O modelo IS/LMThe IS/LM model, first developed by Sir
John Hicks and
Alvin Hansen, has been used from
1937 onwards to summarize a major part of Keynesian
macroeconomics. It can be presented as a graph of two intersecting lines in the first quadrant.The
abscissa represents
national income or
real gross domestic product (PIB) and is labelled Y. The
ordinate represents the
interest rate, r. The graph thus represents the interface between the "real" and the "monetary" parts of the economy.The IS schedule is drawn as a downward-
sloping curve. The initials IS stand for "Investment/Saving equilibrium" but since 1937 have been used to represent equilibrium in the product market, where total spending (Consumer spending + planned private Investment + Government purchases + net exports) equals an economy's total output and income. To keep the link with the historical meaning, the IS curve can represent the equilibrium where total private investment equals total saving, where the latter equals consumer saving plus government saving (the budget surplus) plus foreign saving (the trade surplus). Either way, in equilibrium, all spending is desired or planned; there is no unplanned inventory accumulation (i.e., no general glut of goods and services). The level of real
PIB (Y) is determined along this line for each
interest rate.Thus the IS schedule is a
locus of points of equilibrium in the "real" (non-financial) economy. Given expectations about returns on fixed investment, every level of interest rates (r) will generate a certain level of planned fixed
investment and other interest-sensitive spending: lower interest rates encourage higher fixed investment and the like. Income is at the equilibrium level for a given interest rates when the saving
consumers choose to do out of that income equals investment (or, more generally, when "leakages" from the
circular flow equal "injections"). A higher level of income is needed to generate a higher level of saving (or leakages) at a given interest rate. Alternatively, the
multiplier effect of an increase in fixed investment raises real PIB. Either way explains the downward slope of the IS schedule. In sum, this line represents the line of causation from falling interest rates to rising planned fixed investment (etc.) to rising national income and output.The LM schedule is an upward-sloping curve representing the role of finance and money. The initials LM stand for "Liquidity preference/Money supply equilibrium" but is easier to understand as the equilibrium of the demand to hold money as an asset and the supply of
money by banks and the
Central Bank. The interest rate is determined along this line for each level of real PIB.Rising PIB (Y) implies an increased transactions demand for money and
liquidity preference. With a given and inelastic money supply curve, the equilibrium interest rate (r) rises. This explains the upward slope of the LM curve.The point where these schedules intersect represents a short-run
equilibrium in the real and monetary sectors (though not necessarily in other sectors, such as labor markets). In IS/LM equilibrium, both product markets and money markets are in equilibrium. Both the interest rate and real PIB are determined.
Consequências de uma política orçamental expansionistaOne Keynesian hypothesis is that a government's deficit spending has an effect similar to that of a lower saving rate or increased private fixed investment, increasing the amount of aggregate demand for national income at each individual interest rate. An increased deficit by the national government shifts the IS curve to the right. This raises the equilibrium interest rate (from r1 to r2) and national income (from Y1 to Y2), as shown in the graph above.
The graph indicates one of the major criticisms of deficit spending as a way to stimulate the economy: rising interest rates lead to crowding out – i.e., discouragement – of private fixed investment, which in turn may hurt long-term growth of the supply side (potential output). Keynesians respond that deficit spending may actually "crowd in" (encourage) private fixed investment via the
accelerator effect, which helps long-term growth. Further, if government deficits are spent on productive public investment (e.g., infrastructure or public health) that directly and eventually raises potential output.The IS/LM model also allows for the role of
monetary policy. If the money supply is increased, that shifts the LM curve to the right, lowering interest rates and raising equilibrium national income.
Despesa públicaEven though households and companies often engage in deficit spending, it is typically only when the government does so that it sparks a controversy. Like other institutions,
governments operate on a
budget -- or try to do so. When the
expenditures of a government (its purchases of goods and services, plus its tranfers (grants) to individuals and corporations) are greater than its tax
revenues, it creates a
deficit in the government budget. When tax revenues exceed government purchases and transfer payments, the government has a budget surplus (as in the late 1990s in the United States).Following
John Maynard Keynes, many
economists recommend deficit spending in order to moderate or end a
recession, especially a severe one.
