Lecture 6: Macromodel Exercises
Dr. Rajeev Dhawan Director
Given to the
EMBA 8400 Class Buckhead Center
April 17, 2009
1B: Monetary-Stimulus (Inflation) Experiment
When Money Growth Stops Slowly by 2017
• Rate of growth of the money supply is increased from 0% to 5% in 2009, and then kept at 5% until 2013, and then decreased slowly to 0% by 2017 (stays at 0% afterwards)
Money Supply
$5,000 $4,500 $4,000 $3,500
$ Billions
$3,000
$2,500 $2,000 $1,500 $1,000
$500
$-
2007
2008
2010
2011
2014
2015
2017
2018
2021
2022
2024
2025
2028
2029
2031
2032
2009
2012
2013
2016
2019
2020
2023
2026
2027
2030
2033
Years
Money Supply (Simulation) Money Supply (Base)
2034
2034 2033
2032 2031
2029
2028 2027
2026 2025
Money Supply Growth
2024 2023
2022
2020
2018
2017 2016
2015 2014
2013 2012
2011 2010
2009 2008
2007
6.0 5.0 4.0 3.0 2.0 1.0 0.0
Money Supply Growth (Base)
2019
Years
2021
Money Supply Growth (Simulation)
2030
(in Percentage %)
•
Inflation follows the money growth path, lagging behind at first but then overshooting on the way down. Inflation, however, is equal to the growth rate of money supply in the long-run
Money Supply Growth Vs. Inflation
7.0 6.0 5.0
(in Percentage %)
4.0 3.0 2.0 1.0 0.0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
-1.0 -2.0
Years
Inflation Money Supply Growth
•The real interest rate becomes cyclic. At first it drops which helps investment and then when it rises it hurts investment.
Real Interest Rate
4.3
(In Percentage %)
4.2 4.1 4.0
3.9 3.8 3.7 3.6 3.5 3.4
$ Billions
2007
2009
2011
Real Interest Rate (Simulation)
2013
2015
2017
2019
Years
2021
$1,030 Real Interest Rate (Base) $1,020
$1,010
2023
$1,040
$1,000 $990 $980 $970
$960
$950 $940
2025
2027
2029
2031
2033
Investment
2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Years
Investment (Simulation) Investment (Base)
Real Exchange Rate
2007 2008 2009 2013 2014 2015
2010 2011 2012 2016
1.200
Exports
2018 2019 2020 2024 2025 2026 2029 2030 2031
2017 2021 2022 2023 2027 2028 2032 2033
$1,785
1.000
$1,780 $1,775 $1,770
($ Billions)
(In Percentage %)
0.800 0.600 0.400 0.200
0.000
$1,765 $1,760 $1,755 $1,750 $1,745
$1,740 $1,735 Years
Years
Real Exchange Rate (Simulation)
Real Exchange Rate (Base)
Exports (Simulation)
Exports (Base)
Imports
$2,040 $2,030 $2,020
$ Billions
$2,010 $2,000 $1,990 $1,980 $1,970 Years
Imports (Simulation) Imports (Base)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
2034
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
• Real GDP shoots above the base case values, so that there is a boom in the economy in the short-run. In the long-run, once the prices adjust completely, the economy is back to its potential GDP
GDP
$7,150 $7,100
Unemployment Drops
$7,050
$ Billions
$7,000 $6,950 $6,900
Unemployment Rises
$6,850 $6,800
2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Years
GDP (Simulation) GDP (Base)
1C: Monetary-Stimulus (Inflation) Experiment When Money Growth Never Stops!
• Rate of growth of the money supply is increased from 0% to 5%. • This is done forever (till the end of simulation period in 2034!)
