welcome to day 12 principles of macroeconomics
TRANSCRIPT
Welcome to Day 12
Principles of Macroeconomics
Chapter 6
Measuring Total
Output and Income
1. MEASURING TOTAL OUTPUT
Learning Objectives1. Define gross domestic product and its
four major spending components and illustrate the various flows using the circular flow model.
2. Distinguish between measuring GDP as the sum of the values of final goods and services and as the sum of values added at each stage of production.
3. Distinguish between gross domestic product and gross national product.
1.1 The Components of GDP
• A flow variable is a variable that is measured over a specific period of time.
• A stock variable is a variable that is independent of time.
GDP = consumption (C) + private investment (I) + government purchases (G) + net exports (Xn)
Or
GDP = C + I + G + Xn
1.1 The Components of GDP
• Personal consumption is a flow variable that measures the value of goods and services purchased by households during a time period.
Firms Households
Personal consumption
Consumer goods and services
Factors of production (labor,
capital, and natural resources)
Factor incomes (wages, interest, profit, and rent)
1.1 The Components of GDP
• Gross private domestic investment is the value of all goods produced during a period for use in the production of other goods and services.
Firms Households
Personal consumptionPrivate investment
Factor incomes
1.1 The Components of GDP
• Government purchases are the sum of purchases of goods and services from firms by government agencies plus the total value of output produced by government agencies themselves during a time period.
• Transfer payments are payments that do not require the recipient to produce a good or service in order to receive them.
1.1 The Components of GDP
Firms Households
Personal consumption
Factor incomes
Private investment
Government agencies
Government purchases
1.1 The Components of GDP
• Exports are the sales of a country’s goods and services to buyers in the rest of the world during a particular time period.
• Imports are purchases of foreign-produces goods and services by a country’s residents during a period.
• Net Exports are exports minus imports.Exports (X) – imports (M) = net exports (Xn)
• A trade deficit occurs when there are negative net exports.
• A trade surplus occurs when there are positive net exports.
1.1 The Components of GDP
Firms Households
Personal consumption
Factor incomes
Private investment
Government agencies
Government purchases
Net Exports
Rest of the world
1.1 The Components of GDP
3. GDP AND ECONOMIC WELL-BEING
Learning Objectives1. Discuss and give examples of
measurement and conceptual problems in using real GDP as a measure of economic performance and of economic well-being.
2. Explain the use of per capita real GNP or GDP to compare economic performance across countries and discuss its limitations.
3.2 Conceptual Problems with Real GDP
• A second set of limitation or real GDP stems from problems inherent in the indicator itself.
– Household Production– Underground and Illegal Production– Leisure– The GDP Accounts Ignore “Bads” (e.g.
crime spending, negative externalities, environmental pollution)
• More GDP cannot necessarily be equated with more human happiness.
3.3 International Comparisons of Real GDP and GNP
• Per capita real GNP or GDP is a country’s real GNP or GDP divided by its population.
• Comparing one country’s output to another presents additional challenges. That said, when the data suggest huge disparities in levels of GNP per capita, for example, we observe real differences in living standards.
Welcome to Day 13
Principles of Macroeconomics
Chapter 7
Aggregate Demand
and Aggregate Supply
Output or Real GDP
• Potential output is the level of output an economy can achieve when labor is employed at its natural level.
– the natural level of real GDP
Welcome to Day 14
Principles of Macroeconomics
1. AGGREGATE DEMAND
Learning Objectives1. Define potential output, also called the natural level of
GDP.2. Define aggregate demand, represent it using a
hypothetical aggregate demand curve, and identify and explain the three effects that cause this curve to slope downward.
3. Distinguish between a change in the aggregate quantity of goods and services demanded and a change in aggregate demand.
4. Use examples to explain how each component of aggregate demand can be a possible aggregate demand shifter.
5. Explain what a multiplier is and tell how to calculate it.
1.1 The Slope of the Aggregate Demand Curve
• Aggregate demand is the relationship between the total quantity of goods and services demanded (from all the four sources of demand) and the price level, all other determinants of spending unchanged.
