Macro-Market-Micro AGEC 430 Macroeconomics of Agriculture Spring 2010

Let’s Look at a Simplified Closed Macroeconomy

CeCe Y-T Ac Consumption

CeCe Y-T Ac ieie IeIe Ai Consumption Investment

CeCe Y-T Ac ieie IeIe Ai Ad PePe Y pot As Consumption Investment Aggregate Product YeYe Remember that aggregate demand includes both consumption and investment expenditures as well as government spending and net exports.

CeCe Y-T Ac ieie IeIe Ai Ad PePe Y pot As Consumption Investment Aggregate Product LsLd wr e YeYe LeLe Lmax Labor Market

CeCe Y-T Ac ieie IeIe Ai Ad PePe Y pot As Consumption Investment Aggregate Product LsLd wr e YeYe LeLe Lmax Labor Market Phillips Curve UR %ΔP%ΔP

CeCe Y-T Ac ieie IeIe Ai Ad PePe Y pot As Consumption Investment Aggregate Product LsLd wr e YeYe LeLe Lmax Labor Market Phillips Curve UR %ΔP%ΔP These relationships represent a simplified “real” macroeconomy

Ms Md ieie Qm Money Market Policy Linkages

Ms Md ieie Qm Y t-1 h T Money Market Tax Revenue Policy Linkages

Ms Md ieie Qm Y t-1 h T h T G Money Market Tax Revenue Budget Deficit Policy Linkages

Ms Md ieie Qm Y t-1 h T h T G Money Market Tax Revenue Budget Deficit Policy Linkages National debt ND t = ND t-1 + G t - T t

Wheat Market Dw Sw Pw e Qw e Ad PePe Y pot As Aggregate Product YeYe Macro to Market Linkage

Wheat Market Dw Sw Pw e Qw e Wheat Producer MC Pw e MR qw e Ad PePe Y pot As Aggregate Product YeYe Market to Micro Linkage AC

Wheat Market Dw Sw Pw e Qw e Wheat Producer MC Pw e MR qw e Ad PePe Y pot As Aggregate Product YeYe Market to Micro Linkage AC Is the wheat producer making a profit?

Wheat Producer MC Pw e MR qw e Market to Micro Linkage AC Average profit is the difference between MR and AC at qw e Total profit therefore is equal to average profit times qw e Is the wheat producer making a profit?

Wheat Producer MC Pw e MR qw e Market to Micro Linkage AC Average profit is the difference between MR and AC at qw e Total profit therefore is equal to average profit times qw e Is the wheat producer making a profit?

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Effects of Expansionary Monetary Policy

Ms Md ieie Qm Money Market Action: The Federal Reserve buys government bonds. Action: The Federal Reserve buys government bonds.

Ms Md ieie Qm Money Market Effect: This action expands the money supply, shifting the money supply curve to the right, and lowers the market interest rate. Effect: This action expands the money supply, shifting the money supply curve to the right, and lowers the market interest rate.

ieie IeIe Ai Investment 1 Let’s look at the effect on the “real” economy. Let’s look at the effect on the “real” economy.

ieie IeIe Ai Ad PePe Y pot As Investment Aggregate Product YeYe 1 2

ieie IeIe Ai Ad PePe Y pot As Investment Aggregate Product YeYe 1 2 CeCe Y-T Ac Consumption 3 We defined inflation as follows: %ΔP = a 1 (%Δwr) + a 2 (Y / YPOT) demand pull inflation Is there demand pull inflation in this economy? Why? We defined inflation as follows: %ΔP = a 1 (%Δwr) + a 2 (Y / YPOT) demand pull inflation Is there demand pull inflation in this economy? Why?

ieie IeIe Ai Ad PePe Y pot As Investment Aggregate Product LsLd wr e YeYe LeLe Lmax Labor Market CeCe Y-T Ac Consumption 3 We defined inflation as follows: %ΔP = a 1 (%Δwr) + a 2 (Y / YPOT) cost push inflation Is there cost push inflation in this economy? Why? We defined inflation as follows: %ΔP = a 1 (%Δwr) + a 2 (Y / YPOT) cost push inflation Is there cost push inflation in this economy? Why?

What Does The Phillips Curve Therefore Look Like in This Economy?

Phillips Curve UR %ΔP%ΔP ???