Money Supply
$14,000
$12,000
$10,000
$ Billions
$8,000 $6,000 $4,000 $2,000 $-
2007
2008
2010
2011
2014
2015
2017
2018
2021
2022
2024
2025
2028
2029
2031
2032
2009
2012
2013
2016
2019
2020
2023
2026
2027
2030
2033
Years
Money Supply (Simulation) Money Supply (Base)
2034
• Money Supply Growth Rate is a constant 5% forever starting in year 2007
Money Supply Growth
6.0
(in Percentage %)
5.0 4.0 3.0 2.0 1.0 0.0
2007
2008
2009
2010
2011
2012
Money Supply Growth (Base)
2013
2014
2015
2016
2017
2018
2019
Years
Money Supply Growth (Simulation)
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
•
Inflation follows the money growth path, lagging behind at first but then over-shooting on the way down. Inflation, however, is equal to the growth rate of money supply in the long-run
Money Supply Vs. Inflation
$14,000 $12,000 $10,000 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
Money Supply
$8,000 $6,000 $4,000 $2,000 $-
Year
Money Supply Inflation
Inflation
2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Real Interest Rate
4.2
(In Percentage %)
4.1 4.0 3.9 3.8 3.7 3.6 3.5
$ Billions
2007
2009
2011
Real Interest Rate (Simulation)
2013
2015
2017
2019
Years
Real Interest Rate (Base)
2021
2023
$1,040 $1,030
$1,020
$1,010 $1,000 $990 $980 $970
2025
2027
2029
2031
2033
Investment
2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Years
In vestmen t (Simulatio n ) In vestmen t (Base)
Comparison of Real and Nominal Interest Rates
Real Vs Nominal Interest Rate
12.0
10.0
(In Percentage %)
8.0
6.0
4.0
2.0
0.0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Real Interest Rate
2017
2018
2019
2020
Years
Nominal Interest Rate
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
• Real GDP shoots above the base case values, so that there is a boom in the economy in the short-run. In the long-run, once the prices adjust completely, the economy is back to the potential GDP
GDP vs GDP Potential
$7,150 $7,100 $7,050
$7,000
$ Billions
$6,950 $6,900 $6,850
2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
GDP
Years Potential GDP
Lessons From the Three Monetary (Inflation) Experiments
Money Supply Growth
6.0
(in Percentage %)
5.0 4.0 3.0 2.0 1.0 0.0
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031
1c 1b 1a
Years Money Growth (Base) Experiment 1-A Experiment 1-B Experiment 1-C
Inflation Response Depends on How Long Monetary Stimulus Lasts
Inflation
7.00 6.00 5.00
(In Percentage %)
4.00 3.00 2.00 1.00 0.00
2005 2007 2009 2011 2013
1c 1a
1b
2015 2017 2019 2021 2023 2025 2027 2029 2031
-1.00 -2.00 -3.00
Years Experiment 1-A Inflation (Base) Experiment 1-B Experiment 1-C
Interest Rate Overshooting Depends on How QUICKLY Monetary Growth Returns to Normal
Real Interest Rate
4.3 4.2
(In Percentage %)
4.1 4.0 3.9 3.8 3.7 3.6
1b
1c 1a
Experiment 1-A
2005
2007
2009
2011
Interest Rate (Base)
2013
2015
2017
Years
Experiment 1-B Experiment 1-C
2019
2021
2023
2025
2027
2029
2031
Depth of the Recession Depends Upon How Quickly the Monetary Stimulus is Withdrawn!
$7,150 $7,100 $7,050
GDP
1b
1c
$ Billions
$7,000 $6,950 $6,900 $6,850 $6,800 $6,750 $6,700
1a
Experiment 1-A
2005
2007
2009
2011
GDP (Base)
2013
2015
2017
Years
Experiment 1-B Experiment 1-C
2019
2021
2023
2025
2027
2029
2031
2a. Fiscal-Stimulus Policy Experiment
2a. Fiscal-Stimulus Policy Experiment
In this experiment real government spending is increased in steps of $100 billion higher from 2009 to 2012, and then spending stays elevated at that level forever. NO INCREASE IN TAX RATE: A deficit-financed war provides the historical context for large increases in government spending.
