts: 9
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7/10/2016 4:58:56 PM
Posted: 5 months ago
This is so confusing! When I first requested clarification about this I was told that the expansionary fiscal policy considered in the question should be assumed not to involve tax changes. The first tutor admitted that a tax decrease would create supply side changes. This was not obvious from the wording of the question. After asking about this again I was told that expansionary fiscal policy only affects AD.

My online sources defined expansionary fiscal policy to include an increase in government spending and/or a decrease in taxes.

An article entitled A Macroeconomic Approach to Teaching Supply-Side Economics in the Journal of Economic Education Spring 1994;25,1 addressed this question and is very clear that tax cuts increase aggregate supply: "... this tax cut will increase aggregate supply."

In another economics textbook I saw a shift in the LRAS due to supply-side interventions. "Supply-side measures will lead to shifts to the right in both the LRAS and AD..."

Even my current textbook agrees that expansionary fiscal policy can change aggregate supply through tax changes.

"Most discussion of discretionary fiscal stimulus focuses on its effects on aggregate demand, but you've seen that taxes influence aggregate supply."

"... taxes influences aggregate supply. ... These supply side effects of a tax cut occur along with the demand side effects and are probably much larger than the demand side effects."

What seems to have happened is that supply side theory is now becoming more accepted by the economics community. The textbook made some quite strong statements in favor of a supply side view. The problem is that this new viewpoint in the textbook has not updated in the test bank questions.

The textbook then goes on to discuss the $800 billion Stimulus plan from 2008. An Administration economist is quoted as saying that the multiplier for the $500 billion spending stimulus could be as high as 1.5. This would mean the $500 billion would magically convert into $750 billion. The government economist admitted that the 1.5 never happened, though intimated that the economic slump would have even more severe had this stimulus not been applied. {This cover could always be used whenever you have no idea what you are doing.}

However, other economists with a more supply side orientation are quoted as saying they felt the spending multiplier could be as low as 0.3. This would mean that the $500 billion would tragically transform into only $150 billion.

So amazingly the macroeconomists can only guesstimate within a confidence interval that exceeds 100% or in this instance over $500 billion what the macroeconomic effects of the spending stimulus would be.

There was also a $300 billion tax cut and they seemed to be even more divided on what the macroeconomic effect of this would be. The supplier siders called it as a multiplier of 6, so the $300 billion should convert to $1.8 trillion.

Why aren't people outraged by this? Negligently throwing around trillions of dollars of taxpayers money could be understood as a criminal offense: a state sanctioned economic crime. Could this be brought to the UN as a Crime against Humanity? It is not clear to me why kleptocracy has not been characterized as a crime; in some third world nations it most surely has.

I found this discussion in my textbook to be truly alarming! Do macroeconomists truly have no clue what they are doing? Do they blindly attempt to influence the macroeconomy without any precise idea of what they are doing? If Keynesian economics could be somehow proven empirically to be true then perhaps I could grudgingly accept it. The political argument could then be based upon hard evidence. As it is now, Keynesians and supply siders are almost totally in the clear from suggestions that they might be wrong simply because macroeconomic science appears no where near to answering this question.

I asked my tutors: Do macroeconomists have any idea what they are doing? Their response was: Not really, the economy is very .... complex.

What I find disappointing is that monetary policy is more of a science. In my textbook
a figure is shown of the relationship between interest rate changes and the one year later GDP growth. It is startling. The two time series are almost completely in sync. Even though the economy is indeed quite complicated, by simply manipulating interest rates you can control the economy almost exactly one year down the road. Wouldn't be that many good chair throwing arguments with monetary policy. There would be a lot more with Supply-side versus Keynesians.
BillSPrestonEsq
Posts: 140
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7/10/2016 10:21:53 PM
Posted: 5 months ago
At 7/10/2016 4:58:56 PM, supplysider wrote:
This is so confusing! When I first requested clarification about this I was told that the expansionary fiscal policy considered in the question should be assumed not to involve tax changes. The first tutor admitted that a tax decrease would create supply side changes. This was not obvious from the wording of the question. After asking about this again I was told that expansionary fiscal policy only affects AD.

My online sources defined expansionary fiscal policy to include an increase in government spending and/or a decrease in taxes.

An article entitled A Macroeconomic Approach to Teaching Supply-Side Economics in the Journal of Economic Education Spring 1994;25,1 addressed this question and is very clear that tax cuts increase aggregate supply: "... this tax cut will increase aggregate supply."

