Public Deabt

Last week, Japan's government downgraded its views on consumer sentiment and machinery orders, while the Bank of Japan effectively cut its assessments on exports.

(a) Using the basic Keynesian model, provide a detailed analysis of the likely impact of the changes described above for Japan's real GDP and rate of unemployment. (20 marks)

The excerpt states that the Japanese consumers have less confidence in the Japanese economy, which means that they will be less inclined to spend on products and be more inclined to save a larger portion of their disposable income. The downgraded views on machinery orders suggests that firms plan to invest less in the economy as well. The cut of assessments on exports by the Bank of Japan refers to the decrease of exports in the economy. All this factors would mean that economic growth will slow down in Japan, thus causing real GDP to grow at a slower rate or it might even fall.

The graph above shows the economy in equilibrium, where planned aggregate expenditure(PAE) is equal to the gross domestic product (GDP). PAE consists of 4 major components, consumption(Cd), planned investments(Ip) which has both planned investments by the company in capital equipment and spending on inventories, government spending(G) and exports(X) by the Japanese economy. This occurs at point A, where the 45 degree line cuts the PAE line in the diagram. The line INJp represents the planned injections in the economy, which is formed by the Ip, G and X functions. The line Cd represents the consumption function in the economy. The y-intercept is the exogenous consumption in the Japanese economy, while the gradient of the line is the marginal propensity of the consumers to consume. In order for this model to work, the assumption that all imports are bought by the consumers, not by firms and by the government. Thus, PAE combines all the 4 factors into 1 single line. Withdrawals from the Japanese economy is represented by the line WD, where it consists of...