Government Spending
$1,400 $1,200 $1,000
$ Billions
$800 $600 $400 $200 $0
2007 2008 2009 2010
2011
2012
2013
Govt. Spending (Simulation)
2014
2015
2016
2017
2018
2019
2020
Years
Govt. Spending (Base)
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Government Spending and Tax Rate
Government Spending vs. Tax Rate
$1,400 $1,200 $1,000 $800 8.0% $600 6.0% $400 $200 $2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
16.0% 14.0% 12.0%
10.0%
Government Spending
4.0% 2.0% 0.0%
Years
Government Spending Tax Rate
Tax Rate
•Higher government spending adds directly to real GDP, by the national income accounting identity. Since prices do not adjust completely in the first year, the full adjustment is delayed and the economy goes into a damped oscillations but in the long run GDP comes back to steady state
GDP
$7,100 $7,050 $7,000 $6,950 $6,900 $6,850 $6,800
Unemployment Drops
$ Billions
Unemployment Rises
2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Years
GDP (Simulation) GDP (Base)
•
Inflation follows the a cyclic path. Why? Because GDP has risen. So initially it shoots up and then drops, but eventually settles to the steady state values
Inflation
4.00 3.00
(In Percentage %)
2.00
1.00
0.00
2007 2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
-1.00
-2.00
Years
Inf lation (Simulation) Inf lation (Base)
The booming economy raises the demand for money and forces the real interest rate higher.
Real Interest Rate
8.0 7.0
(In Percentage %)
6.0 5.0 4.0 3.0 2.0 1.0 0.0
2007
2009
2011
Real Interest Rate (Simulation)
2013
2015
2017
2019
Years
Real Interest Rate (Base)
2021
2023
2025
2027
2029
2031
2033
Rise in interest rate hurts investment
Investment Vs. Real Interest Rate
$1,020 $1,000 $980 $960 6.0
5.0
8.0 7.0
Investment
$940 $920 $900 $880 $860 $840
$820
4.0 3.0 2.0 1.0 0.0
2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
$800 Years
Investment
Real Interest Rate
Real Interest Rate
Real Exchange Rate
Real Exchange Rate
1.010 1.005 1.000
(In Percentage %)
0.995 0.990 0.985 0.980 0.975 0.970 0.965
0.960
2007
2009
Real Exchange Rate (Simulation)
2011
2013
2015
2017
2019
Years
Real Exchange Rate (Base)
2021
2023
2025
2027
2029
2031
2033
Higher real interest rates also raise the exchange rate relative to the domestic price level and the restof-the-world price level. That is, the real exchange rate rises. This lowers real exports.
Exports
2007 2008 2009 2013 2014 2015 2018 2019 2020 2021 2024 2025 2026 2030 2031 2032
2010 2011 2012 2016 2017 2022 2023 2027 2028 2029 2033 2034
$1,800 $1,750
($ Billions)
$1,700
$1,650 $1,600 $1,550 $1,500
Years
Exports (Simulation) Exports (Base)
The imports rise as exchange rate rises.
Imports
$2,200 $2,150 $2,100
$ Billions
$2,050 $2,000 $1,950 $1,900 Years
Imports (Simulation) Imports (Base)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Higher imports and lower exports cause net exports (trade deficit) to drop.
