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MACROECONOMICS

MACROECONOMICS. The Big Picture. Goals of Macroeconomic Policy. Price Stability Economic Growth Full Employment. INFLATION. A sustained increase in the general price level as measured by the consumer price index (CPI) or the implicit price deflator (IPD).

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MACROECONOMICS

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  1. MACROECONOMICS The Big Picture

  2. Goals of Macroeconomic Policy • Price Stability • Economic Growth • Full Employment

  3. INFLATION A sustained increase in the general price level as measured by the consumer price index (CPI) or the implicit price deflator (IPD)

  4. Unanticipated inflation hurts lenders and helps borrowers • Why interest? Lenders have to be compensated for foregoing current consumption • The real rate of interest • The nominal or market rate minus • The rate of inflation • If the nominal rate is 5% and the rate of inflation is 6%, the real rate of interest is %

  5. Unanticipated inflation hurts lenders and helps borrowers • Why interest? Lenders have to be compensated for foregoing current consumption • The real rate of interest • The nominal or market rate minus • The rate of inflation • If the nominal rate is 5% and the rate of inflation is 6%, the real rate of interest is -1%

  6. InflationPerverse Robin Hood • Helps • Borrowers • Some businesses • Home owners

  7. Inflation Perverse Robin Hood • Hurts • Lenders • Home owners • Fixed income earners

  8. Lenders are hurt $20.00 $20.00

  9. Lenders are hurt Interest rate = 5% $21.00 Inflation rate = 9% $21.80 Real Interest rate = -4%

  10. Inflation affects others • Distorts price signals • Those living on fixed incomes • Businesses with fixed contracts • Property owners with fixed leases • Businesses who can raise prices • COLA’s

  11. How does Inflation/Deflation affect you? • If your purchasing power increases as a result of inflation/deflation, you win. • If your purchasing power falls as a result of inflation/deflation, you lose.

  12. Full Employment • The labor force 16 to 65, able and willing to work, working or actively seeking work • The unemployment rate – the household survey Number of people unemployed labor force

  13. Change in nonfarm payroll employment • The establishment survey • A better but not good indicator • What is the difference between the number of employees you had last month and the number you have this month?

  14. Economic Growth • Nominal GDP doesn’t tell you anything; it must be “deflated.” • Use the IPD to change nominal to real GDP • REAL GDP = Nominal GDP * 100 IPD

  15. Economic Growth The rate of economic growth Real GDP2 - Real GDP1 Real GDP1

  16. THE CIRCULAR FLOW

  17. THE EXPANDED CIRCULAR FLOW

  18. Total Expenditures • E = C + I + G + (X-M) • C = Personal consumption • I = Business investment • G = Total government spending • (X-M) = Net exports (exports minus imports)

  19. Main Points • Macroeconomics investigates the relationships between different sectors of the economy and the affect of changes in different variables on those sectors. • Macroeconomics is the study of market aggregates such as gross domestic product, the unemployment rate, and the consumer price index. • Three goals for an economy are full employment, price stability, and economic growth

  20. Main Points • Inflation is an increase in the overall price level • Inflation arbitrarily redistributes purchasing power and distorts price signals. • The real rate of interest is the market rate minus the rate of inflation.

  21. Two measures of the strength of the labor market are the unemployment rate and the change in nonfarm payroll employment. Economic growth is the rate of change of Real GDP for a specific time period, usually a year. Economic growth should be strong enough to generate employment but not so strong as to cause inflation Main Points

  22. Main Points • The circular flow illustrates the interdependence of different sectors of the economy. • Total expenditures are composed of consumption, investment, government, and net exports • E = C + I + G + (X-M)

  23. Main Points • Consumption is the largest spending category (2/3 of total spending) in GDP and is affected mainly by income. • Investment is the least stable spending category and is determined mainly by the relationship between the cost of borrowing and the expected return on investment. • Government spending is fairly predictable due to its contractual nature and built in stabilizers.

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