When the economy has high unemployment, an increase in government purchases create a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. (This is the multiplier effect). This raises the real gross domestic product (PIB) and the employment of labor, all else constant lowering the unemployment rate. (The connection between demand for PIB and unemployment is called
Okun's Law.) Cutting personal taxes and/or raising transfer payments can have similar expansionary effects, though most economists would say that such policies have weaker effects on aggregate demand. On the other hand, if supply-side (non-Keynesian) effects are brought into consideration, which method has a better stimulative economic effect is a matter of debate.The increased size of the market, due to government deficits, can further stimulate the economy by raising business profitability and spurring optimism, which encourages private fixed investment in factories, machines, and the like to rise. This
accelerator effect stimulates demand further and encourages rising employment.Similarly, running a government surplus or reducing its deficit reduces consumer and business spending and raises unemployment. This can lower the inflation rate. Any use of the government deficit to steer the macro-economy is called
fiscal policy.A deficit does not simply stimulate demand. If private investment is stimulated, that increases the ability of the economy to supply
output in the long run. Also, if the government's deficit is spent on such things as infrastructure, basic research, public health, and education, that can also increase potential output in the long run. (These are
public goods which are very unlikely to be provided by private initiatives.) Finally, the high demand that a government deficit provides may actually allow greater growth of potential supply, following
Verdoorn's Law.There is, however, a danger that deficit spending may create
inflation -- or encouraging existing inflation to persist. (In the
United States, this is seen most clearly when Vietnam-war era deficits encouraged inflation.) This is especially true at low unemployment rates (say, below 4% unemployment in the U.S.). But government deficits are not the only cause of inflation: it can arise due to such supply-side shocks as the "oil crises" of the 1970s and inflation left over from the past (inflationary expectations and the price/wage spiral). There must also be enough money circulating in the system to allow inflation to persist -- so that inflation depends on
monetary policy.
A government deficit also impacts the economy through the loanable funds market. When there isn't enough tax money to cover outlays, the government must borrow. This increases the demand for loanable funds and thus (ignoring other changes) pushes up interest rates. Rising interest rates can "crowd out" (discourage) fixed private investment spending, cancelling out some or even all of the demand stimulus arising from the deficit -- and perhaps hurting long-term supply-side growth. But increased deficits also raise the amount of total income received, which raises the amount of saving done by individuals and corporations and thus the supply of loanable funds, lowering interest rates. Thus,
crowding out is a problem only when the economy is already close to full employment (say, at about 4% unemployment) and the scope for increasing income and saving is blocked by resource constraints (
potential output). It should be noted that despite a government debt that exceeded PIB in 1945, the U.S. saw the long prosperity of the 1950s and 1960s. The growth of the "supply side", it seems, was not hurt by the large deficits and debts.A government deficit leads to increased government debt (often confusingly called the "national debt" or the "public debt"). In the U.S., the government borrows by selling bonds (T-bills, etc.) rather than getting loans from banks. The most important burden of this debt is the interest that must be paid to bond-holders, which restricts a government's ability to raise its outlays or cut taxes to attain other goals. Further, most of the government debt is owned by rich people, so that a rising debt can raise the demand for the funds supplied by the rich, encouraging income inequality.
Whether government deficits are good or bad cannot be decided without examining the specifics. Just as with borrowing by individuals or businesses, it can be good or bad. If the government borrows (runs a deficit) to deal with a severe recession (or depression), to help self-defense, or is spent on public investment (in infrastructure, education, basic research, or public health), the vast majority of economists would agree that the deficit is bearable, beneficial, and even necessary.
If, on the other hand,
the deficit finances waste (pork-barrel projects/"elefantes brancos"), or current consumption, most would recommend tax hikes, transfer cuts, and/or cuts in government purchases to balance the budget. The decision about whether the deficits are good or bad can only be made democratically by an informed public.However, this is rarely the case, because the decisions are made by politicians elected on many different grounds and on the basis of their ability to raise campaign funds. Further, the public generally does not have an adequate economic education, especially since most of the mass media does not consider economic issues very seriously. The public is likely to listen to the bickering of politicos. For example, while the magnitude of deficit spending is often best measured as a proportion of PIB, those uneducated in economics pay attention instead to the absolute numbers of a government deficit. In order to fight this "economic education deficit", groups such as The National Council on Economic Education have been created in the U.S.Not all government deficits are intentional, a result of policy decisions. When an economy goes into a recession (say, due to monetary policy), deficits usually rise, at least in the U.S. and other large, rich, countries: with less economic activity, a relatively progressive tax system implies that tax revenues automatically fall. Similarly, transfer payments such as unemployment insurance benefits and food stamp grants rise.Most economists agree that raising taxes or cutting government spending (or both) is a big mistake in this situation: U.S. President Herbert Hoover made the Great Depression greater by raising taxes (and cutting demand further) in the early 1930s. Instead, he should have relied on the increased deficit to moderate the recession. This is called automatic (or built-in) stabilization. (Similarly, a rise in PIB and employment automatically causes the government deficit to shrink in size, discouraging over-heating and inflation.)Most economists favor the use of automatic stabilization over active or discretionary use of deficits to fight mild recessions (or surpluses to fight inflation). Active policy-making takes too long for politicians to institute and too long to affect the economy. Often, the medicine ends up affecting the economy only after its disease has been cured, leaving the economy with side-effects such as inflation. For example, President John F. Kennedy proposed tax cuts in response to the high unemployment of 1960, but these were instituted only in 1964 and impacted the economy only in 1965 or 1966 and encouraged inflation then, reinforcing the effect of Vietnam war spending. The vast majority of economists are now in favor of
monetary policy to replace active use of deficits or surpluses.