• The aggregate demand curve is a graphical representation of aggregate demand.
• The wealth effect is the tendency for a change in the price level to affect real wealth and thus alter consumption.
• The interest rate effect is the tendency for a change in the price level to affect the interest rate and thus to affect the quantity of investment demanded.
• The international trade effect is the tendency for a change in the price level to affect net exports.
• The change in the aggregate quantity of goods and services demanded refers to a movement along an aggregate demand curve.
Aggregate Demand
1.2 Changes in Aggregate Demand
• A Change in aggregate demand is a change in the aggregate quantity of goods and services demanded at every price level. This can be caused by changes in…
– Consumption,– Investment,– Government purchases,– Net exports.
1.2 Changes in Aggregate Demand
The Multiplier
• The multiplier is the ratio of the change in the quantity of real GDP demanded at each price level to the initial change in one or more components of aggregate demand that produced it.
EQUATION 1.1Multiplier = Δ (real GDP demanded at each price level)
initial Δ (component of AD)
EQUATION 1.2 Δ (real GDP demanded at each price level) = Multiplier × initial Δ (component of AD)
The Multiplier
AD1AD2
Effect of initial increase in net exports without
multiplier effect
The Multiplier
AD1AD2
Effect of initial decrease in net exports without
multiplier effect
2. AGGREGATE DEMAND AND AGGREGATE SUPPLY: THE LONG RUN AND THE SHORT RUN
Learning Objectives1. Distinguish between the short run and the long run, as these
terms are used in macroeconomics.2. Draw a hypothetical long-run aggregate supply curve and
explain what it shows about the natural levels of employment and output at various price levels, given changes in aggregate demand.
3. Draw a hypothetical short-run aggregate supply curve, explain why it slopes upward, and explain why it may shift; that is, distinguish between a change in the aggregate quantity of goods and services supplied and a change in short-run aggregate supply.
4. Discuss various explanations for wage and price stickiness.5. Explain and illustrate what is meant by equilibrium in the
short run and relate the equilibrium to potential output.
2. AGGREGATE DEMAND AND AGGREGATE SUPPLY: THE LONG RUN AND THE SHORT RUN
• The short run in macroeconomic analysis, is a period in which wages and some other prices are sticky and do not respond to changes in economic conditions.
• A sticky price is a price that is slow to adjust to its equilibrium level, creating sustained periods of shortage or surplus.
• The long run in macroeconomic analysis, is a period in which wages and prices are flexible.
2.1 The Long Run
• The long run aggregate supply (LRAS) curve is a graphical representation that relates the level of output produced by firms to the price level in the long run.
Long-Run Equilibrium
Why is the long-run aggregate supply curve (LRAS) straight up and
down?
Let’s believe that the more profitable something is, the more of it will be made. How do rising
prices affect profits?
Price of car Cost of making car$20,000 Labor $8,000
Steel $8,000Glass $4,000
Total Cost of Making Car = $20,000
Profit is $0.
Now double the sales price and all the costs.
Price of car Cost of making car$40,000 Labor $16,000
Steel $16,000Glass $8,000
Total Cost of Making Car = $40,000
Profit is $0.
How many more cars are being made at double the sales price?
Price of car Cost of making car$22,000 Labor $8,000
Steel $8,000Glass $4,000
Total Cost of Making Car = $20,000
Profit is $2,000.
Now double the sales price and all the costs.
Price of car Cost of making car$44,000 Labor $16,000
Steel $16,000Glass $8,000
Total Cost of Making Car = $40,000
Profit is $4,000.
Is it actually more profitable to make cars now?
Welcome to Day 15
Principles of Macroeconomics
1) Take out a piece of paper.2) Write your name, the day and
time of the class.3) Write Econ 2 Quiz 5
Fill in the blanks for the following equation. Use only the domestic parts of GDP You may
use the common one letter abbreviations.
1) GDP = ___ + ___ + ___
2) Write out what one of the abbreviations stands for.
2.2 The Short Run
• The short run aggregate supply (SRAS) curve is a graphical representation of the relationship between production and the price level in the short run.
