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Macro Economics

Macro Economics. Big Ideas (a work in progress). Circular Flow of Income GDP Aggregate Demand The Business Cycle Unemployment Injections & Leakages Expenditure Multiplier. Fiscal Policy Aggregate Supply and the inflation-unemployment trade-off Banks and Banking Money Market

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Macro Economics

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  1. Macro Economics Big Ideas (a work in progress)

  2. Circular Flow of Income GDP Aggregate Demand The Business Cycle Unemployment Injections & Leakages Expenditure Multiplier Fiscal Policy Aggregate Supply and the inflation-unemployment trade-off Banks and Banking Money Market Monetary Policy Shifting AS Macro Economics: Big Ideas

  3. GDP • The value of all final goods and services produced in an economy in a year. • Measures activity • Refinements • GDP per capita • Real GDP • Drawbacks: R.F. Kennedy quote

  4. P / I AD AD GDP ($) Aggregate Demand • Circular flow of income • Σ market DD curves • “horizontal sum” • P-Q space changes: • Price or Inflation • GDP • GDP = C + I + G + (X-M)

  5. Business Cycle • GDP goes up and down • Peaks & troughs • Economy expands then contracts • Recession & recovery • Boom and bust cycle • Recession or depression? • The “accelerator” • Durable goods last … then they don’t

  6. The interdependence of goods and factor markets UN P / I AD1 AD0 GDP1 GDP GDP2 GDPF Business Cycle & AD (3) Factor demand (2) Producer supply $ $ Factor services Goods P P S S PF1 P1 D1 D1 QF1 O O Q1 Q Q Factor services Goods $ $ http://www.harpercollege.edu/mhealy/eco212i/lectures/asad/asad.htm (1) Consumer demand (4) Factor supply

  7. Unemployment • GDP ≈ size of the national income “pie” • U ≈ income distribution • Employment and unemployment

  8. The circular flow of income Expenditure Multiplier INJECTIONS Export expenditure (X) • How fast does money leak out / in? • Every dollar that does not leak out goes around again • From incremental income • “Marginal propensity” • Savings rate • Tax rate • Import rate • Amplifies both growth and contraction Investment (I) Government expenditure (G) Consumption of domestically produced goods and services (Cd) Factor payments GOV. BANKS, etc ABROAD Import expenditure (M) Net taxes (T) Net saving (S) WITHDRAWALS

  9. Marginal Propensity to Withdraw • Example: • MPS … 5% + MPT … 20% + MPM … 25 % MPW … 50% • Multiplier = 1 50% • Multiplier = 2 • Calculation: • MPS (marginal propensity to save) • MPT (marginal propensity to tax) • MPM (marginal propensity to import) MPW • Multiplier = 1 MPW

  10. Inflation Interest Rates Growth Taxes Bankruptcies Productivity Energy costs Unemployment Foreclosures The economic problem • It’s the economy, stupid! Credited to James Carville in the Bill Clinton1992 U.S. Presidential campaign • Size of the pie and who gets it • GDP, inflation and unemployment • Fiscal policy • Monetary policy

  11. Fiscal Policy • Change G in GDP equation • GDP = C + I + G + (X-M) • Shifts AD left or right • Gov’t surplus? • Gov’t deficit? • Fiscal Policy P / I AD AD GDP ($)

  12. Monetary Policy • Using interest rates to change GDP equation • GDP = C + I + G + (X-M) • Shifts AD left or right • Money Market • Interest, i , is the price of money • Money, Banks and Banking • Money Supply & Monetary Policy

  13. Aggregate Supply • Flat then steep • Very elastic at low GDP • Easy to attract employed resources into the economy • Perfectly inelastic at high GDP • Expensive to find / use additional resources – absolute limit to production • Marching slowly outward

  14. AS and AD • Economic policy almost all about AD • Fiscal policy • Monetary Policy • Trade-off • Inflation vs Unemployment • What about AS?? UN P / I AD1 AD0 GDP1 GDP GDP2 GDPF

  15. Shifting Aggregate Supply • “Supply-side economics” • Trickle-down economics • “Feeding the birds by feeding the horse” • Margaret Thatcher, UK 1979-90 • Ronald Reagan, US 1980-88 • The “holy grail” of macroeconomics • ( Da Vinci Code fans?) • GDP  and unemployment  • without inflation penalty • How?

  16. Microeconomic SS shifts • More suppliers? • AS is all there is • Cost of production? • If prices  - no asymptote shift • If resources  - asymptote shifts • Technology & nature and environment • Shifts asymptote but mostly one-way • Technology advances, environment gets worse

  17. AS Shift – not asymptote • Cost of production  • Wages across the board • Thatcher, Reagan? • Shifting incentives & rewards • Make things cheaper • Cannot make more AD AS0 AS1

  18. AS Shift – asymptote too • Works great in reverse!! • 1970’s “Stagflation” • Unemployment AND inflation • Energy shocks • 1973, 1979 • 2008-2011 oil prices? • Global climate change? AS1 AS0 AD

  19. AS Shift – asymptote too • Find more resources • Improve productivity • Real productivity • Build infrastructure • Improve technology • Next big thing? • Microchip revolution • Internet • What’s next? AS0 AS1 AD

  20. Your assignment … Aggregate Supply shifts in history?

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