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Summary Macroeconomics

Macroeconomics for EOR (Rijksuniversiteit Groningen)

Studeersnel wordt niet gesponsord of ondersteund door een hogeschool of universiteit

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Exam Summary Statistical Inference

Iris de Jong

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Chapter 1
The foremost single measure of how an economy performs is the aggregate level of income. Income
is revenue derived from work and assets, such as wages, interest, dividends and profits.

nominal incomes are incomes expressed in a certain currency at current prices.

Rule of 72
As a rule of thumb, divide 72 by the annual income growth rate in percent to learn in how many
years income doubles.

Factors of production are all resources used in the production of goods and services, labour,
capital goods such as machines, and natural resources such as oil.

When output is put on the market for people to buy, the two mayor things that can go wrong in
this process are as follows:
• Firm may not use all available production factors to produce output, thus leaving factors
idle in the form of unemployment or slack.
• People may not want to buy all that is being produced, that is, demand may fall short
of output
The expenditure approach measures aggregate output as the sum of all spendings. The income
approach adds up all incomes instead.

Income received by households may not arrive at the firms as demand for three main reasons:

1. People save,
2. Governments levy taxes,
3. People buy foreign goods.

There are also three reasons why demand from outside the circular flow may be directed towards
domestic output:
1. Firms invest,
2. Government spending,

3. Foreigners buy our goods.

Transfers are payments from governments to individuals or firms that do not involve goods or
services, such as welfare payments or housing subsidies.

The following equation holds at all times

(S − I) + (T − G) + (IM − EX) = 0

where S = savings, I = investment, T = taxes, G = government expenditure, IM = imports and

EX = exports.

Note: It is more common to call (EX − IM ) = N X net exports, or, as an approximation, the
current account (CA).

Countries run twin deficits if both the government budget and the current account are in deficit.

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The quantity equation is defined by

M ·V =P ·Y

where M = money supply, V = velocity of money circulation, P = price level, Y = real income
and P · Y = nominal income.

Real income is income in terms of what it can buy.

The aggregate supply curve indicates how much supply firms are willing to produce at va-
rious price levels.

The government budget is primarily a planning instrument. In hindsights it breaks down go-
vernment receipts and expenditures, and shows how deficits are being financed.

The balance of payments records a country’s trade in goods, services and financial assets with
other countries.
The balance of payments if subdivided into three mayor accounts: the current account (CA),
the capital account (CP) and the official reserve account (OR).
The current account records goods, services and transfers into and out of the country.
The capital account records the flow of financial assets into and out of the country.
The official reserve account records the purchases and sales of foreign currency by the central
bank.

EX − IM = ∆F + ∆RES

∆M = ∆BCB + ∆RES
Empirical tests are confrontations of hypotheses derived from models or theories with real-world
data or events. They serve to gauge whether a model is useful or not. Most empirical tests address
either of two questions:
• Can the model provide a specific macroeconomic event with a coherent explanation?

• Are the building blocks, the equations, used in the construction of the mode, or the conclu-
sions offered by the model, supported by the real-world data?

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Chapter 2
The steady state income results when all variables, including the capital stock have adjusted
to their desired or equilibrium levels.
Potential income is the income that can be produced with current labour an capital. The capital
stock may or may not have reached its equilibrium level.

The business cycle refers to recurring fluctuations of income relative to potential income. A
boom describes rising income which culminates in a peak. A recession describes declining inco-
me which bottoms out at a trough.

Households receive gross income Y . Payments of taxes reduces this to disposable income Y −T .
After removing savings from the loop we obtain what is left for consumption C, C = Y − T − S.

Total expenditure = C + I + G + EM − IM = Total income

Aggregate expenditure is the sum of all planned or voluntary spending on domestically pro-
duced goods and services.

Actual expenditure is the sum of all categories of demand, including unplanned investment.

The aggregate expenditure only equals income if firms succeed in setting output to a level that
does not require them to undertake any unplanned investment in the form of undesired inventory
changes.

Taxes T in our model are net taxes, the difference between all taxes and transfers. Govern-
ment spending G in our model are government purchases of goods and services. It does not
include transfers.

The marginal propensity to consume says by how much consumption rises if income rises
by one unit.

For consumption C we assume that individuals always want to spend a constant fraction c of
their income Y . c is the marginal propensity to consume. The consumption function is given by:
C =c·Y.