• A change in the aggregate quantity of goods and services supplied is characterized by movement along the short-run aggregate supply curve.
• A change in short-run aggregate supply is characterized by a change in the aggregate quantity of goods and services supplied at every price level in the short-run.
Price of car Cost of making car$20,000 Labor $8,000
Steel $8,000Glass $4,000
Total Cost of Making Car = $20,000
Profit is $0.
Now double the sales price and all the costs.
Price of car Cost of making car$40,000 Labor $8,000
Steel $16,000Glass $8,000
Total Cost of Making Car = $32,000
Profit is $8,000.
How many more cars are being made at double the sales price?
Deriving the Short-Run Aggregate Supply Curve
Things that raise the cost of production shift the SRAS curve
left. Things that lower the of production shift the SRAS curve right. For example, changes in:
1) Resource prices2) Wages
3) Cost of employer paid health insurance
Changes in Short-Run Aggregate Supply
SRAS1 SRAS2SRAS3
Shift caused by decrease in
price of natural resources.
Shift caused by increase in
price of natural resources.
Short-Run Equilibrium
SRAS1SRAS2
Shift caused by increase in health insurance premium
paid by firms
AD1
Y2 Y1
P1
P2
Short-Run Equilibrium
SRAS1
AD2
Shift caused by increase in government purchases.
AD1
Y2Y1
P1
P2
3. RECESSIONARY AND INFLATIONARY GAPS AND LONG-RUN MACROECONOMIC
EQUILIBRIUM
Learning Objectives1. Explain and illustrate graphically
recessionary and inflationary gaps and relate these gaps to what is happening in the labor market.
2. Identify the various policy choices available when an economy experiences an inflationary or recessionary gap and discuss some of the pros and cons that make these choices controversial.
3.1 Recessionary and Inflationary Gaps
• A recessionary gap is the gap between the level of real GDP and potential output, when real GDP is less than potential.
3.1 Recessionary and Inflationary Gaps
• An inflationary gap is the gap between the level of real GDP and potential output, when real GDP is greater than potential.
What determines exactly where Yp is?
When unemployment is high, wages fall in the long-run.
When unemployment is low, wages rise in the long-run.
When unemployment is at the natural rate of unemployment, wages stay the same in the long-run.
Yp is the amount of real GDP produced when unemployment is
at the natural level.
It is the amount of stuff we make when unemployment is such that wages do not change even in the
long-run.
When output is low, unemployment is high and wages fall. SRAS curve shifts right until output rises to Yp.
When output is high, unemployment is low and wages rise. SRAS curve shifts left until output rises to Yp.
Welcome to Day 16
Principles of Macroeconomics
Welcome to Day 17
Principles of Macroeconomics
1) Take out a piece of paper.2) Write your name, the day and
time of the class.3) Write Econ 2 Quiz 6
In a normal one good supply and demand curve, the supply curve
slopes up, showing that the businesses will produce more of the good at a higher price. Explain why
the macro long-run aggregate supply curve does not slope up, but is
straight up and down, showing that businesses do not produce more of
the good at higher prices.
3.2 Restoring Long-Run Macroeconomic Equilibrium
AD1
SRAS1
P1
Inflationary gap Y2YP
SRAS2
LRAS
P3
P2
AD2
Shift caused by increase in government purchases.
Shift in long run as nominal wages rise.
3.2 Restoring Long-Run Macroeconomic Equilibrium
AD1
SRAS1
P1
Recessionary gap Y2 YP
SRAS2
LRAS
P2
Shift in long run as nominal wages fall.
Shift caused by increase in
insurance premiums paid by firms..
Chapter 9
The Nature and
Creation of Money
1. WHAT IS MONEY?
Learning Objectives1. Define money and discuss its three basic
functions.2. Distinguish between commodity money
and fiat money, giving examples of each.3. Define what is meant by the money
supply and tell what is included in the Federal Reserve System’s two definitions of it (M1 and M2).