In another economics textbook I saw a shift in the LRAS due to supply-side interventions. "Supply-side measures will lead to shifts to the right in both the LRAS and AD..."

Even my current textbook agrees that expansionary fiscal policy can change aggregate supply through tax changes.

"Most discussion of discretionary fiscal stimulus focuses on its effects on aggregate demand, but you've seen that taxes influence aggregate supply."

"... taxes influences aggregate supply. ... These supply side effects of a tax cut occur along with the demand side effects and are probably much larger than the demand side effects."

What seems to have happened is that supply side theory is now becoming more accepted by the economics community. The textbook made some quite strong statements in favor of a supply side view. The problem is that this new viewpoint in the textbook has not updated in the test bank questions.

The textbook then goes on to discuss the $800 billion Stimulus plan from 2008. An Administration economist is quoted as saying that the multiplier for the $500 billion spending stimulus could be as high as 1.5. This would mean the $500 billion would magically convert into $750 billion. The government economist admitted that the 1.5 never happened, though intimated that the economic slump would have even more severe had this stimulus not been applied. {This cover could always be used whenever you have no idea what you are doing.}

However, other economists with a more supply side orientation are quoted as saying they felt the spending multiplier could be as low as 0.3. This would mean that the $500 billion would tragically transform into only $150 billion.

So amazingly the macroeconomists can only guesstimate within a confidence interval that exceeds 100% or in this instance over $500 billion what the macroeconomic effects of the spending stimulus would be.

There was also a $300 billion tax cut and they seemed to be even more divided on what the macroeconomic effect of this would be. The supplier siders called it as a multiplier of 6, so the $300 billion should convert to $1.8 trillion.

Why aren't people outraged by this? Negligently throwing around trillions of dollars of taxpayers money could be understood as a criminal offense: a state sanctioned economic crime. Could this be brought to the UN as a Crime against Humanity? It is not clear to me why kleptocracy has not been characterized as a crime; in some third world nations it most surely has.

I found this discussion in my textbook to be truly alarming! Do macroeconomists truly have no clue what they are doing? Do they blindly attempt to influence the macroeconomy without any precise idea of what they are doing? If Keynesian economics could be somehow proven empirically to be true then perhaps I could grudgingly accept it. The political argument could then be based upon hard evidence. As it is now, Keynesians and supply siders are almost totally in the clear from suggestions that they might be wrong simply because macroeconomic science appears no where near to answering this question.

I asked my tutors: Do macroeconomists have any idea what they are doing? Their response was: Not really, the economy is very .... complex.

What I find disappointing is that monetary policy is more of a science. In my textbook
a figure is shown of the relationship between interest rate changes and the one year later GDP growth. It is startling. The two time series are almost completely in sync. Even though the economy is indeed quite complicated, by simply manipulating interest rates you can control the economy almost exactly one year down the road. Wouldn't be that many good chair throwing arguments with monetary policy. There would be a lot more with Supply-side versus Keynesians.

I consider myself of the Austrian school and understand your frustration. I read your question yesterday and spent about 4 hours reading and watching lectures on AS-AD curves to see if I could help. No... no I am more confused now about the 'correct' answer. I read and listened to a lot of contradictory information concerning both the definition of the AS and how it is affected. Really frustrating. It seems that many of the same inputs are used for both the AD and AS curves, or at least they overlap. Not to mention the different schools of thought with different AS curves and different theories supporting them. Some do make some sense but overall it seems like a very poor way to both measure and predict economic trends in my opinion.
supplysider
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7/12/2016 1:20:08 AM
Posted: 5 months ago
BillSPrestonEsq, thank you for joining the discussion.

Supply-side economics has become so mired in partisan politics that it nearly impossible to even start an academic conversation about it. This might be one of those times where my tutors know the answer, though feel the students can not handle the truth.

It looks like there might be a heavy duty Economics Department meeting going on trying to resolve this question. The question has been sitting in their in-box for quite a while now and I don't think anyone wants to pick it up and answer it.

My economics text and probably most others has countless examples of the AD curve shifting. There is an entirely natural tendency after taking an ECON100 course to reflexively move that AD curve. It is not as obvious to move the AS curve. There is not a single example in my textbook of moving the AS curve even in the section on supply-side economics in which it is noted:

"...These supply-side effects of a tax cut occur along with the demand-side effects and are probably much larger than the demand-side effects
"

Education is just another form of brain washing. Making it all the more important when warping people's brain to warp them towards the right answer! I read about an supply-side expert who had written a book and was slammed on a TV debate by someone who had no conception of what supply side economics was!