The Keynesian cross is a diagram which plots planned expenditure against income and ac-
tual expenditure against income. Equilibrium income obtains where both lines cross.

At equilibrium income all spending is planned spending.

Equilibrium condition:
Income Y = aggregate expenditure AE =⇒
1
Y = C + I + G + N X = cY + I + G + N X =⇒ Y = (G + I + N X)
1−c

Disposable income is that part of income left to households after the payments of taxes.

The marginal income tax rate says by how much taxes rise if income rises by one unit. The
average income tax rate gives the share of taxes on income on average, that is YT .

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Capital costs are the costs of financing the purchase of capital goods. They equal the inte-
rest payment for a loan, or the interest foregone because money was invested and not lent out.

The internal rate of return is the revenue generated by a project as a percentage of the in-
vested funds.

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Chapter 3
The exchange rate is the price of one unit of foreign currency in terms of domestic currency.

Transactions demand for money is money held to cover routine expenditures.

A flow variable is measured over a period of time. Examples are: income, consumption and
exports.
A stock variable is measured at a point in time. Examples are the money supply, the number of
workers and the capital stock.

Money demand function

L = kY − hi
where L denotes the demand for money, or liquidity.

Precautionary demand for money is wealth held in the form of money for the purpose of
covering unexpected expenditures.

Speculative demand for money is wealth held as money at times when other assets are con-
sidered excessively risky.

The risk premium is the difference between the risk-free interest rate and the expected re-
turn on alternative, risky assets.

The LM-curve identifies combinations of income and the interest rate for which the demand
for money equals the money supply.

LM curve
k 1
i= Y − M̄
h h

Monetary policy rule

M = M̄ = a(i − ī)

LM curve under monetary policy rule

k M̄ a
i= Y − + i
a+h a+h a+h

Y+e
is a stand-in for all income expected to accrue during future periods. Period incomes may
be weighted to reflect time discounting. The Y+e would be a present value.

The real exchange rate R is the ratio between the price of goods abroad and a home:

R = EP world IP

Import function:
IM = M1 Y − M2 R

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Export function:
EX = x1 Y world + x2 R

Purchasing power parity denotes the exchange rate sE P P P that equates prices abroad and
at home in domestic currency.
E P P P · P world = P

The IS curve shows those combinations of income and the interest rate for which aggregate
expenditure equals income or output.

IS curve:
1 − c + M1 x 2 + M2 I¯ + G + x1 Y world
i=− Y + R+
b b b

The goods market equilibrium conditions for the global economy reduces to Y = C + I + G
since EX = IM = N X = 0.

Monetary policy manipulates the money supply or the interest rate to achieve policy goals
such as rise in income.

Fiscal policy manipulates government spending and taxes to achieve policy goals such as a
rise in income.

The term crowding out refers to the phenomenon that an increase in one category of demand
goes at the expense of the reduction in some other component of demand.

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Chapter 4
A closed economy is an economy that does not trade or interact financially with other countries.
The global economy is a closed economy.
An open economy trades goods or assets with other countries. Most national economies are open
economies.

Balance of payments
BP = CA + CP + OR = 0
where BP = balance of payments, CA = current account, CP = capital account and OR = official
reserves account.

The balance of payments surplus is defined as BP surplus = −OR.

In the foreign exchange market different currencies are traded for one another.

Current account equilibrium:

x1 world x2 + M2
Y = Y + R
M1 M1

An individual is risk neutral if he is indifferent between a guaranteed payment of e500 , and

playing a free lottery in which he can win either e0 or e1000 with a probability of 50% each.

CP = κ(i − iworld )

The FE curve identifies combinations of income and the interest rate for which the foreign
exchange market is in equilibrium.

General FE curve
M1 x1 M2 − x 2
i = iworld + Y − Y world − R
κ κ κ

The IS-LM-FE model consists of three equilibrium conditions for three markets:

IS curve:
1 − c + M1 I¯ + G + x1 Y world b
R= Y − + i
M2 + x 2 M2 + x 2 M2 + x 2

LM curve
M h
Y = + i
κ κ

FE curve
i = iworld

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Chapter 5
The Mundell-Fleming model is a toll for analyzing macroeconomic issues. It comprises the
goods market (IS), the money market (LM) and the foreign exchange market (FE).

Fiscal policy manipulates government spending and taxes to achieve policy goals such as a
rise in income.