1.1 The Functions of Money
− A medium of exchange is anything that is widely accepted as a means of payment. • To Barter an individual exchanges
goods directly for other goods.− A unit of account is a consistent means
of measuring the value of things.− A store of value is an item that holds
value over time.
• Money is anything that serves as a medium of exchange.
1.2 Types of Money
• Commodity money is money that has value apart from its use as money.
– E.g. Mackerel in federal prisons, gold, and silver • Fiat money is money that some authority, generally
a government, has ordered to be accepted as a medium of exchange.
– E.g. paper money and coins in the U.S. “this note is legal tender for all debts public and private”
• Currency is paper money and coins.• Checkable deposits are balances in checking
accounts.• A check is a written order to a bank to transfer
ownership of a checkable deposit.
1.3 Measuring Money
• Money supply refers to the total quantity of money in the economy at any one time.
• Liquidity is the ease with which an asset can be converted into currency.
• M1 is the narrowest of the Fed’s money supply definitions that includes currency in circulation, checkable deposits, and traveler’s checks.
• M2 is a broader measure of the money supply than M1 that includes M1 and other deposits.
The two M’s: January 2012
Measured in billions
Welcome to Day 18
Principles of Macroeconomics
2. THE BANKING SYSTEMS AND MONEY CREATION
Learning Objectives1. Explain what banks are, what their
balance sheets look like, and what is meant by a fractional reserve banking system.
2. Describe the process of money creation (destruction), using the concept of the deposit multiplier.
3. Describe how and why banks are regulated and insured.
2.1 Banks and Other Financial Intermediaries
• A financial intermediary is an institution that amasses funds from one group and makes them available to another.
• A bank is a financial intermediary that accepts deposits, makes loans, and offers checking accounts.
2.2 Bank Finance and a Fractional reserve System
• A balance sheet is a financial statement showing assets, liabilities, and net worth.
• Assets are anything of value.• Liabilities are obligations to other parties.• Net worth refers to assets less liabilities.• Reserves are bank assets held as cash in
vaults and in deposits with the Federal Reserve.
• A fractional reserve banking system is a system in which banks hold reserves whose value is less than the sum of claims outstanding on those reserves.
The Consolidated Balance Sheet for U.S. Commercial Banks, January 2012
Assets Liabilities and Net Worth
Reserves $1,592.9 Checkable deposits $8,517.9
Other assets 1,316.2 Borrowings 1,588.1
Loans 7,042.0 Other liabilities 1,049.4
Securities 2,546.1
Total assets $12,497.2 Total Liabilities $11,155.4
Net worth $1,341.8
2.3 Money Creation
• Required reserves are the quantity of reserves banks are required to hold.
• The required reserve ratio is the ratio of reserves to checkable deposits a bank must maintain.
• Excess reserves are reserves in excess of the required level.
• A bank is said to be loaned up when its excess reserves equal zero.
A Balance Sheet for ACME Bank
ACME Bank
Assets Liabilities
Reserves $1,000 Deposits $10,000
Loans $9,000
A Balance Sheet for ACME Bank
A Balance Sheet for ACME Bank
2.4 The Deposit Multiplier
• A deposit multiplier is the ratio of the maximum possible change in checkable deposits (ΔD) to the change in reserves (ΔR).
EQUATION 2.1
EQUATION 2.5
10000,1$
000,10$
R
Dmd
dmR
D
rrr
1
Welcome to Day 19
Principles of Macroeconomics
1) Take out a piece of paper.2) Write your name, the day and
time of the class.3) Write Econ 2 Quiz 7
Using the AD curve and the long run aggregate supply curve only, show the effect of an increase in AD in the long run. Mark starting price and quantity
P1 and Q1, and ending price and quantity P2 and Q2. Next to the
diagram, write what is happening to price and quantity (rises, falls, stays the
same).
2.4 The Deposit Multiplier
• A deposit multiplier is the ratio of the maximum possible change in checkable deposits (ΔD) to the change in reserves (ΔR).