Everyone listen in to my re-education re-warping on supply-side changes! The idea seems to be that you simply move the AS and LRAS to the right. When you do this you can have non-inflationary growth. It is magical! If you only shift the AD curve to the right past Potential Income, then you have actually achieved nothing. The AS curve is simply going to shift to the left as workers eventually gain higher wages, though at the same time real GDP has fallen! All you have done is removed an inflationary gap and returned to Potential Income at the expense of everyone being poorer.

This does not need to happen with supply-side approaches you can fill in the inflationary gap by simply shifting the AS curve. The economic boom that occurred in America in the 1990s might have been encouraged by the fiscal discipline during that decade and the supply side policies of the previous one.

More broadly we should also note large supply-side changes that have been occurring throughout the economy. For example, the ongoing movement towards globalization of our economy should mean that the AS curve is flattening out or shifting to the right. The notion that somehow we will hit inflationary limits to growth simply might not be an accurate reflection of a world in which over a billion people in China have entered into global supply chains.

I also suggested to a tutor that the techno-boom of the last 15 years has been a massive instance of a supply-side shift. I now have access through my online university to a 20,000 journal online reference library for free (with my course registration)! I can go onto pubmed and read a huge number of journals with open access policies (There is ongoing discussion in the scientific community to open the entire scientific literature to an open access model). Not to mention genomics, infotech, ... . Supply-side changes has made me feel massively wealthier than I was even a few years ago. The only reason why you can't add $50,000 per year to everyone income is because technology has allowed us all these goodies without actually having to pay for them! My tutor did not disagree with this assessment.

I suspect that they'll be happy to see me finish the course. I have litigated nearly single demerit mark. Almost all my gripes have been resolved in my favor. For example, one question asked whether a sales tax creates a change in supply or demand. In a previous Economics course our textbook said that taxes can be viewed as essentially equivalent when they are applied to the buyer or the seller. If you put a bowl on the store's counter, if the buyer puts the tax in, then it is considered a demand change. If the seller puts in the tax, then it is considered a supply change.
From what I read online sales taxes can be structured in such a way that the buyer or seller can be understood to have put the money in the bowl.

Another disagreement that I had was with the magnitude of MPC when dissaving occurs. This was a tricky one, though I think that I have the right answer for this one.
Let's say that you have $20,000 in income and you are spending $25,000. You are dissaving by $5000. Most people would go with the idea that spending more than what you have means that you have a marginal propensity to consume that is higher than 1. However, this is not correct. The question is what is happening at the margin. What happens when the person with an income of $20,000 then makes $21,000?
What happens at the margin? Strangely, this person ( or more accurately MPC considers the entire economy) actually saves a part of the extra $1,000. This seems very counter-intuitive. However, when you look at what happened during the only American recorded instance of dissaving this is exactly what happened. At the absolute height of the Great Depression in 1933 when incomes finally started to increase, people were saving! The government was pleading with people to spend and not save their money. People's wealth had become so depleted that they needed to build it up again. It was quite surprising to find that the MPS for nearly every year throughout this period was positive. Tutors did not buy it!

Only other question I have is about consumption. One of the assignment questions asked whether a highway was investment, consumption or both. Answer: Both. I noticed recently in my course materials that a bridge was considered to be an investment. My thinking now is that some highways are structurally equivalent to a bridge. In fact there are highly expensive highway projects that are entirely bridges! If a highway can be shown to equate with a bridge then I could use the course reference that said that a bridge is an investment!
BillSPrestonEsq
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7/12/2016 2:08:17 AM
Posted: 5 months ago
At 7/12/2016 1:20:08 AM, supplysider wrote:

I am impressed. I am glad that there are young people questioning and challenging this system. I hope there are more of you! A lot of good observations there.
I have been interested in economics for about ten years now but have no formal education. I have probably spent about 5 or 6 hours now since reading your post trying to figure out what the AD-AS model is good for, if anything, and how to use it.
I actually wrote a reply earlier but decided not to post it as I need more time to think about this model. But, I did copy it, so now I'm just going to post it for the hell of it.
Since I wrote this I have thought about it more thoroughly and hopefully I will come to some reasonable conclusion in the next few days.

