gdp: spending y = c + i + g + nx money mv = py circular flow spending—output—income measuring...
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•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
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Macro - ReviewMacro - Review
GDP = C + I + G + NXGDP = C + I + G + NX
MV = P Y (= $GDP)MV = P Y (= $GDP)
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Circular Flow
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GDP: Real and Nominal• Gross Domestic Product (GDP): 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 GDP = C + I + G + Ex – Im
= C + I + G + NX= C + I + G + NX• Real GDPReal GDP adjusts for inflation
$GDP = P x Q $ GDP = GDP Deflator x Real GDP$ GDP = GDP Deflator x Real GDP
Real GDP = Q = $GDP/P = Nominal GDP divided by
(deflated by) the GDP Price Deflator
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Price Indexes (Base Year = 100)Price Indexes (Base Year = 100)• Consumer Price Index (CPI)Consumer Price Index (CPI)
– cost over time of a typical bundle of goods and services purchased by households.
CPI = Cost of Typical Market Basket CPI = Cost of Typical Market Basket NowNow
divided bydivided by
Cost of the Same Basket in Base YearCost of the Same Basket in Base Year
Inflation Rate = {Change in CPI} Inflation Rate = {Change in CPI} ÷ {Initial CPI}÷ {Initial CPI}
• GDP Price Deflator (GDP Price Index)GDP Price Deflator (GDP Price Index)– measures average prices over time of all
goods and services included in GDP.
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2006 2007
Quantity Price Quantity Price
Cars
Computers
Oranges
10
4
1,000
$2,000
$1,000
$1
12
6
1,000
$3,000
$500
$1
$GDP in 2006 = $GDP in 2007 =
% Growth =
2006 Base Prices
GDP in 2006|2006= GDP in 2007|2006=
% Growth =
P in 2006|2006 = P in 2007|2006=
2007Base Prices
GDP in 2006|2007= GDP in 2007|2007=
% Growth =
P in 2006|2007 = P in 2007|2007=
2006 – 2007 Average Price Base
GDP in 2006|avg P= GDP in 2007|avg P=
% Growth =
P in 2006|avg P = P in 2007|avg P=
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UnemploymentUnemployment
Rate ofUnemployment
= number unemployednumber in the Labor Force
Unemployment rate: % of Unemployment rate: % of labor forcelabor force not working. not working.
• 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)(NAIRU)Seasonal UnemploymentFrictional Unemployment: searching for jobsStructural Unemployment: Imperfect match between employee skills and requirements of available jobs.• Cyclical Unemployment : Results from business cycle
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Interest Rates: Nominal and RealInterest 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 - r = i - • Low real interest rates spur business
investment spending (the II in C + II + G + NX)
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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
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Aggregate Demand Curve
AD = C + I + G + NX
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Factors that Shift AD
• Consumption– Income– Wealth– Interest Rates– Expectations/Confidence– Demographics– Taxes
• Investment– Interest Rates– Technology– Cost of Capital Goods– Capacity Utilization– Expectations/Confidence
AD = C + I + G + NXAD = C + I + G + NX
Government Spending Net Exports
– Domestic & Foreign Income
– Domestic & Foreign Prices
– Exchange Rates– Government Policy
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Aggregate Supply: Short – Run & Long – Run
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Aggregate Demand and
Supply Equilibrium:
Short-run and long-run responses to increase in aggregate demand
::
AutomaticAdjustment
viaPrice Change
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Macroeconomic ViewpointsLaissez - Faire
ClassicalMonetaristNew Classical
Activist/InterventionistKeynesianNew Keynesian
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Demand-Side Policy: Greater
Spending Means Higher Prices
Real GDP
Pri
ce
Le
ve
l
(c) Aggregate Demand and Supply in the classical range of AS curve. (Prices rise without significant improvements in output and employment.)
AD1
AD
Y?
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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
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Functions of Money
• Medium of exchange
• Unit of account
–Standard of Deferred Payment
• Store of value
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Multiple Creation of Bank Deposits M1Fractional 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)
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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?
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How Money Supply Changes Affect GDP
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Aggregate Demand and Supply Phillips Curve
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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).
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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