We speak of a system of flexible exchange rates when governments and central banks al-
low the exchange rate to be determined by market forces alone.

Crowding out occurs when an increase in government spending reduces private spending, such
as net exports or investment.

We speak of a system of fixed exchange rates when governments or central banks announ-
ce an exchange rate, the parity rate at which they are prepared to buy or sell any amount of
domestic currency.

Fiscal policy: Flexible exchange rates

If financial investors cannot obtain domestic currency at the current price, they offer more. This
drives up the price per unit of domestic currency, and it drives the exchange rate down. The
domestic currency appreciates. Domestic goods become more expensive relative to foreign goods
and net exports fall. The IS curve shifts to the left. The interest rate and income gradually slide
down the LM curve. They slide down until the domestic rate does not exceed the world interest
rate anymore, causing the excess demand for domestic currency to continue. Only as IS returns
to its original position and the economy returns to its old equilibrium are all three markets in
equilibrium. Note that the LM curve does not move.

Fiscal policy: Fixed exchange rates

Again, higher government expenditures shits the IS curve to the right, and the resulting income
increase tends to push up the interest rate beyond the world interest rate. Now, however, the
resulting excess demand for domestic currency cannot and need not be eliminated by appreciation.
Instead, the central bank is obliged to supply just that amount of additional money that would-be
buyers cannot find in the market. So two things happen, which did not happen under flexible
exchange rates:
1. The exchange rate cannot appreciate, meaning that the IS curve cannot shift back. It remains
in its new position.
2. The domestic money supply increases due to the monetary foreign exchange market inter-
vention of the central bank, shifting the LM curve to the right
The LM curve must continue to shift until it intersect IS. It cannot come to a halt earlier because
this would leave an incipient advantage for the domestic interest rate, creating excess demand for
domestic money.

Monetary policy manipulates the money supply or the interest rate to achieve policy goals
such as a rise in income.

Comparative static analysis looks at how equilibrium positions change after policy changes.
It says nothing about whether and how the economy gets there.

If an equilibrium is stable, the economy moves towards this equilibrium from all disequilibri-
um situations.

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Dynamic analysis looks at whether an equilibrium in stable, and traces the transition from
one equilibrium to another.

Exchange rate overshooting occurs if the immediate response of the exchange rate to a distur-
bance (such as a money-supply increase) exceeds the response that is needed in the long run.

Fundamentals are exogenous variables that determine the equilibrium of an economy or a market.

In a speculative bubble investors pay a price that exceeds the fundamental value of an as-
set because they anticipate the price to be even higher tomorrow.

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Chapter 6
The aggregate supply curve shows the total quantity of goods and services supplied by all firms
in the economy on different price levels.

The extreme Keynesian aggregate supply curve is horizontal, stating that, at the current
price, firms are ready to produce any output that is demanded.

The classical aggregate supply curve is vertical, stating that firms produce only one out-
put Y ∗ , no matter how high prices are.

Production function
Y = F (K, L)
where Y = output, K = capital, L = labour and F is a function.

The marginal product of labour schedule indicates the additional output produced by one
more unit of labour that obtains at various levels of employment.

The (aggregate) labour demand curve shows the (aggregate) quantity of labour that firms
demand at different real wage rates.

Π = Y (K0 , L) − w × L
Profits = output - wage costs, where w = real wage.

The aggregate labour supply curve shows the (aggregate) quantity of labour supplied by
workers at different real wage rates.

Cyclical unemployment is unemployment that arises temporarily during the downswing of

the business cycle.

The economy returns to equilibrium unemployment after a boom or recession. Equilibrium

unemployment reflects the institutional characteristics of the labour market.

Unit labour costs are the wage costs per unit of output. Marginal unit labour costs are higher
than average unit labour costs when the marginal product of labour falls.

The tax wedge is the difference between the labour costs of a firm and the wage that wor-
kers take home.

A real wage rigidity is a market imperfection that keeps the real wage from falling to the
level that eliminates involuntary unemployment.

Insiders are all currently employed workers. Outsiders are those currently out of employment
who are seeking employment.

Efficiency wage theory argues that raising the real wage may lower costs per unit of out-
put by raising labour productivity.