At 7/10/2016 4:58:56 PM, supplysider wrote:
This is so confusing! When I first requested clarification about this I was told that the expansionary fiscal policy considered in the question should be assumed not to involve tax changes. The first tutor admitted that a tax decrease would create supply side changes. This was not obvious from the wording of the question. After asking about this again I was told that expansionary fiscal policy only affects AD.

My online sources defined expansionary fiscal policy to include an increase in government spending and/or a decrease in taxes.

An article entitled A Macroeconomic Approach to Teaching Supply-Side Economics in the Journal of Economic Education Spring 1994;25,1 addressed this question and is very clear that tax cuts increase aggregate supply: "... this tax cut will increase aggregate supply."

In another economics textbook I saw a shift in the LRAS due to supply-side interventions. "Supply-side measures will lead to shifts to the right in both the LRAS and AD..."

Even my current textbook agrees that expansionary fiscal policy can change aggregate supply through tax changes.

"Most discussion of discretionary fiscal stimulus focuses on its effects on aggregate demand, but you've seen that taxes influence aggregate supply."

"... taxes influences aggregate supply. ... These supply side effects of a tax cut occur along with the demand side effects and are probably much larger than the demand side effects."


I think we are both confused about the same thing and my conclusion is this, but I could be way off here, if anyone can help me out with this that would be great.
Some explain changes in the SRAS or the quote you gave above, "..this tax cut will increase aggregate supply." But other explanations I read or listened to defined SRAS as only a curve. That makes sense to me. That way the only shift is in the AD curve while the SRAS dictates how far the AD curve will shift left or right. The only inputs should be Price Level on the vertical axis and Real GDP on the horizontal axis. The SRAS curve should remain static in this model and the price level moving up and down the curve. Real GDP is defined as Y (GDP) + C (consumption) + I (gross investment) + G (government spending) + (X - M) (net exports).
Those are the inputs which should predict price levels based on the shape of the SRAS curve by shifting the AD curve left or right. Or if there is a change in price level that should also shift the AD curve along the SRAS curve. The LRAS 'curve' as I understand it is static and represents a 'natural' level of production in the economy. And in the long term wages and cost are flexible and so adjust to reach this sort of equilibrium of production. At least that's what I have made of it. I have never been too interested in these macro models and am obviously not very experienced with them.
The theories to why the curve is the shape it is does make some sense ( misperception theory, sticky wages/cost theory). There just seems to be different conclusions on what shape the curve actually is based the school of thought. I will say Keynes did make a point with one thing at least, in that wages are sticky downward. That does make sense to me. The rest of Keynesian economic thought is completely bogus from my point of view. I am more of a classical guy myself.

I found this discussion in my textbook to be truly alarming! Do macroeconomists truly have no clue what they are doing? Do they blindly attempt to influence the macroeconomy without any precise idea of what they are doing? If Keynesian economics could be somehow proven empirically to be true then perhaps I could grudgingly accept it. The political argument could then be based upon hard evidence. As it is now, Keynesians and supply siders are almost totally in the clear from suggestions that they might be wrong simply because macroeconomic science appears no where near to answering this question.


It sure does seem that way doesn't it? That economists have no idea what they are talking about? At least the one's running the show, I don't think that is a mistake. Keynesians have a opinion that is very convenient for politicians and the FED.
I have not mapped out prices vs. GDP on a graph and compared them to the model, it seems easy enough. Boring as hell and time consuming sure, but I haven't actually tried searching for it either. One would assume this has already been done, I mean, that would be ridiculous if it hasn't.

I asked my tutors: Do macroeconomists have any idea what they are doing? Their response was: Not really, the economy is very .... complex.

What I find disappointing is that monetary policy is more of a science. In my textbook
a figure is shown of the relationship between interest rate changes and the one year later GDP growth. It is startling. The two time series are almost completely in sync. Even though the economy is indeed quite complicated, by simply manipulating interest rates you can control the economy almost exactly one year down the road. Wouldn't be that many good chair throwing arguments with monetary policy. There would be a lot more with Supply-side versus Keynesians.

Not really specific to your comments but this is a great video about monetary and fiscal policy. https://www.youtube.com...
supplysider
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7/15/2016 4:25:32 AM
Posted: 4 months ago
Thank you Bill for your considered reply.