EQUATION 2.1
EQUATION 2.5
10000,1$
000,10$
R
Dmd
dmR
D
rrr
1
3. THE FEDERAL RESERVE SYSTEM
Learning Objectives1. Explain the primary functions of central banks.2. Describe how the Federal Reserve System is
structured and governed.3. Identify and explain the tools of monetary policy.4. Describe how the Fed creates and destroys money
when it buys and sells federal government bonds.
• A central bank is a bank that acts as a banker to the central government, acts as a banker to banks, acts as a regulator of banks, conducts monetary policy, and supports the stability of the financial system.
3.1 Structure of the Fed
3.2 Powers of the Fed
• Fed sets the reserve requirements.
What happens to the money supply if the Fed lowers the reserve requirement?
What if they raise the reserve requirement?
3.2 Powers of the Fed
• Fed sets the reserve requirements.
What happens to the money supply if the Fed lowers the reserve requirement? - Money supply goes up.
What if they raise the reserve requirement? - Money supply goes down.
3.2 Powers of the Fed
• The discount window and other credit facilities– The discount rate is the interest rate
changed by the Fed when it lends reserves to banks.
– The federal funds market is a market in which banks lend reserves to one another.
– A federal funds rate is the interest rate charged when one bank lends reserves to another.
What happens to the money supply if the Fed raises the discount rate?
What if they lower the discount rate?
What happens to the money supply if the Fed raises the discount rate?
- Lowers the money supply.
What if they lower the discount rate?- Raises the money supply.
3.2 Powers of the Fed
• Open market operations–A bond is a promise by the issuer
of the bond to pay the owner of the bond a payment or a series of payments on a specific date or dates.
–Open market operations are the buying and selling of federal government bonds by the Fed.
Open market operations are the Fed buying and selling government bonds to banks.
When the Fed buys bonds from banks with newly created money, the banks have more
reserves to loan out.-Money supply goes up.
When the Fed sells bonds to banks, the banks have less reserves to loan out.
- Money supply goes down.
Welcome to Day 20
Principles of Macroeconomics
1) Take out a piece of paper.2) Write your name, the day and
time of the class.3) Write Econ 2 Quiz 8
1. Which of the following is money as defined by M2?
A) Currency inside bank vaults.B) Credit cards.
C) Gold.D) None of the above.
Chapter 10
Financial Markets
and the Economy
1. THE BOND AND FOREIGN EXCHANGE MARKETS
Financial markets are markets in which funds accumulated by one group are made available to another group.
– Savers supply funds to financial markets and borrowers demand funds.
1.1 The Bond Market
• Bond prices and interest rates.• The face value of a bond is the amount
the issuer of a bond will have to pay on the maturity date.
• The maturity date is the date when a bond matures, or comes due.
• The interest rate is the payment made for the use of money, expressed as a percentage of the amount borrowed.
1.1 The Bond Market
EQUATION 1.1
• At a price of $950, the interest rate is 5.3%
rateinterest 100price Bond
price bond- valueFace
%3.5 100$950
$950-$1,000
It is generally considered that a decrease in the interest rate,
ceteris paribus, will increase AD, as people will borrow more money to
buy things.
You can hold your money as cash for convenience of spending
ORYou can put it in the bank to earn
interest.
The higher the interest rate, the less cash you want to hold.
2.1 The Demand for Money
2.1 The Demand for Money
• Other determinants of the demand for money
– Real GDP– The Price Level– Expectations– Preferences
An increase in real GDP, for example, causes demand to increase. At the same interest rate the quantity of money
demanded increases from M to M’.
2.2 The Supply of Money
• Supply curve of money is the curve that shows the relationship between the quantity of money supplied and the market interest rate all other determinants of supply unchanged.
M
2.3 Equilibrium in the Market for Money
• Money market is the interaction among institutions through which money is supplied to individuals, firms, and other institutions that demand money.
• Money market equilibrium is the interest rate at which the quantity of money demanded is equal to the quantity of money supplied.
2.3 Equilibrium in the Market for Money
The Fed creates new money. 1) Banks have excess reserves.
2) Interest rates fall.3) Loans increase which increases
spending (AD).4) People hold onto more cash,
and put less in the bank.