Labour productivity or efficiency or effort x can be measured as output produced per work
hour. Unit labour costs, U LC are wage costs per unit of output. The manipulations:
wL w w
U LC = = =
Y (Y /L) x

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show that U LC can also be expressed as the real wade divided by labour productivity.

The efficiency wage is the wage that minimized unit labour costs.

Elasticity measures by how many percentage points one variable responds if some other va-
riable changes by 1%.

Work effort is elastic with respect to wages when its wage elasticity exceeds 1 in absolute si-
ze.
Work effort is inelastic with respect to wages when its wage elasticity is smaller than 1 is absolute
size.

Mismatch unemployment occurs when the sills or geographic location of job seekers do not fit
the patterns of job vacancies.

Structural unemployment is unemployment that does not go away in equilibrium, due to

institutions or habits.

Frictional unemployment exists because it takes time to find existing jobs, to relocate or
to retain.

The Beveridge curve is a negatively sloped line, depicting an inverse relationship between the
vacancy rate and the unemployment rate. A boom represents a movement up this line, a recession
a slide down the line.

Aggregate supply curve:

P = P e + λ(Y − Y ∗ )

A sticky nominal wage needs time to respond to new information.

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Chapter 7
The term demand-side equilibrium refers to the income level at which the economy would be
in equilibrium provided that firms supply all goods and services that are being demanded.

AD curve: Flexible exchange rates

p = m − bY + h(iW + εe )

where εe is expected depreciation

AD curve: Fixed exchange rates

p = e + pW − bY + γY w + δG − f (iW + εe )

where e is the log of the exchange rate.

Long-run AS curve:
Y =Y∗

Adaptive expectations are formed on the basis of the recent history of the variable under
consideration alone. Expectations adapt to what the variable did in the past. Adaptive expecta-
tions are driven by the general equation

pe = pe−1 + a(p−1 − pe−1 )

How quickly expected prices adapt to actual prices is measured by the coefficient a.

Under flexible exchange rates the aggregate demand curve has a negative slope for the fol-
lowing reason: A price increase reduces the real money supply. Since the domestic interest rate
cannot deviate from the world interest rate, the demand for money must be reduced by a decline
in income.

Under fixed exchange rates, the aggregate demand curve has a negative slope for the follo-
wing reason: A price increase reduced the real exchange rate. This appreciation creates an excess
supply of domestic goods at the old level of income. Since the interest rate is fixes to the world
interest rate, the supply of goods can only equal the demand for goods at a lower level of income.

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Chapter 8
The SAS curve indicates the aggregate output that firms are willing to produce at different
inflation rates.

SAS curve:
π = π e + λ(Y − Y ∗ )
where π is the rate of inflation (= p − p−1 ) and π e is the expected rate of inflation (= pe − p−1 ).

The SAS curve has a positive slope. If inflation is as expected, potential output Y ∗ is produced.
If inflation is higher than expected, real wages are too low and firms hire more labour and pro-
duce more than normal. The SAS curve shifts up as π e rises and moves to the right as Y ∗ increases.

DAD curve: Flexible exchange rates

π = µ − bY + bY−1 + h(∆iW + ∆εe )

where π is the inflation rate and µ is the money growth rate (= m − m−1 )

DAD curve: Fixed exchange rates

π = ε + π w − bY + bY−1 + γ∆Y w + δ∆G − f (∆iw = ∆εe )

Under fully fixed exchange rates ε = ∆ε = 0.

The DAD curve has a negative slope. As we move down DAD the real exchange rate rises, and
so does aggregate demand. Under flexible exchange rates the position of DAD is mainly determi-
ned by money growth, µ, but also by changes in the world interest rate and changes in expected
depreciation. The curve moves up as any of those factors increases. Under fixed exchange rates
the position of DAD is mainly determined by world inflation, π w , but also by changes in world
income, government spending, the world interest rate and expected devaluation. As any of those
factors increases, DAD moves. It moves up with the first three factors and down with the last two.

EAS curve (equilibrium aggregate supply)

Y =Y∗

EAD curve: Flexible exchange rates

π=µ

EAD curve: Fixed exchange rates

π = πW

Positioning SAS: We know that if inflation were exactly as expected, output would be at its
normal level. Therefore, mark expected inflation of the vertical axis. Then go horizontally to the
right until you hit the vertical line over Y ∗ . This is a point on the current SAS.
Positioning DAD: Under flexible exchange rates, if income remained where it was last period,
inflation would equal the growth rate of money supply. Under fixed exchange rates, if income
remained unchanged, inflation would equal world inflation. Therefore, mark last period’s income

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in the horizontal axis. Move vertically up until you hit either the horizontal at the money supply
growth rate, or the horizontal line at world inflation plus devaluation when exchange rates are
fixed. This gives a point on the current DAD curve.