I have gotten word back from my tutors on this (a third time) one and while they agreed that LRAS and SAS would shift with expansionary fiscal policy it should not be assumed that the expansionary fiscal policy described in the question is that type of expansionary fiscal policy. They suggested that I only assume expansionary fiscal policy leads to shifts in the AD curve. I found this clarification to be very ..... clarifying? I really admire that they are sticking to a logically inconsistent position. At least sticking to the wrong answer is consistent.

I think the AD-AS model at the very least is good for keeping us out of another Great Depression scenario. The policy mistakes made at that time were simply astounding. I have doubts about the rationality of Keynesian economics, though at least it would not floor the economy into reverse. It might not be an optimal economic strategy, though at least it is not evil genius bad.

From what I remember the Phillips curve determines the speed at which the SRAS shifts. The AD and AS curves should be mostly independent. Consider that with supply and demand curves different factors for to sellers and buyers are defining each of these relationships.

Expansionary fiscal policy could have a mix of economic effects. For example, the rebuttal from some Keynesian economists to the 1980s tax cuts was that such tax cuts would also have substantially increased AD.

In terms of the assumptions underlying AS and AS I would assume that it is another one of those economic concepts that is ceteris paribus. We are only seeing Price Level and Real GDP as named variables, though this results from simply waving a magic wand and making everything else disappear. So for aggregate supply I would guess there is nearly an infinity of other variables that could be thrown into the function. GDP in China, International Trade Policy, exchange rates ... there would be quite a few. It is very handy to know the phrase ceteris paribus. Whenever life is getting a little too intense, ceteris paribus is a good one to throw out there.

Funnily enough, along the SAS curve the money wage rate is held constant (ceteris paribus). This is the driving motivation for companies to expand production (that is why the SAS curve is upward sloping). As the price level increases and the revenue that production generates is increasing, labour costs are held constant (this is assuming that workers have negotiated a contract that binds them to a fixed wage).

Further to the point about ceteris paribus I am fairly impressed that economics is one of the only academic subjects that readily leaps to mind that even tried to articulate a function of probably infinite dimension. Almost every other subject that I can think of mathematics, physics... all try to keep functional relationships fairly tame. You might have a 3 or even perhaps a four dimensional relationship, though mostly functions are described so that they have some obvious physical form in a 3D projection. Economics creates this massive functional relationships and then after scaring their students silly pulls back and pleads ceteris paribus.

One of the big insights that emerges from introductory economics is that the labeled axes do not result in shifts of curves, instead a movement along a curve results. So with supply/demand when price changes the supply/demand relationship has not changed: there is no shift. Changing price means that you move along the existing curve. Ceteris paribus is not broken. It is only when ceteris paribus is broken that shift occurs. When one of the infinity of variables other than then the labeled axes change then a curve will shift. The idea would be f(1,2,c,c,c,c,c,)--> f(2,3,c,c,c,c,c), where the c's are a few of the many variables being held constant lets you move along the existing curve without shadows from other dimensions disrupting the entire supply/demand relationship.

Something also to realize that LRAS can shift due to economic growth. This is the only supply shift that is shown in our textbook. This is a natural supply shift that results from changes in Potential Income as a result of investment in capital. Basically an inherent supply-side effect. The textbook says that the constant shifting of LRAS, AD, and SRAS creates a level of instability in the economic system which creates a business cycle.

Yes, and that was the second part of the labour equation. The economy is pulled up along the SRAS as firms make more money with a rising price level and fixed labor wage rates through to an inflationary gap. Workers then demand higher wages which pushes the SRAS leftward and moves you back to the LRAS with a higher price level. Supply-side approaches offer the possibility of moving beyond the limiting point of a somewhat limiting Potential Income. It does seem a little bit confusing to label LRAS as a long run AS when Potential Income is in fact almost constantly increasing. When you look at the curve for Potential Income it is typically shown as growing at an almost perfectly constant rate. All the messy things in the real economy such as changing inventories, etc, just disappear.

I was very surprised how big the knowledge uncertainty gap is here. It is basically half a trillion stimulus spending could go a trillion dollars either up or down in terms of a multiplier. I suggested to my tutors that perhaps what should be done to resolve this is to do some covert macroeconomic ops. Throw a billion into the economy quietly and see what happens. Do this systematically over a few years to see what resulted. The monetary authorities decide on what they should do to interest rates every few weeks and now they have a very good model of what this does to the real economy. With stimulus packages they only do this when there is a crisis so they really have almost no clue what will happen when you throw around a trillion or so.