Trade Deficit (Net Exports)
2007 2010 2013 2014 2016 2017 2020 2021 2023 2024 2027 2030 2031 2034
2008 2009 2011 2012 2015 2018 2019 2022 2025 2026 2028 2029 2032 2033
$$(100) $(200)
$ Billions
$(300) $(400) $(500) $(600) Years
Trade Deficit (Simulation) Trade Deficit (Base)
Higher real GDP and constant tax rates, raises the real disposable income and thus also increases consumption in the short-run, but in the long-run it settles back to steady state values
Consumption
$5,560
$5,540
$5,520 $5,500
$ Billions
$5,480 $5,460
$5,440
$5,420 $5,400 $5,380
$5,360
2007
2008
2009
2010
2011
2012
2013
Consumption (Simulation)
2014
2015
2016
2017
2018
2019
2020
Years
Consumption (Base)
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Comparison of Government Spending and Consumption
Govt. Spending vs. Consumption
$1,400 $1,200 $5,560 $5,540
Govt. Spending ($ Billions)
$1,000 $800 $600 $400 $200 $2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
$5,500 $5,480 $5,460 $5,440 $5,420 $5,400 $5,380 $5,360
Years
Govt. Spending Consumption
Consumption ($ Billions)
$5,520
Even though the tax rate is constant, higher GDP levels result in increased tax revenues
Tax Revenues
$1,065 $1,060 $1,055 $1,050 $1,045 $1,040
$1,035
$ Billions
$1,030 $1,025
2007
2008
2009
2010
Tax Revenues (Simulation)
2011
2012
2013
2014
2015
2016
2017
2018
2019
Years
2020
2021
Tax Revenues (Base)
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Government Deficit/Surplus and the Real Interest Rate
Surplus Vs. Real Interest Rate
$350 $300 $250 $200 $150 12.0 10.0 8.0 6.0 4.0 2.0 0.0
2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
$100 $50 $$(50) $(100) $(150)
Years
Surplus Real Interest Rate
Real Interest Rate (in%)
Surplus
A Somewhat “Sequential” Working of the Model (Fiscal Policy)
As Government Spending goes up (G↑), GDP goes up (GDP↑) which causes price level to go up too (P↑). Real Interest Rate rises (R↑) which depresses Investment (I↓). Also as Real Interest Rate rises the Real Exchange Rate rises (EXCH↑) which hurts Exports (EX↓) but boosts Imports (IM↑) causing the Trade Deficit to rise (NETEX ↑). As GDP goes up the tax collections rise but not by as much as the increase in government spending causing the Government deficit to increases.
Summary of Reactions
In this experiment real government spending is increased in steps of $100 billion higher from 2007 to 2010, and then spending stays elevated at that level forever. Inflation follows the a cyclic path. Initially shoots and then drops, but eventually settles to the steady state values Higher government spending adds directly to real GDP, by the national income accounting identity. Since prices do not adjust completely in the first year, the full adjustment is delayed and the economy goes into a damped oscillations but in the long run GDP comes back to steady state The booming economy raises the demand for money and forces the real interest rate higher. Higher real interest rates also raise the exchange rate relative to the domestic price level and the rest-of-the-world price level. That is, the real exchange rate rises. This lowers real exports and raises real Imports, causing net exports (trade deficit) to drop for both the reasons. Higher real GDP and constant tax rates, raises the real disposable income and thus also increases consumption in the short-run, but in the long-run it settles back to steady state values Even though the tax rate is constant, higher GDP levels result in increased tax revenues
