Download A Bit Longer Principles Review

•GDP: Spending Y = C + I + G + NX
Money MV = PY
•Circular flow
Spending—Output—Income
•Measuring GDP and Price Indexes
•Unemployment Rate
•Laborforce
•Natural rate
•Interest rate: nominal and real
•Consumption function
C = C0 + mpc x Yd
•Aggregate Demand: C + I + G + NX
•Shifts
•Aggregate Supply: Short-run—Long-run
•AD—AS Equilibrium
•Automatic adjustment via price
•Keynesian intervention
•Fiscal Policy
•Money
•Functions
•Money creation in banking system
•Monetary Policy
•Tools
•Effects
•Phillips Curve
•Inflation—Unemployment
Tradeoff ?
•Expectations and “natural
rate”
•Economic Growth
•Factor growth—investment
•Technology
Macro - Review
GDP = C + I + G + NX
MV = P Y (= $GDP)
Circular
Flow
GDP: Real and Nominal
• Gross Domestic Product (GDP): the market
value of all final goods and services
produced within a country during a year.
GDP = C + I + G + Ex – Im
= C + I + G + NX
• Real GDP adjusts for inflation
$GDP = P x Q
$ GDP = GDP Deflator x Real GDP
Real GDP = Q = $GDP/P
= Nominal GDP divided by
(deflated by) the GDP Price Deflator
Price Indexes (Base Year = 100)
• Consumer Price Index (CPI)
– cost over time of a typical bundle of goods
and services purchased by households.
CPI = Cost of Typical Market Basket Now
divided by
Cost of the Same Basket in Base Year
Inflation Rate = {Change in CPI} ÷ {Initial CPI}
• GDP Price Deflator (GDP Price Index)
– measures average prices over time of all
goods and services included in GDP.
2006
Cars
Computers
Oranges
Quantity
Price
Quantity
Price
10
4
1,000
$2,000
$1,000
$1
12
6
1,000
$3,000
$500
$1
$GDP in 2006 =
2006 Base Prices
GDP in 2006|2006=
P in 2006|2006 =
2007Base Prices
GDP in 2006|2007=
P in 2006|2007 =
2006 – 2007 Average Price Base
GDP in 2006|avg P=
P in 2006|avg P =
2007
$GDP in 2007 =
% Growth =
GDP in 2007|2006=
% Growth =
P in 2007|2006=
GDP in 2007|2007=
% Growth =
P in 2007|2007=
GDP in 2007|avg P=
% Growth =
P in 2007|avg P=
Unemployment
Unemployment rate: % of labor force not working.
number unemployed
Rate of
= number in the Labor Force
Unemployment
• Unemployed persons: not working and looking
• Labor force: Employed + unemployed
noninstitutionalized persons 16+ years of age
• Underemployed workers are treated as employed
• Discouraged workers are not in the labor force
• “Natural” or normal rate of unemployment (NAIRU)
Seasonal Unemployment
Frictional Unemployment: searching for jobs
Structural Unemployment: Imperfect match between
employee skills and requirements of available jobs.
• Cyclical Unemployment : Results from business cycle
Interest Rates: Nominal and Real
• Nominal Interest Rate (i): the interest
rate observed in the market.
• Real Interest Rate (r): the nominal rate
adjusted for inflation ().
r=i-
• Low real interest rates spur business
investment spending (the I in C + I + G + NX)
Consumption Function
C = C0 + mpc * Yd
C0 = Autonomous Consumption
mpc = Marginal Propensity to Consume
mpc+mps = 1 [what’s not consumed is saved]
Yd = Disposable Income
Aggregate Demand Curve
AD = C + I + G + NX
Factors that Shift AD
AD = C + I + G + NX
• Consumption
– Income
– Wealth
– Interest Rates
– Expectations/Confidence
– Demographics
– Taxes
• Investment
– Interest Rates
– Technology
– Cost of Capital Goods
– Capacity Utilization
– Expectations/Confidence


Government Spending
Net Exports
– Domestic & Foreign
Income
– Domestic & Foreign
Prices
– Exchange Rates
– Government Policy
Aggregate Supply:
Short – Run & Long – Run
Aggregate
Demand and
Supply
Equilibrium:
Short-run
and long-run
responses to
increase in
aggregate
demand
:
:
Automatic
Adjustment
via
Price Change
Macroeconomic Viewpoints
Laissez - Faire
Classical
Monetarist
New Classical
Activist/Interventionist
Keynesian
New Keynesian
Demand-Side
Policy: Greater
Spending Means
Higher Prices
Price Level
(c) Aggregate Demand and Supply in
the classical range of AS curve. (Prices
rise without significant improvements
in output and employment.)
AD1
AD
Y?
Real GDP
Fiscal Policy: Some Definitions
• Fiscal policy: government spending and
taxing
– Demand-side policies
– Supply-side policies:
• Discretionary Fiscal Policy:
• Automatic Stabilizers:
– Progressive taxes
– Unemployment insurance
– Welfare payments / other transfer payments
Functions of Money
•
Medium of exchange
•
Unit of account
–Standard of Deferred Payment
•
Store of value
Multiple Creation of Bank Deposits  M1
Fractional Reserve Banking System: r = .1
Deposit expansion multiplier = 1/r
(when banks lend all excess reserves and public redeposits
proceeds of loans into the banking system  no leakages)
The Fed’s Policy Tools
1) Reserve Requirements
2) Discount rate
“primary credit rate”
3) Open market operations
• Manage the public’s expectations
Inflation Targeting?
How Money Supply Changes Affect GDP
Aggregate Demand and Supply
 Phillips Curve
Expectations
and the Phillips Curve
• Starting at (1): 5%
unemployment and 3%
inflation. People believe
inflation will continue at 3%
 Curve I.
• Then Fed hypes inflation to
6%  unemployment falls to
3% (Point 2 on Curve I).
• Expectations adjust to 6%
inflation  Wage demands
up  Economy moves to
point (3) Unemployment
returns to 5%.
• If expectations adjust
instantly, e.g., anticipating
Fed’s policy, economy moves
directly from (1) to (3).
Economic Growth
• Economic growth: an increase in Real GDP.
• Small changes in rates of growth
 Big changes over many years
• Per Capita Real GDP: real GDP divided by
population.
Determinants of Economic Growth
• Size and quality of the labor force
• Capital
• Land/Natural Resources … are not a necessary
condition for economic growth … they can be
acquired through trade.
• Technology