This entire discussion about supply side approaches has substantial economic significance as the FED even now is looking at an unemployment rate that would typically be described as below the natural rate and wondering whether the economy needs to cool down a bit. It would be amazing if the supply-side could simply remove the speed limits and allow unemployment to continue falling-- why should success be allowed to be the problem, ceteris paribus?
BillSPrestonEsq
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7/16/2016 2:07:47 AM
Posted: 4 months ago
Here's why this model makes no sense: Price Level is on one axis and the 'demand' on the other axis is also quantified as a price. Using Real GDP does adjust for inflation which should make it a slightly more accurate way to measure the quantity of goods being sold, but it's simply not a quantity, it's a price. Price on one axis and price on the other. It may have very limited uses in the most crude possible estimations and may be worth noting but could actually be useful if GDP wasn't used. Really GDP is a terrible way to measure the health or growth of the economy. It is an even more terrible way to measure the quantity or quality of goods and services sold.
kmhunt
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7/16/2016 2:36:05 AM
Posted: 4 months ago
At 7/16/2016 2:07:47 AM, BillSPrestonEsq wrote:
Here's why this model makes no sense: Price Level is on one axis and the 'demand' on the other axis is also quantified as a price. Using Real GDP does adjust for inflation which should make it a slightly more accurate way to measure the quantity of goods being sold, but it's simply not a quantity, it's a price. Price on one axis and price on the other. It may have very limited uses in the most crude possible estimations and may be worth noting but could actually be useful if GDP wasn't used. Really GDP is a terrible way to measure the health or growth of the economy. It is an even more terrible way to measure the quantity or quality of goods and services sold.

Bill, my degree is in Economics and I have studied it for almost 10 years after graduating. I also am a fan of Austrian school of Economics (Right now I'm reading The Road to Serfdom by F.A. Hayek) and don't really like Keynesian policy for some of the reasons mentioned above. However if you want a good read check "Principles of Macroeconomics" by Gregory Mankiw. We used it in my undergraduate studies and it was direct to the point and provided lots of exercises which students could relate to. It goes into Classical Theory as well as Keynesian and will provide a solid foundation in different schools of thought.
kmhunt
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7/16/2016 3:46:38 AM
Posted: 4 months ago
At 7/15/2016 4:25:32 AM, supplysider wrote:
Thank you Bill for your considered reply.

I have gotten word back from my tutors on this (a third time) one and while they agreed that LRAS and SAS would shift with expansionary fiscal policy it should not be assumed that the expansionary fiscal policy described in the question is that type of expansionary fiscal policy. They suggested that I only assume expansionary fiscal policy leads to shifts in the AD curve. I found this clarification to be very ..... clarifying? I really admire that they are sticking to a logically inconsistent position. At least sticking to the wrong answer is consistent.

I think the AD-AS model at the very least is good for keeping us out of another Great Depression scenario. The policy mistakes made at that time were simply astounding. I have doubts about the rationality of Keynesian economics, though at least it would not floor the economy into reverse. It might not be an optimal economic strategy, though at least it is not evil genius bad.

From what I remember the Phillips curve determines the speed at which the SRAS shifts. The AD and AS curves should be mostly independent. Consider that with supply and demand curves different factors for to sellers and buyers are defining each of these relationships.

Expansionary fiscal policy could have a mix of economic effects. For example, the rebuttal from some Keynesian economists to the 1980s tax cuts was that such tax cuts would also have substantially increased AD.

In terms of the assumptions underlying AS and AS I would assume that it is another one of those economic concepts that is ceteris paribus. We are only seeing Price Level and Real GDP as named variables, though this results from simply waving a magic wand and making everything else disappear. So for aggregate supply I would guess there is nearly an infinity of other variables that could be thrown into the function. GDP in China, International Trade Policy, exchange rates ... there would be quite a few. It is very handy to know the phrase ceteris paribus. Whenever life is getting a little too intense, ceteris paribus is a good one to throw out there.

Funnily enough, along the SAS curve the money wage rate is held constant (ceteris paribus). This is the driving motivation for companies to expand production (that is why the SAS curve is upward sloping). As the price level increases and the revenue that production generates is increasing, labour costs are held constant (this is assuming that workers have negotiated a contract that binds them to a fixed wage).

Further to the point about ceteris paribus I am fairly impressed that economics is one of the only academic subjects that readily leaps to mind that even tried to articulate a function of probably infinite dimension. Almost every other subject that I can think of mathematics, physics... all try to keep functional relationships fairly tame. You might have a 3 or even perhaps a four dimensional relationship, though mostly functions are described so that they have some obvious physical form in a 3D projection. Economics creates this massive functional relationships and then after scaring their students silly pulls back and pleads ceteris paribus.

