Macroeconomic Policy and Agriculture

1
MacroeconomicPolicy and Agriculture

• Chapter 15

2
Can macroeconomic policy affect agriculture?
Sure! The above headline from the front page of
the Des Moines Register in 1984 described the
financial stress caused by double digit interest
rates used by the Fed to bring inflation under
control.
Page 357
3
Macro to Micro Linkages for Agriculture
Macro
CPI
AD
AS
GDP
Equilibrium in the national product market
4
Macro to Micro Linkages for Agriculture
Macro
Market
CPI
PCORN
D
AD
AS
S
GDP
QCORN
Equilibrium in the national product market
Equilibrium in the national corn market
5
Macro to Micro Linkages for Agriculture
Macro
Market
Micro
CPI
PCORN
D

MC
AD
AS
S
GDP
QCORN
Output
qcorn
Equilibrium in the national product market
Equilibrium in the national corn market
Equilibrium for Gary Corngrower in Texas
6
Macro trends contributing to the farm financial
crisis in the early-1980s
Page 372
7
Drop in real net farm income and higher real
interest rates led to declines in farm land values
Page 373
8
As real net farm incomes declined and real
interest rates rose, investment expenditures fell
sharply. Outlays for operating inputs also
declined.
General economy was in much better shape
Page 374
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Recall the policy impacts on the general economy
10
This table summarizes the impacts that
expansionary and contractionary monetary and
fiscal policy have upon key variables that can
have a distinct effect on the financial health of
farm operator families.
Page 358
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Effects of Expansionary Monetary Policy
Interest rates fall
AI
12
Effects of Expansionary Monetary Policy
Interest rates fall
AI
Investment grows
13
Effects of Expansionary Monetary Policy
Interest rates fall
Gap closes with some inflation
AI
Investment grows
14
Impact of Expansionary Macro Policy
Macro
Market
Micro
CPI
PCORN
D

AD
AS
S
MC
GDP
QCORN
Output
qcorn
Equilibrium in the national product market
Equilibrium in the national corn market
Equilibrium for Gary Corngrower in Texas
15

• Expansionary monetary policy impacts
• Ag commodity prices in general Higher
• Interest expenses Lower
• Net farm incomes Higher
• Farmland prices Higher

16
This table summarizes the impacts that
expansionary and contractionary monetary and
fiscal policy have upon key variables that can
have a distinct effect on the financial health of
farm operator families.
Page 358
17
Effects of Contractionary Monetary Policy
Interest rates rise
18
Effects of Contractionary Monetary Policy
Interest rates rise
Investment falls
19
Effects of Contractionary Monetary Policy
Interest rates rise
Gap closes with less inflation
Investment falls
20
Lets look at policy impacts on the Ag sector
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Impact of Contractionary Macro Policy
Macro
Market
Micro
CPI
PCORN
D

AD
AS
S
MC
GDP
QCORN
Output
qcorn
Equilibrium in the national product market
Equilibrium in the national corn market
Equilibrium for Gary Corngrower in Texas
22

• Contractionary monetary policy impacts
• Ag commodity prices in general Lower
• Interest expenses Higher
• Net farm incomes Lower
• Farmland prices Lower

23
This table summarizes the impacts that
expansionary and contractionary monetary and
fiscal policy have upon key variables that can
have a distinct effect on the financial health of
farm operator families.
Page 358
24
Effects of Expansionary Fiscal Policy
Taxes cut Deficit rises
25
Effects of Expansionary Fiscal Policy
Taxes cut Deficit rises
Consumption rises
26
Effects of Expansionary Fiscal Policy
Taxes cut Deficit rises
Gap closes with more inflation
Consumption rises
27
Effects of Expansionary Fiscal Policy
Spending raised Deficit rises
28
Effects of Expansionary Fiscal Policy
Spending raised Deficit rises
Gap closes with more inflation
29
Impact of Expansionary Macro Policy
Macro
Market
Micro
CPI
PCORN
D

AD
AS
S
MC
GDP
QCORN
Output
qcorn
Equilibrium in the national product market
Equilibrium in the national corn market
Equilibrium for Gary Corngrower in Texas
30

• Expansionary fiscal policy impacts
• Ag commodity prices in general Higher
• Interest expenses Higher
• Net farm incomes Higher
• Farmland prices Somewhat higher

31
This table summarizes the impacts that
expansionary and contractionary monetary and
fiscal policy have upon key variables that can
have a distinct effect on the financial health of
farm operator families.
Page 358
32
Effects of Contractionary Fiscal Policy
Taxes raised Deficit falls
33
Effects of Contractionary Fiscal Policy
Taxes raised Deficit falls
Consumption falls
34
Effects of Contractionary Fiscal Policy
Taxes raised Deficit falls
Gap closes with less inflation
Consumption falls
35
Effects of Contractionary Fiscal Policy
Spending cut Deficit falls
36
Effects of Contractionary Fiscal Policy
Spending cut Deficit falls
Gap closes with less inflation
37
Impact of Contractionary Macro Policy
Macro
Market
Micro
CPI
PCORN
D

AD
AS
S
MC
GDP
QCORN
Output
qcorn
Equilibrium in the national product market
Equilibrium in the national corn market
Equilibrium for Gary Corngrower in Texas
38

• Contractionary fiscal policy impacts
• Ag commodity prices in general Lower
• Interest expenses Lower
• Net farm incomes Lower
• Farmland prices Somewhat lower

39
Impacts on economic well being
40
Measuring Economic Well-Being
Price
Consumer surplus
1
Producer surplus
2
Quantity
41
What Can We Say About Garys Business?
Macro
Market
Micro
CPI
PCORN
D

AD
AS
S
MC
ATC
GDP
QCORN
Output
qcorn
Equilibrium in the national product market
Equilibrium in the national corn market
Equilibrium for Gary Corngrower in Texas
42
What Can We Say About Garys Business?
Macro
Market
Micro
CPI
PCORN
D

AD
AS
S
MC
ATC
GDP
QCORN
Output
qcorn
Equilibrium in the national product market
Equilibrium in the national corn market
Equilibrium for Gary Corngrower in Texas
43
Measuring Economic Well-Being
Price
Consumer surplus? Before 12 After 15 Gain
5 2
5
1
4
2
Producer surplus? Before 3 After 234 Gain
24
3
Quantity
44
What Can We Say About Garys Business?
Macro
Market
Micro
CPI
PCORN
D

AD
AS
S
MC
ATC
GDP
QCORN
Output
qcorn
Equilibrium in the national product market
Equilibrium in the national corn market
Equilibrium for Gary Corngrower in Texas
45
Impact of Contractionary Macro Policy
Macro
Market
Micro
CPI
PCORN
D

AD
AS
S
MC
GDP
QCORN
Output
qcorn
Equilibrium in the national product market
Equilibrium in the national corn market
Equilibrium for Gary Corngrower in Texas
46
Measuring Economic Well-Being
Price
Consumer surplus? Before 15 After 12 Loss
2 5
5
1
4
2
3
Producer surplus? Before 234 After 3 Loss
24
Quantity
47
Summary

• Know the direction of affects that expansionary
  and contractionary monetary and fiscal policy
  have on key macro variables, including interest
  rates, inflation and unemployment.
• Know the affects that expansionary and
  contractionary monetary and fiscal policy have on
  key Ag sector variables, including farm product
  prices, farmland values and farm input sales.
• Understand the implications for consumer and
  producer surplus.

48
Chapter 16 begins our focus on international
trade.