Economic Regulation

Abstract

The multiplier-accelerator models of Chapter 17 show oscillations or growth in output around the level Y = 0, the stationary state of the models. This is because we have ignored autonomous expenditure as an element in demand. If there is autonomous expenditure and if it is a constant A over time, then the level of output is A/s in the stationary state, as given by the multiplier, and oscillations or growth are around Y = A/s. This is the situation we found (10.3 above) in the corresponding equilibrium (growth) models. It is time to reintroduce A and to go on beyond the special case of A constant by allowing A to vary over time in some way specified by exogenous factors. We start by taking A as increasing at some constant and exogenous rate of growth over time; we then turn, in the next section, to cases of autonomous oscillation in A. Finally, we turn to a more important problem, where autonomous expenditure is by government and regulated according to the current movements in output to achieve specified objectives. Regulatory demand then provides an additional feedback in the system.