One of the big insights that emerges from introductory economics is that the labeled axes do not result in shifts of curves, instead a movement along a curve results. So with supply/demand when price changes the supply/demand relationship has not changed: there is no shift. Changing price means that you move along the existing curve. Ceteris paribus is not broken. It is only when ceteris paribus is broken that shift occurs. When one of the infinity of variables other than then the labeled axes change then a curve will shift. The idea would be f(1,2,c,c,c,c,c,)--> f(2,3,c,c,c,c,c), where the c's are a few of the many variables being held constant lets you move along the existing curve without shadows from other dimensions disrupting the entire supply/demand relationship.

Something also to realize that LRAS can shift due to economic growth. This is the only supply shift that is shown in our textbook. This is a natural supply shift that results from changes in Potential Income as a result of investment in capital. Basically an inherent supply-side effect. The textbook says that the constant shifting of LRAS, AD, and SRAS creates a level of instability in the economic system which creates a business cycle.

Yes, and that was the second part of the labour equation. The economy is pulled up along the SRAS as firms make more money with a rising price level and fixed labor wage rates through to an inflationary gap. Workers then demand higher wages which pushes the SRAS leftward and moves you back to the LRAS with a higher price level. Supply-side approaches offer the possibility of moving beyond the limiting point of a somewhat limiting Potential Income. It does seem a little bit confusing to label LRAS as a long run AS when Potential Income is in fact almost constantly increasing. When you look at the curve for Potential Income it is typically shown as growing at an almost perfectly constant rate. All the messy things in the real economy such as changing inventories, etc, just disappear.

I was very surprised how big the knowledge uncertainty gap is here. It is basically half a trillion stimulus spending could go a trillion dollars either up or down in terms of a multiplier. I suggested to my tutors that perhaps what should be done to resolve this is to do some covert macroeconomic ops. Throw a billion into the economy quietly and see what happens. Do this systematically over a few years to see what resulted. The monetary authorities decide on what they should do to interest rates every few weeks and now they have a very good model of what this does to the real economy. With stimulus packages they only do this when there is a crisis so they really have almost no clue what will happen when you throw around a trillion or so.

This entire discussion about supply side approaches has substantial economic significance as the FED even now is looking at an unemployment rate that would typically be described as below the natural rate and wondering whether the economy needs to cool down a bit. It would be amazing if the supply-side could simply remove the speed limits and allow unemployment to continue falling-- why should success be allowed to be the problem, ceteris paribus?

The way I describe Keynesian vs Hayekian policy to a lamen is asking the question "How do you take care of a drunkard's hangover?" Keynesian policy would be giving him more alcohol while Hayek would tell him to sweat it out and while it would suck initially you will be much better in the long run. Keynes believed that it is the government's role to subsidize the lack of public spending in a recession. This eases the tension initially but without liquidation of mal-investment, labor etc etc you are only pro-longing the inevitable.

We will be facing another recession soon. When we decided to bailout banks and businesses in 2008 in essence that money went to square up banks that made bad decisions and should have gone insolvent while other businesses suffered. With too much easy credit people are de-incentivized for private savings and instead excessively consume. Keynes and Hayek agreed that government 'hoarding of money' was inherently bad and caused deflation, however when there is private savings that money (in the bank) is loaned out and used for investment which creates production and jobs.
supplysider
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7/16/2016 8:58:45 PM
Posted: 4 months ago
Welcome kmhunt!
Glad to have you on the thread to help clear up some of the confusions that can arise when talking about macroeconomics.

I sort of wanted to stay away from Mankiw when discussing supply-side because of the comments in the 3rd Edition of Principles of Macroeconomics entitled Charlatans and Cranks ("fad economics") concerning supply-side economics (specifically the Laffer Curve) :

"... People on fad diets put their health at risk but rarely achieve the permanent weight loss they desire. Similarly, when politicians rely on the advice of charlatans and cranks, they rarely get the desirable results they anticipate."

https://en.wikipedia.org...

This likely is not an accurate portrayal of the totality of his supply-side views, though I did not want the thread to devolve into confusion over this issue.

As much as supply-side economics has essentially become persona non grata politically, I am inspired by the potential far-reaching economic benefits of such an approach. Non-inflationary growth without having to move back to potential when the economy is doing too well? Sounds great!