Phillips Curve UR %ΔP%ΔP Phillips Curve UR %ΔP%ΔP Thus we can ignore the Phillips Curve for now. Since no inflation possible

ieie IeIe Ai Ad PePe Y pot As Investment Aggregate Product LsLd wr e YeYe LeLe Lmax Labor Market Wheat Market Dw Sw PW e QW e 5 CeCe Y-T Ac Consumption 3 Increase in wages and disposable personal income increases the demand for wheat as long as the income elasticity > zero.

ieie IeIe Ai Ad PePe Y pot As Investment Aggregate Product LsLd wr e YeYe LeLe Lmax Labor Market Wheat Market Dw Sw PW e QW e Wheat Producer MC PW e MR qw e 56 CeCe Y-T Ac Consumption 3 AC

Farm Income Statement: Farm revenueUp Farm expensesUp slightly Farm taxable incomeUp Income taxesNo change Net farm incomeUp Impact on Farm Financial Statements MC PW e MR qw e 6 AC

Farm Income Statement: Farm revenueUp Farm expensesUp slightly Farm taxable incomeUp Income taxesNo change Net farm incomeUp Impact on Farm Financial Statements Remember taxes assumed to be based on Y t-1 and not current income.

Farm Income Statement: Farm revenueUp Farm expensesUp slightly Farm taxable incomeUp Income taxesNo change Net farm incomeUp Farm Balance Sheet: 1/ Current assetsUp Current liabilities Up (accrued taxes) Land values 2/Up Fixed liabilities No change Fixed assetsNo change Net worth Up Total assetsUp Total debt and equity Up Impact on Farm Financial Statements 1/ Assumes a current market value balance sheet. 2/ Capitalized land values rise due to higher farm income.

Farm Income Statement: Farm revenueUp Farm expensesUp slightly Farm taxable incomeUp Income taxesNo change Net farm incomeUp Farm Balance Sheet: 1/ Current assetsUp Current liabilities Up (accrued taxes) Land values 2/Up Fixed liabilities No change Fixed assetsNo change Net worth Up Total assetsUp Total debt and equity Up Impact on Farm Financial Statements 1/ Assumes a current market value balance sheet. 2/ Capitalized land values fall due to lower farm income. Conclusion: Expansionary monetary policy good for farmers.

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Effects of Contractionary Fiscal Policy

Y t-1 h T Tax Revenue Action: The government raises the income tax rate. Action: The government raises the income tax rate.

Y t-1 h T h T G Tax Revenue Budget Deficit Effect: Raises tax revenue and lowers the budget deficit in the short run since tax revenue based on last year’s income. Effect: Raises tax revenue and lowers the budget deficit in the short run since tax revenue based on last year’s income.

CeCe Y-T Ac Consumption 1 Let’s look at the effect on the “real” Economy again. Let’s look at the effect on the “real” Economy again.

CeCe Y-T Ac Consumption 1 ieie IeIe Ai Investment 2

CeCe Y-T Ac Consumption 1 ieie IeIe Ai Investment 2 Ad PePe Y pot As Aggregate Product YeYe 3

LsLd wr e LeLe Lmax Labor Market 4 CeCe Y-T Ac Consumption 1 ieie IeIe Ai Investment 2 Ad PePe Y pot As Aggregate Product YeYe 3

LsLd wr e LeLe Lmax Labor Market 4 Wheat Market Dw Sw PW e QW e 5 CeCe Y-T Ac Consumption 1 ieie IeIe Ai Investment 2 Ad PePe Y pot As Aggregate Product YeYe 3 Decrease in wages and disposable personal income decreases the demand for wheat as long as the income elasticity > zero.

LsLd wr e LeLe Lmax Labor Market 4 Wheat Market Dw Sw PW e QW e Wheat Producer MC PW e MR qw e 56 CeCe Y-T Ac Consumption 1 ieie IeIe Ai Investment 2 Ad PePe Y pot As Aggregate Product YeYe 3 AC

Farm Income Statement: Farm revenueDown Farm expensesDown slightly Farm taxable incomeDown Income taxesDown Net farm incomeDown Impact on Farm Financial Statements MC PW e MR qw e 6 AC

Farm Income Statement: Farm revenueDown Farm expensesDown slightly Farm taxable incomeDown Income taxesDown Net farm incomeDown Impact on Farm Financial Statements Last year’s income taxed at a higher rate.

Farm Income Statement: Farm revenueDown Farm expensesDown slightly Farm taxable incomeDown Income taxesDown Net farm incomeDown Farm Balance Sheet: 1/ Current assetsDownCurrent liabilities Down (accrued taxes) Land values 2/DownFixed liabilities No change Other assetsNo changeNet worth Down Total assetsDownTotal debt and equity Down Impact on Farm Financial Statements 1/ Assumes a current market value balance sheet. 2/ Capitalized land values fall due to lower farm income.

Farm Income Statement: Farm revenueDown Farm expensesDown slightly Farm taxable incomeDown Income taxesDown Net farm incomeDown Farm Balance Sheet: 1/ Current assetsDownCurrent liabilities Down (accrued taxes) Land values 2/DownFixed liabilities No change Other assetsNo changeNet worth Down Total assetsDownTotal debt and equity Down Impact on Farm Financial Statements 1/ Assumes a current market value balance sheet. 2/ Capitalized land values fall due to lower farm income. Conclusion: Contractionary fiscal policy not good for farmers.

Any Questions?

Know These Relationships