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PB202 MACROECONOMICS

PB202 MACROECONOMICS. CHAPTER 1 INTRODUCTION TO MACROECONOMIC. Prepared by: Azlina bt Azmi Session of December 2010. Chapter objectives. Learn macroeconomic in general To evaluate government policies and tools To know the Aggregate Demand and Aggregate Supply. Chapter Sneak Peak.

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PB202 MACROECONOMICS

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  1. PB202MACROECONOMICS CHAPTER 1 INTRODUCTION TO MACROECONOMIC Prepared by: Azlina bt Azmi Session of December 2010

  2. Chapter objectives • Learn macroeconomic in general • To evaluate government policies and tools • To know the Aggregate Demand and Aggregate Supply

  3. Chapter Sneak Peak Arrow Process Why use graphics from PowerPointing.com? - Definition -AD curve - AS curve • - What is macroeconomics? • Macroeconomics versus microeconomics • - Macroeconomic goal EFFECT ON UNEQUAL EQUILIBRIUM OF AD & AS AGGREGATE DEMAND & AGGREGATE SUPPLY GOVERNMENT POLICIES AND TOOLS MACROECONOMICS IN GENERAL SUMMARY Fiscal policy Monetary Policy • How does it affects price level and real GDP? • Factors that shift AD curve • Factors shift AS curve This illustration is a part of ”Building Plan”. See the whole presentation at slideshop.com/value-chain

  4. What is macroeconomics? • The branch of economics that studies decision making for the economy as a whole (inflation, unemployment, economic growth, money supply, national incomes, business cycle)

  5. Macroeconomics vs Microeconomics

  6. Macroeconomic Goal • Price stability • Economic growth • Full employment • Distribution of income

  7. Price stability • A situation in which prices in an economy don’t change much over time • Would mean that an economy would not experience inflation or deflation • However, it is not common in economy to have price stability

  8. Economic growth • A positive change in the level of production of goods and services by a country over a certain period of time • Nominal growth is defined as economic growth including inflation • Real growth is nominal growth minus inflation • Economic growth is usually brought about by technological innovation and positive external forces

  9. Distribution of income

  10. Inflation

  11. Inflation • An increase in the overall average price level of goods and services in the economy • How do we know when it is inflation? • By computing price level using CPI index • Key measurement: Consumer Price Index (CPI) • Types of inflation: • Cost Push Inflation • Demand Pull Inflation • Imported Inflation

  12. Cost – Push Inflation • A phenomenon in which the price levels rise (inflation) due to increases in the cost of wages and raw materials • Develops because the higher costs of production factors decreases in aggregate supply (the amount of total production) in the economy • Fewer goods being produced and demand for these goods remains consistent, the prices of finished goods increase (inflation)

  13. Demand Pull Inflation • Economists will often say that demand – pull inflation is a result of too many dollars chasing too few goods • Is a result of strong consumer demand. • When individuals are trying to purchase the same good, the price will inevitably increase

  14. Unemployment • The growth of economy and unemployment are always “catching our eyes” • Why? • Affect our future • GDP rises (economic in boom), full of jobs • GDP falls, firms facing a bankruptcy and more workers lost their job

  15. Business cycles • Alternating periods of economic growth and contraction, which can be measured by changes in real GDP (Tucker. I.B, 2008) • As a mirror of changes in unemployment and other key measures of macro economy • 4 phases: • Peak • Recession • Trough • Recovery

  16. Government Policies • In order to stimulate economic growth, price level and aggregate demand (AD) • To combat recession and inflation • Two types: • Fiscal Policy (tax and government spending) • Monetary Policy (money supply)

  17. Fiscal Policy • The use of government spending and taxes to influence the nation’s spending, employment and price level • Falls in to two types: • Expansionary Fiscal Policy • Contractionary Fiscal Policy

  18. Expansionary Fiscal Policy • In order to combat recession • To increase aggregate demand • Reduce tax, increase government spending or equally

  19. Contractionary Fiscal Policy • To combat inflation • To increase aggregate demand • Increase tax, reduce government spending

  20. Monetary Policy • The government tool to control level of money supply in the economy • Changes in money supply can led changes in interest rate • How Federal Reserve’s power to change money supply can also alter the interest rate • Two types: • Expansionary Monetary Policy • Contractionary Monetary Policy

  21. Expansionary Monetary Policy • To combat recession • Increasing money supply leads interest rate to fall • How? • Funds will be injected into the banking system to reduce interest rates • Spending and borrowing would increase • Resulting increase in consumption and investment to stimulate economic growth

  22. Contractionary Monetary Policy • To combat inflation • Decreasing money supply leads an increase in interest rate • How? • Withdrawing funds from the banking system and raising interest rates • The higher interest rates will encourage people to save more and spend less • More expensive for people to borrow money

  23. GDP growth and public expenditure share to GDP (%)

  24. Aggregate Demand • The total amount of goods and services demanded in the economy at a given time period. • Describe relationship between price levels and aggregate output • Negative relationship • Also known as “total spending” • Formula: AD = C+I+G+(X-M)

  25. Aggregate Supply • A total supply of goods and services produced in the economy at given overall price level at given time period • Positive relationship between price and output • Also known as “total output”

  26. AD – AS curve

  27. Shifts in AD • Consumer expect a recessions • Foreign income rises • Foreign price levels fall • Government spending increases

  28. Shifts in AD • Consumer expect a recessions • They will not spend as much money today as to “save for a rainy day’ • Thus, if spending has decreased, then AD must decrease • Shown shift to the left

  29. Consumer expect a recessions

  30. Shifts in AD • Foreign income rises • We would expect that foreigners would spend more money – both in their home country and in ours • A rise in foreign spending and exports – increase AD • AD curve shift to the right

  31. Foreign income rises

  32. Shifts in AD • Foreign price levels fall • If foreign price fall, then foreign goods become cheaper • We expect that consumers in our country are now more likely to buy foreign goods and less likely to buy domestic made goods • Thus, fall in AD • AD curve shift to the left

  33. Foreign price levels fall

  34. Government spending increases

  35. Shifts in AS • Size and quality of labor • Technological innovations • Increase in wages • Increase in production costs • Changes in producer taxes and subsidies

  36. Technological improvements

  37. Shift in AS • Workers expect inflation and negotiate higher wages now • If the cost of hiring workers has gone up, then companies will not want to hire as many workers • AS would shrink, and AS curve shift to the left • Reduction in real GDP as well as increase in the price level • The expectation of future inflation has caused price level to increase today

  38. Workers expect inflation and negotiate higher wages now

  39. Lower costs of input

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