We are now right at the point in which the current economic paradigm is stuck in a corner. Unemployment has reached the natural rate. Seemingly the only move is to slow down the game and raise rates to prevent triggering inflation. I would love to see a supply-side response.

Why not giv'er and push the economy past full employment? Doing this would create a temporary wage push. A wave of technology innovation would result that would substitute capital for labor. The increased productivity of labor would result in higher wages. This process of overclocking the economy and allowing innovation to accommodate it would be a powerful way of getting around the conception of supply-side policies as simply about tax cuts.

There is so much empty money in the economy that resulted from the increase in the monetary base, one does worry that yet another speculative frenzy might be on the horizon when it reenters the real economy and simply bids up asset prices again. Creating a clear use for all the available investable low interest rate capital would seem to be a win all around.

One does not want to try to become too much of a macroeconomic trailblazer as one would not want to greatly increase the demand for psychotherapeutic services. For me this whole helicopter money proposal does greatly increase psychic stress, even still the helicopter approach appears to be approaching a lift off point: Australia did this during the 2008 crisis to good economic effect. Send everyone money and then offset it with open market purchases. Still seems nutty.

The below link does not dispute the economic benefits of "doing an airdrop", though it could become so intoxicating for governments that it could become the equivalent of curing the hangover by staying drunk ... forever. There is a certain appeal, though, in having the ability to end-run the banking system with a direct cash transfer to the public. Currently, this form of helicopter money creation is illegal.

Keynesianism would be right up there too and the crazometer.

https://www.weforum.org...
someloser
Posts: 1,377
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7/17/2016 7:30:54 AM
Posted: 4 months ago
At 7/9/2016 8:50:28 PM, Benshapiro wrote:
Most of the Keynesian crap they teach you is false. It's subverted under the philosophy of big-government Marxism.
Kenesian economics have almost nothing to do with Marxism lol.

And I say this as someone who finds it to be the most obnoxious economic school on the face of the earth.
Ego sum qui sum. Deus lo vult.

"America is ungovernable; those who served the revolution have plowed the sea." - Simon Bolivar

"A healthy nation is as unconscious of its nationality as a healthy man of his bones. But if you break a nation's nationality it will think of nothing else but getting it set again." - George Bernard Shaw
supplysider
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9/24/2016 3:40:14 AM
Posted: 2 months ago
Just received my grade for the macroeconomics course and I did GREAT!

Really enjoyed the course, though the underlying premise of governments trying to drive the economy with monetary and fiscal policy still seems disturbing to me.

Shouldn't the lesson of the Great Depression have been that governments really do not know what they are doing with respect to macroeconomic control? Why is it that whenever governments FAIL large they interpret this as a great opportunity to become even more involved in some activity. It would have been as if an epic fail in my macroeconomics course was some clear signal that I should be appointed to manage the national economy.

I have been receiving notes from my school that they want me to move forward with my business studies. I am just so freaked out by the underlying assumptions being made in macroeconomics. While I have shown high level understanding of macro as shown from my course results, I really do not have high level belief in macro. I have just not yet mastered the Orwellian genius of fully believing in the doublethink.

One great practical result of the course is that I can now observe the deliberations of the Fed and have insight and an opinion on where they should go with their monetary policy. Clearly the US economy is very near or below its natural unemployment rate. A rate cut now does not seem unreasonable. However, I would tend to think that a policy of giving 'er might be in order. One point from the course that I am little fuzzy on, is why in a highly interconnected global economy there is such a focus on domestic employment markets. Why not just rev the US economy and let China or other nations step up and help absorb the demand and thus avoiding the predictable domestic inflation push? I am sure the Fed has substantial macroeconomic insight and research resources and the answer is that unacceptable inflation would result, though I would still want to push the accelerator and watch as the labor economy adjusted to such a state (for example, by introducing new labor saving technology). This approach if it were successful would achieve lower unemployment rates, higher productivity and higher wages for workers. Seems like a risk worth taking.
supplysider
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12/7/2016 5:26:49 PM
Posted: 2 days ago
With the new administration close to taking office, their forthcoming macroeconomic policy is greatly anticipated. I wonder if they will stay with conventional macroeconomic thinking and increase interest rates in order to head off inflation. This would conventional policy, though as a reward for those who supported them perhaps they might choose to push the accelerator more than would typically be expected.