Data Table 2 (a): Govt. Spending
EXOGENOUS VARIABLES POLICY VARIABLES Money Supply (M) New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff
$3,500.0 $3,500.0 $0.0 $764.9 $764.9 $0.0 15% 15% 0% $3,500.0 $3,500.0 $0.0 $864.9 $764.9 $100.0 15% 15% 0% $3,500.0 $3,500.0 $0.0 $964.9 $764.9 $200.0 15% 15% 0% $3,500.0 $3,500.0 $0.0 $1,064.9 $764.9 $300.0 15% 15% 0% $3,500.0 $3,500.0 $0.0 $1,164.9 $764.9 $400.0 15% 15% 0% $3,500.0 $3,500.0 $0.0 $1,164.9 $764.9 $400.0 15% 15% 0% $3,500.0 $3,500.0 $0.0 $1,164.9 $764.9 $400.0 15% 15% 0% $3,500.0 $3,500.0 $0.0 $1,164.9 $764.9 $400.0 15% 15% 0% $3,500.0 $3,500.0 $0.0 $1,164.9 $764.9 $400.0 15% 15% 0%
Government Purchases (G)
Tax Rate (TAX%)
REST-OF-WORLD VARIABLES Price Level, ROW
1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0
Real Interest Rate, ROW
GDP @ Rest of World
OTHERS Potential GDP (GDP@FULL)
$7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0
Name of Experiment: ENDOGENOUS VARIABLES ACCOUNTING IDENTITIES Gross Domestic Product (GDP)
Deficit Financing Experiment
History 2008
New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff
$7,000.0 $7,000.0 $0.0 $1,050.0 $1,050.0 $0.0 $5,950.0 $5,950.0 $0.0 ($248.2) ($248.2) $0.0 1.00 1.00 0.00
**** 2009
$7,064.8 $7,000.0 $64.8 $1,059.7 $1,050.0 $9.7 $6,005.1 $5,950.0 $55.1 ($320.5) ($248.2) -$72.3 1.01 1.00 0.01
Short Run 2010 2011
$7,067.9 $7,000.0 $67.9 $1,060.2 $1,050.0 $10.2 $6,007.7 $5,950.0 $57.7 ($392.6) ($248.2) -$144.3 1.04 1.00 0.04 $7,034.1 $7,000.0 $34.1 $1,055.1 $1,050.0 $5.1 $5,979.0 $5,950.0 $29.0 ($466.8) ($248.2) -$218.6 1.08 1.00 0.08
**** 2012
$6,995.3 $7,000.0 -$4.7 $1,049.3 $1,050.0 -$0.7 $5,946.0 $5,950.0 -$4.0 ($544.2) ($248.2) -$295.9 1.12 1.00 0.12
**** 2019
$7,014.1 $7,000.0 $14.1 $1,052.1 $1,050.0 $2.1 $5,962.0 $5,950.0 $12.0 ($544.2) ($248.2) -$296.0 1.11 1.00 0.11
Long Run 2024 2029
$6,998.7 $7,000.0 -$1.3 $1,049.8 $1,050.0 -$0.2 $5,948.9 $5,950.0 -$1.1 ($544.2) ($248.2) -$295.9 1.12 1.00 0.12 $6,999.8 $7,000.0 -$0.2 $1,050.0 $1,050.0 $0.0 $5,949.9 $5,950.0 -$0.1 ($544.2) ($248.2) -$295.9 1.12 1.00 0.12
**** 2034
$7,000.1 $7,000.0 $0.1 $1,050.0 $1,050.0 $0.0 $5,950.1 $5,950.0 $0.1 ($544.2) ($248.2) -$295.9 1.12 1.00 0.12
Taxes (T)
Disposable Income (YDP)
Net Exports (NETEX)
Price Level (P)
BEHAVIORAL EQUATIONS Consumption Expenditure ( C)
$5,483.3 $5,483.3 $0.0 4.0 4.0 0.0 $1,000.0 $1,000.0 $0.0 1.00 1.00 0.00 $1,764.3 $1,764.3 $0.0 $2,012.5 $2,012.5 $0.0 0.0 0.0 0.0 $5,534.1 $5,483.3 $50.7 4.5 4.0 0.5 $986.3 $1,000.0 -$13.7 1.00 1.00 0.00 $1,670.4 $1,764.3 -$93.9 $2,061.1 $2,012.5 $48.6 1.4 0.0 1.4 $5,536.5 $5,483.3 $53.1 5.2 4.0 1.2 $959.0 $1,000.0 -$40.9 1.00 1.00 0.00 $1,631.1 $1,764.3 -$133.2 $2,101.0 $2,012.5 $88.4 2.8 0.0 2.8 $5,510.1 $5,483.3 $26.7 6.0 4.0 2.0 $926.0 $1,000.0 -$74.0 0.99 1.00 -0.01 $1,620.2 $1,764.3 -$144.1 $2,137.2 $2,012.5 $124.7 3.6 0.0 3.6 $5,479.6 $5,483.3 -$3.7 6.9 4.0 2.9 $894.9 $1,000.0 -$105.1 0.99 1.00 -0.01 $1,619.8 $1,764.3 -$144.5 $2,175.2 $2,012.5 $162.7 3.5 0.0 3.5 $5,494.4 $5,483.3 $11.0 6.9 4.0 2.9 $896.6 $1,000.0 -$103.4 0.99 1.00 -0.01 $1,633.9 $1,764.3 -$130.4 $2,178.1 $2,012.5 $165.6 0.2 0.0 0.2 $5,482.3 $5,483.3 -$1.0 6.9 4.0 2.9 $895.6 $1,000.0 -$104.3 0.99 1.00 -0.01 $1,631.6 $1,764.3 -$132.7 $2,175.8 $2,012.5 $163.2 -0.1 0.0 -0.1 $5,483.2 $5,483.3 -$0.1 6.9 4.0 2.9 $895.9 $1,000.0 -$104.1 0.99 1.00 -0.01 $1,631.8 $1,764.3 -$132.5 $2,175.9 $2,012.5 $163.4 0.0 0.0 0.0 $5,483.4 $5,483.3 $0.1 6.9 4.0 2.9 $896.0 $1,000.0 -$104.0 0.99 1.00 -0.01 $1,631.8 $1,764.3 -$132.5 $2,176.0 $2,012.5 $163.4 0.0 0.0 0.0