Adaptive expectations are being formed on the basis of what the variable actually did in
the past. Adaptive inflation expectations are driven by the equation:

π e = π−1
e e
+ a(π−1 − π−1 )

How quickly expectations adapt to actual inflation is measured by the adjustment coefficient a.

Rational expectations draw on all available information. This may include a wide set of other
variables, or even knowledge of a macroeconomic model such as DAD-SAD.

Perfect foresight is never wrong. It assumes that individuals know and foresee everything,
taking the concept of rational expectations to the extreme.

Economically rational expectations suppose that individuals collect information and increase
the sophistication of their forecast only to the point where the costs begin to exceed the expected
benefits.

The real interest rate is the nominal interest rate (as observed in the market) minus the inflati-
on rate. It deducts from nominal interest payments the purchasing power lost due to price increases.

The Fisher equation says that interest rates change if either the real interest rate or inflati-
on changes. The implication that one percentage point increase in inflation raises the nominal
interest rate by one percentage point is called the Fisher effect.

Fisher equation:
i = r̄ + π
where i = nominal interest rate, r̄ = approximately constant normal rate interest rate, π = infla-
tion rate.

Inflation is an increase in the price level, expressed as a percentage rate of change.

Deflation is a fall in the price level.
Disinflation is a decrease in the rate of inflation.

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Chapter 9
Extensive form of production function:

Y = F (K, L)

The assumptions that economists make about the production function are as follows:
• Output increases as either factor or both factor increase.
• If one factor remains fixed, increases of the other factor yield smaller and smaller output
gains.

• If both factors rise by the same percentage, output also rises by this percentage.
The marginal product of capital is the output added by adding one unit of capital.

A production function has constant returns to scale if raising inputs by a given factors
ses output by the same factor.

Solow residual:
∆A ∆Y ∆K ∆L
= −α − (1 − α)
A Y K L

The requirement line shows the amount of investment required to keep the capital stock at
the indicated level.

A steady state is an equilibrium in which variables do not change anymore. The movement
from one steady state to another is called transition dynamics.

The golden rule of capital accumulation defines the savings rate that maximizes consumption.
At the resulting capital stock, additional capital exactly generates enough output gains to cover
the incurred additional depreciation.

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Chapter 10.1
I + (EX − IM ) = S + (T − G)
| {z } | {z }
total private investment National saving

arranged this way, the circular flow identity reveals that national saving is either invested
at home or abroad.

A rise in T shifts the savings curve up.

A rise in G shifts the savings curve down

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Chapter 11
Policy-making is the control of macroeconomic instruments, say, the decision to raise taxes next
year or to intervene in foreign exchanges today. Institutions provide guidelines or restrictions for
policy-makers.

A constraint lists what people can get, given a budget or other limiting factors.
Preferences indicate what people want.

Public support function:

s = s̄ − 0.5π 2 + βY
where s stands for the public support of the incumbent party or government, say, as measured by
the vote share received at an election or in an opinion poll.

A government indifference curve (which we also call an iso-support curve) in π − Y space

lists all combinations of π and Y between which the government is indifferent (or that yield the
same public support).

In contrast to normal business cycles, political business cycles have their roots in the political
system, usually in the motivation of politicians or parties.

Economists speak of a game if individual A’s best choice depends on what individual B does,
and B’s best choice depends on what A does.

An inflation bias exists if the inflation rate in equilibrium is higher than the optimal long-
run inflation rate of zero.

When time inconsistency is at work, a policy that seems optimal from today’s view is no
longer considered optimal when it is time to act.

Ways out of the inflation-bias trap:

1. The constraint, as represented by the SAS curve. Anything that would make the short-run
or surprise aggregate supply curve steeper would reduce the inflation bias.
2. The preferences, as represented by the iso-vote of indifference curves. Anything that makes
monetary policy care less about income gains, or other gains from surprise inflation, makes
indifference curves flatter. The result is a smaller inflation bias.