Crowding-outIn economics,
crowding out theoretically occurs when the government expands its borrowing more to finance increased expenditure or tax cuts in excess of revenue (i.e., is engaged in deficit spending) crowding out private sector investment by way of higher interest rates. It represents one of the major controversies in modern Macroeconomics.Since increased borrowing leads to higher interest rates by creating a greater demand for money and hence a higher "price" (ceteris paribus), the private sector, who is sensitive to interest rates will likely reduce investment due to a lower rate of return, this is the investment that is crowded out. The weakening of fixed investment and other interest-sensitive expenditure counteracts to varying extents the expansionary effect of government deficits. More importantly, a fall in fixed investment by business can hurt long-term economic growth of the supply side, i.e., the growth of
potential output.However, this crowding-out effect is moderated by the fact that government spending expands the market for private-sector products and thus stimulates – or "crowds in" – fixed investment (via the "
accelerator effect"). This accelerator effect is most important when business suffers from unused industrial capacity, i.e., during a serious
recession or a
depression.Crowding out of another sort may occur due to the prevalence of floating
exchange rates. Government borrowing leads to higher interest rates, which attract inflows of money on the
capital account from foreign financial markets into the domestic currency (i.e., into assets denominated in that currency). Under floating exchange rates, that leads to
appreciation of the exchange rate and thus the "crowding out" of domestic exports (which become more expensive to those using foreign currency). This counteracts the demand-promoting effects of government deficits but has no obvious negative effect on long-term economic growth.In the United States during the late 1990s, another kind of crowding out of exports occurred: large increases in private fixed investment and consumer spending encouraged high interest rates, a high dollar exchange rate, and hurt exports.Crowding out is most serious when an economy is already at
potential output or
full employment. Then the government's expansionary
fiscal policy encourages increased prices, which lead to an increased demand for
money. This in turn leads to higher interest rates (ceteris paribus) and crowds out interest-sensitive spending. At potential output, businesses are in no need of markets, so that there is no room for an accelerator effect. More directly, if the economy stays at full employment
gross domestic product, any increase in government purchases shifts resources away the private sector. This phenomenon is sometimes called "real" crowding out.The negative effects on long-term economic growth that occur when private fixed investment are crowded out can be moderated if the government uses its deficit to finance productive investment in education, basic research, at the like. The situation is made worse, of course, if the government wastes borrowed money on such things as "pork belly" projects and tax cuts for the political allies of the current politicians.
Taxa de crescimento potencial do produtoIn
economics,
potential output (also refered to as "natural gross domestic product") refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. The existence of a limit is due to natural and institutional constraints. If actual PIB rises and stays above potential output, then (in the absence of wage and price controls)
inflation tends to increase as
demand exceeds
supply. This is
because of the limited supply of workers and their time, capital equipment, and natural resources, along with the limits of our technology and our management skills. Graphically, the expansion of output beyond the natural limit can be seen as a shift of production volume above the optimum quantity on the
average cost curve. Likewise, if PIB is below natural PIB, inflation will decelerate as suppliers lower prices to fill their excess production capacity.Potential output in macroeconomics corresponds to one point on the
production possibilities frontier (or curve) for a society as a whole seen in introductory economics, reflecting natural, technological, and institutional contraints.Potential output has also been called the "
natural gross domestic product." If the economy is at potential, the
unemployment rate equals the
NAIRU or the "
natural rate of unemployment."Generally speaking, most central banks and other economic planning agencies attempt to keep PIB at or around natural PIB level. This can be done in a number of ways: the two most common strategies are expanding or contracting the government budget (
fiscal policy), and altering the
money supply to change consumption and investment levels (
monetary policy).
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