1. Macroeconomic Policy and Agriculture Chapter 15

2. Page 357 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. 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.

3. Macro AD AS CPI GDP Macro to Micro Linkages for Agriculture Equilibrium in the national product market

4. MacroMarket AD AS CPI GDP P COR N Q COR N D S Macro to Micro Linkages for Agriculture Equilibrium in the national product market Equilibrium in the national corn market

5. MacroMarketMicro AD AS CPI GDP P COR N Q COR N $ Output D S MC Macro to Micro Linkages for Agriculture Equilibrium in the national product market Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium for Gary Corngrower in Texas q corn

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 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. 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

9. Recall the policy impacts on the general economy

10. Page 358 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. 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.

11. AIAI Effects of Expansionary Monetary Policy Interest rates fall

12. AIAI Effects of Expansionary Monetary Policy Interest rates fall Investment grows

13. AIAI Effects of Expansionary Monetary Policy Interest rates fall Investment grows Gap closes with some inflation Gap closes with some inflation

14. MacroMarketMicro AD AS CPI GDP P COR N Q COR N $ Output D S Impact of Expansionary Macro Policy Equilibrium in the national product market Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium for Gary Corngrower in Texas q corn MC

15. Expansionary monetary Expansionary monetary policy impacts: Ag commodity prices in general = Higher Interest expenses = Lower Net farm incomes = Higher Farmland prices = Higher Expansionary monetary Expansionary monetary policy impacts: Ag commodity prices in general = Higher Interest expenses = Lower Net farm incomes = Higher Farmland prices = Higher

16. Page 358 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. 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.

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 Investment falls Gap closes with less inflation Gap closes with less inflation

20. Let’s look at policy impacts on the Ag sector

21. MacroMarketMicro AD AS CPI GDP P COR N Q COR N $ Output D S Impact of Contractionary Macro Policy Equilibrium in the national product market Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium for Gary Corngrower in Texas q corn MC

22. Contractionary monetary Contractionary monetary policy impacts: Ag commodity prices in general = Lower Interest expenses = Higher Net farm incomes = Lower Farmland prices = Lower Contractionary monetary Contractionary monetary policy impacts: Ag commodity prices in general = Lower Interest expenses = Higher Net farm incomes = Lower Farmland prices = Lower

23. Page 358 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. 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.

24. Effects of Expansionary Fiscal Policy Taxes cut Deficit rises Taxes cut Deficit rises

25. Effects of Expansionary Fiscal Policy Taxes cut Deficit rises Taxes cut Deficit rises Consumption rises

26. Effects of Expansionary Fiscal Policy Taxes cut Deficit rises Taxes cut Deficit rises Consumption rises Gap closes with more inflation Gap closes with more inflation

27. Effects of Expansionary Fiscal Policy Spending raised Deficit rises Spending raised Deficit rises

28. Effects of Expansionary Fiscal Policy Spending raised Deficit rises Spending raised Deficit rises Gap closes with more inflation Gap closes with more inflation

29. MacroMarketMicro AD AS CPI GDP P COR N Q COR N $ Output D S Impact of Expansionary Macro Policy Equilibrium in the national product market Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium for Gary Corngrower in Texas q corn MC

30. Expansionary Expansionary fiscal policy impacts: Ag commodity prices in general = Higher Interest expenses = Higher Net farm incomes = Higher Farmland prices = Somewhat higher Expansionary Expansionary fiscal policy impacts: Ag commodity prices in general = Higher Interest expenses = Higher Net farm incomes = Higher Farmland prices = Somewhat higher

31. Page 358 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. 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.

32. Effects of Contractionary Fiscal Policy Taxes raised Deficit falls Taxes raised Deficit falls

33. Effects of Contractionary Fiscal Policy Taxes raised Deficit falls Taxes raised Deficit falls Consumption falls

34. Effects of Contractionary Fiscal Policy Taxes raised Deficit falls Taxes raised Deficit falls Consumption falls Gap closes with less inflation Gap closes with less inflation

35. Effects of Contractionary Fiscal Policy Spending cut Deficit falls Spending cut Deficit falls

36. Effects of Contractionary Fiscal Policy Spending cut Deficit falls Spending cut Deficit falls Gap closes with less inflation Gap closes with less inflation

37. MacroMarketMicro AD AS CPI GDP P COR N Q COR N $ Output D S MC Impact of Contractionary Macro Policy Equilibrium in the national product market Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium for Gary Corngrower in Texas q corn

38. Contractionary Contractionary fiscal policy impacts: Ag commodity prices in general = Lower Interest expenses = Lower Net farm incomes = Lower Farmland prices = Somewhat lower Contractionary 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. Price Quantity Consumer surplus Consumer surplus Producer surplus Producer surplus Measuring Economic Well-Being 1 2

41. MacroMarketMicro AD AS CPI GDP P COR N Q COR N $ Output D S MC What Can We Say About Gary’s Business? Equilibrium in the national product market Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium for Gary Corngrower in Texas q corn ATC

42. MacroMarketMicro AD AS CPI GDP P COR N Q COR N $ Output D S MC Equilibrium in the national product market Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium for Gary Corngrower in Texas q corn What Can We Say About Gary’s Business? ATC

43. Price Quantity Measuring Economic Well-Being 1 2 3 5 4 Consumer surplus? Before = 1+2 After = 1+5 Gain = 5 – 2 Consumer surplus? Before = 1+2 After = 1+5 Gain = 5 – 2 Producer surplus? Before = 3 After = 2+3+4 Gain = 2+4 Producer surplus? Before = 3 After = 2+3+4 Gain = 2+4

44. MacroMarketMicro AD AS CPI GDP P COR N Q COR N $ Output D S MC What Can We Say About Gary’s Business? Equilibrium in the national product market Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium for Gary Corngrower in Texas q corn ATC

45. MacroMarketMicro AD AS CPI GDP P COR N Q COR N $ Output D S Impact of Contractionary Macro Policy Equilibrium in the national product market Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium for Gary Corngrower in Texas q corn MC

46. Price Quantity Measuring Economic Well-Being 1 2 3 5 4 Consumer surplus? Before = 1+5 After = 1+2 Loss = 2 – 5 Consumer surplus? Before = 1+5 After = 1+2 Loss = 2 – 5 Producer surplus? Before = 2+3+4 After = 3 Loss = 2+4 Producer surplus? Before = 2+3+4 After = 3 Loss = 2+4

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….