“The paradox of saving”
As Blanchard says, when autonomous consumption falls (co▼),that is, when consumers choose to reduce their level of autonomous Consumption, equilibrium income decreases. On the other hand, consumption also Decreases, so the level of saving stay unchanged. Mathematically, we can see it In the following formula: S=Y-T-C
We can also check that what really produces Variations in saving are variations in investment, public spending or taxes, And not, the fall of autonomous consumption. Mathematically, we can see it in The following formula, “investment equals saving”: I=Private Saving + Public Saving I=S+T-G so S= I-T+G
In economics, this theory is known as “the paradox of Saving”, which is very relationed to the Keynesian economic theory.
If the government simultaneously increases public Spending and taxes by the same amount, the budget deficit will not change ( Budget= T-G) ΔT=ΔG= Budget Δ=0
On the other hand, income will change in The same amount as public spending as taxes
Monetary policy is an Economic policy that uses the amount of money as a variable to control and Maintain economic stability. For us, monetary policies are based on Deciding a type of interest (i) or making decisions that reduce / increase the Supply / demand of money (Ms, Md) (Purchase bonds, sell bonds ...) We consider that monetary policy is used by The central bank
-Expansive Monetary policy consists of lowering interest rate ( (↓i) or increasing The money supply. (M↑) for Example, purchasing bonds in the open market. In our model, the LM curve will Shift downwards. (LM ↓)
-Restrictive monetary policy, consists in Increasing interest rate (i ↑) or decreasing The money supply (↓M) ; for example, selling bonds in the Open market.In our model, the LM curve will shift upwards. (LM ↑)
Fiscal policy is an economic policy that uses the Budget (T-G) as a variable to control and maintain economic stalibility. We consider that monetary policy is used by the central Bank.
In an expansive fiscal policy, The government will increase public spending (↑G), reduce taxes (↓T) or both (T-G↓). In our model, the IS curve will shift rightwards
In An restrictive fiscal policy, the government will decrease public Spending (↓G), increase taxes (↑T) or both (T-G ↑). In our model, the IS curve Will shift leftwards (IS←)
An economy is in a long-run equilibrium or in a Steady State when its capital stock cannot grow anymore because the whole Amount of investment that the economy can generate is required to make up for Depreciation, in which case net investment becomes zero and the capital stock Cannot grow anymore.