Real Interest Rate ( R)
Investment (I)
Real Exchange Rate (EXCH)
Exports (EX)
Imports (IM)
Inflation (P%)
2b: When…Govt. Spending is Reduced to its Original Spending Value by 2016
•Government Spending increases for four years and then gradually reduced back to the original spending by 2016
Government Spending
$1,400 $1,200 $1,000
$ Billions
$800 $600 $400 $200 $0
2007 2008 2009 2010
2011
2012
2013
Govt. Spending (Simulation)
2014
2015
2016
2017
2018
2019
2020
Years
Govt. Spending (Base)
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
•Government Spending increases for four years and then gradually reduced back to the original spending in 2012 whereas the tax rats remain constant
Government Spending vs. Tax Rate
$1,400 $1,200 $1,000 $800 8.0% $600 6.0% $400 $200 $2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
16.0% 14.0% 12.0%
10.0%
Government Spending
4.0% 2.0% 0.0%
Years
Government Spending Tax Rate
Tax Rate
•Because the government spending is reduced and brought back to the original level in 2012, the real interest rates are forced to come back to the original as the stimulus is taken away.
Real Interest Rate
8.0 7.0
(In Percentage %)
6.0 5.0 4.0 3.0 2.0 1.0 0.0
2007
2009
2011
Real Interest Rate (Simulation)
2013
2015
2017
2019
Years
Real Interest Rate (Base)
2021
2023
2025
2027
2029
2031
2033
Inflation Behavior
Inflation
4.00 3.00
2.00
(In Percentage %)
1.00 0.00
2007 2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
-1.00 -2.00 -3.00 -4.00 -5.00
Years
Inf lation (Simulation) Inf lation (Base)
•As inflation wears off and the real interest rate returns to normal implies that the nominal interest rate will drop
Real Vs Nominal Interest Rate
12.0
10.0
(In Percentage %)
8.0
6.0
4.0
2.0
0.0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
-2.0
Years
Real Interest Rate Nominal Interest Rate
Comparison of Government Spending and Consumption
Govt. Spending vs. Consumption
$1,400 $1,200 $5,600 $5,550 $5,500 $5,450 $5,400 $5,350 $5,300 $5,250
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Govt. Spending ($ Billions)
$1,000 $800 $600 $400 $200 $-
Years
Govt. Spending Consumption
Consumption ($ Billions)
•Higher government spending adds directly to real GDP from the national accounting identity. Since prices do not adjust completely in the first year, the full adjustment is delayed and the economy goes into a damped oscillation toward the long run steady state
GDP vs GDP Potential
$7,150 $7,100 $7,050
$ Billions
$7,000 $6,950 $6,900 $6,850 $6,800 $6,750 $6,700
2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
GDP GDP Potential
Years
3. Neutral-Budget Policy Experiment
– In this experiment real government spending is increased by the same one-step increase imposed in the fiscal-stimulus experiment. – Instead of running a deficit, the government raises the tax rate high enough to crowd out the exact amount of increase in government spending by reducing consumption.