3. Instrument potency. This refers to the ability of the policy-maker to manipulate the mo-
ney supply so as to maximize utility. DAD has to remain lower, reduced inflation expectations
would keep SAS lower as well, removing or reducing the inflation bias.
The Friedman rule call for the money supply to grow at a constant rate approximating long-run
income growth.

The Taylor rule says the interest rate should deviate from its long-run target if inflation dif-
fers from its target and/or income departs from potential income.

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Chapter 13
Central bank independence measures the extent to which the central bank may conduct mo-
netary policy without having to respond to what the government wants.

The Taylor rule reads:

i = itarget + 0.5(π − π target + 0.5(Y − Y ∗ )
with Y ∗ indexed to 100. Then the income gap Y − Y ∗ is in percent. Instead, the income gap can
be written as ln(Y ) − ln(Y ∗ ).

A currency board fixes a country’s exchange rate and maintains total backing of its money
supply with foreign exchange.

Under a crawling peg the exchange rate is adjusted periodically in small, preannounced steps.

The consumer price index measures the price of a fixed basket of consumption goods, part
of which is produced domestically, and part of which is imported.

The producer price index measures the average price of goods and services produced domesti-
cally.

Index of consumer price inflation:

π = απD + (1 − α)ε + (1 − α)πF
where α is the share of home-produced goods in the domestic consumption basket, πD is a weigh-
ted average of the inflation of goods produced domestically and πF is a weighted average of the
inflation of goods produced in a foreign country.

Society’s preferences:
s = s̄ − 0.5π 2 − 0.5β(Y − Y α )2
where Y α is the desirable income.

Stochastic SAS curve:

π = πe + Y − Y ∗ − σ
where σ represent a shock and the SAS curve has slope 1.

The sacrifice ratio is the loss of income (usually measured in percentage of potential income)
caused by reducing inflation by one percentage point.
Total income losses
Sacrifice ratio =
Inflation reduction

The big-leap approach attempts to produce a desired reduction of inflation in one giant step.

The gradualist approach attempts to achieve a desired reduction of inflation slowly, in a series
of small steps.

An optimum currency area is a region or group of countries for which it is beneficial to have
a common currency.

Business cycle synchronization is achieved when two or more countries normally move in-
to booms and recessions together.

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Chapter 14.1-2
We speak of a budget deficit if taxes fall short of expenditure:

Deficit = G + iB − T

The primary deficit ignores government interest spending on the public debt, since the cur-
rent government has little control over this expenditure.

Primary deficit = G − T

The public debt is the net amount that the government owes to the private sector at home
and to foreigners.

Budget constraint:
T + ∆B = G + iB
when ∆M = 0.

Debt ratio dynamics:

∆b = g − t + (r − y)b
B G T ∆Y
where b = Y , g= Y , t= Y , r = i = real interest rate and y = Y .

Equilibrium debt ratio:

g−t
b∗ =
y−r

A phase diagram is a geometric representation of difference equations such as: ∆b = g−t+(r−y)b.

A phase line is the path along which a variable moves in a dynamic model.

Deficit ratio:
∆B
= g − t + ib
Y

General budget constraint:

T + ∆B + ∆M = G + iB

General debt ratio dynamics:

∆b = g − t − µm − (y − r)b
M
where m = PY , µ = money growth rate and r = i − π.

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Chapter 15.1-3
Okun’s law (version 1)
Y − Y ∗ = a′ (u∗ − u)
U
where u = N = unemployment rate, U = unemployment, N = labour force, a′ = aN and a =
some factor.

The Phillips curve postulates a negative relationship between inflation and unemployment. This
relationship is also affected by expected inflation.

Phillips curve:
π = π e + λ′ (u∗ − u)
where λ′ = a′ λ.

One version of Okun’s law states that income growth is negatively related to the change in
the rate of unemployment.

Okun’s law (version 2)

∆Y
= b − â∆u
Y−1
aN
where b = potential income growth and â = Y−1 .

Labour demand curve:

 α
 1−β  β
 1−β
K β
w = (1 − α − β)
L pOIL

Persistence means that post deviations of income from potential income continues to influence
current income.

Hysteresis is the extreme form of persistence, when temporary shocks affects income permanently.

SAS curve with persistence:

π = π e + λ[Y − (Y ∗∗ + α(Y−1 − Y ∗∗ ))]

SAS curve with hysteresis

π = π e + λ(Y − Y−1 )

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