Billions
Government Spending vs. Tax Rate
$880 $860
17.0%
(in %)
16.5%
$840
Government Spending
$820
16.0%
15.5% $780 $760 $740
14.5%
15.0%
$720 $700
2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
14.0%
Years
Government Spending Tax Rate
Tax Rate
$800
Tax Revenues
$1,180 $1,160 $1,140 $1,120
$ Billions
$1,100
$1,080 $1,060 $1,040 $1,020 $1,000 $980
2007
2008
2009
2010
Tax Revenues (Simulation)
2011
2012
2013
2014
2015
2016
2017
2018
2019
Years
2020
2021
Tax Revenues (Base)
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
•Higher taxes via higher tax rate leads to drop in consumption
Consumption
$5,500 $5,480 $5,460 $5,440
$ Billions
$5,420
$5,400 $5,380 $5,360 $5,340
$5,320
2007
2008
2009
2010
2011
2012
2013
Consumption (Simulation)
2014
2015
2016
2017
2018
2019
2020
Years
Consumption (Base)
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Government Spending vs. Consumption
Govt. Spending vs. Consumption
$880 $860 $5,500 $5,480
Govt. Spending ($ Billions)
$820 $800 $780 $760 $740 $720 $700
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
$5,440 $5,420 $5,400 $5,380 $5,360 $5,340 $5,320
Years
Govt. Spending Consumption
Consumption ($ Billions)
$840
$5,460
No Change in Interest Rate!
Real Interest Rate
4.5
(In Percentage %)
4.3
4.0
3.8
3.5
2007
2009
2011
Real Interest Rate (Simulation)
2013
2015
2017
2019
Years
Real Interest Rate (Base)
2021
2023
2025
2027
2029
2031
2033
Increased G and Decreased C => Constant GDP
GDP
$7,500
$7,400
$7,300 $7,200
$ Billions
$7,100 $7,000 $6,900 $6,800 $6,700 $6,600 $6,500
2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Years
GDP (Simulation) GDP (Base)
Name of Experiment: ENDOGENOUS VARIABLES ACCOUNTING IDENTITIES Gross Domestic Product (GDP)
Neutral Experiment
History 2008
New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff
$7,000.0 $7,000.0 $0.0 $1,050.0 $1,050.0 $0.0 $5,950.0 $5,950.0 $0.0 ($248.2) ($248.2) $0.0 1.00 1.00 0.00
**** 2009
$7,000.0 $7,000.0 $0.0 $1,158.5 $1,050.0 $108.5 $5,841.5 $5,950.0 -$108.5 ($248.2) ($248.2) $0.0 1.00 1.00 0.00
Short Run 2010 2011
$7,000.0 $7,000.0 $0.0 $1,158.5 $1,050.0 $108.5 $5,841.5 $5,950.0 -$108.5 ($248.2) ($248.2) $0.0 1.00 1.00 0.00 $7,000.0 $7,000.0 $0.0 $1,158.5 $1,050.0 $108.5 $5,841.5 $5,950.0 -$108.5 ($248.2) ($248.2) $0.0 1.00 1.00 0.00
**** 2012
$7,000.0 $7,000.0 $0.0 $1,158.5 $1,050.0 $108.5 $5,841.5 $5,950.0 -$108.5 ($248.2) ($248.2) $0.0 1.00 1.00 0.00
**** 2019
$6,999.9 $7,000.0 -$0.1 $1,158.5 $1,050.0 $108.5 $5,841.5 $5,950.0 -$108.5 ($248.3) ($248.2) $0.0 1.00 1.00 0.00
Long Run 2024 2029
$7,000.0 $7,000.0 $0.0 $1,158.5 $1,050.0 $108.5 $5,841.5 $5,950.0 -$108.5 ($248.2) ($248.2) $0.0 1.00 1.00 0.00 $7,000.0 $7,000.0 $0.0 $1,158.5 $1,050.0 $108.5 $5,841.5 $5,950.0 -$108.5 ($248.2) ($248.2) $0.0 1.00 1.00 0.00
**** 2034
$7,000.0 $7,000.0 $0.0 $1,158.5 $1,050.0 $108.5 $5,841.5 $5,950.0 -$108.5 ($248.2) ($248.2) $0.0 1.00 1.00 0.00
Taxes (T)
Disposable Income (YDP)
Net Exports (NETEX)
Price Level (P)
BEHAVIORAL EQUATIONS Consumption Expenditure ( C)
$5,483.3 $5,483.3 $0.0 4.0 4.0 0.0 $1,000.0 $1,000.0 $0.0 1.00 1.00 0.00 $1,764.3 $1,764.3 $0.0 $2,012.5 $2,012.5 $0.0 0.0 0.0 0.0 $5,383.3 $5,483.3 -$100.0 4.0 4.0 0.0 $1,000.0 $1,000.0 $0.0 1.00 1.00 0.00 $1,764.3 $1,764.3 $0.0 $2,012.5 $2,012.5 $0.0 0.0 0.0 0.0 $5,383.3 $5,483.3 -$100.0 4.0 4.0 0.0 $1,000.0 $1,000.0 $0.0 1.00 1.00 0.00 $1,764.3 $1,764.3 $0.0 $2,012.5 $2,012.5 $0.0 0.0 0.0 0.0 $5,383.3 $5,483.3 -$100.0 4.0 4.0 0.0 $1,000.0 $1,000.0 $0.0 1.00 1.00 0.00 $1,764.3 $1,764.3 $0.0 $2,012.5 $2,012.5 $0.0 0.0 0.0 0.0 $5,383.3 $5,483.3 -$100.0 4.0 4.0 0.0 $1,000.0 $1,000.0 $0.0 1.00 1.00 0.00 $1,764.3 $1,764.3 $0.0 $2,012.5 $2,012.5 $0.0 0.0 0.0 0.0 $5,383.3 $5,483.3 -$100.0 4.0 4.0 0.0 $1,000.0 $1,000.0 $0.0 1.00 1.00 0.00 $1,764.3 $1,764.3 $0.0 $2,012.5 $2,012.5 $0.0 0.0 0.0 0.0 $5,383.4 $5,483.3 -$100.0 4.0 4.0 0.0 $1,000.0 $1,000.0 $0.0 1.00 1.00 0.00 $1,764.3 $1,764.3 $0.0 $2,012.5 $2,012.5 $0.0 0.0 0.0 0.0 $5,383.3 $5,483.3 -$100.0 4.0 4.0 0.0 $1,000.0 $1,000.0 $0.0 1.00 1.00 0.00 $1,764.3 $1,764.3 $0.0 $2,012.5 $2,012.5 $0.0 0.0 0.0 0.0 $5,383.3 $5,483.3 -$100.0 4.0 4.0 0.0 $1,000.0 $1,000.0 $0.0 1.00 1.00 0.00 $1,764.3 $1,764.3 $0.0 $2,012.5 $2,012.5 $0.0 0.0 0.0 0.0
Real Interest Rate ( R)
Investment (I)
Real Exchange Rate (EXCH)
Exports (EX)
Imports (IM)
Inflation (P%)
Second half of the data Neutral Experiment Table
EXOGENOUS VARIABLES POLICY VARIABLES Money Supply (M) New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff New Sim Base Case Diff
$3,500.0 $3,500.0 $0.0 $764.9 $764.9 $0.0 15% 15% 0% $3,500.0 $3,500.0 $0.0 $864.9 $764.9 $100.0 17% 15% 2% $3,500.0 $3,500.0 $0.0 $864.9 $764.9 $100.0 17% 15% 2% $3,500.0 $3,500.0 $0.0 $864.9 $764.9 $100.0 17% 15% 2% $3,500.0 $3,500.0 $0.0 $864.9 $764.9 $100.0 17% 15% 2% $3,500.0 $3,500.0 $0.0 $864.9 $764.9 $100.0 17% 15% 2% $3,500.0 $3,500.0 $0.0 $864.9 $764.9 $100.0 17% 15% 2% $3,500.0 $3,500.0 $0.0 $864.9 $764.9 $100.0 17% 15% 2% $3,500.0 $3,500.0 $0.0 $864.9 $764.9 $100.0 17% 15% 2%
Government Purchases (G)
Tax Rate (TAX%)
REST-OF-WORLD VARIABLES Price Level, ROW
1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0 1.0 1.0 0.0 4.0 4.0 0.0 $7,000.0 $7,000.0 $0.0
Real Interest Rate, ROW
GDP @ Rest of World
OTHERS Potential GDP (GDP@FULL)
$7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0 $7,000.0 $7,000.0 $0.0