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MACROECONOMICS

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MACROECONOMICS

The Big Picture

- 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)

- 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 %

- 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%

- Helps
- Borrowers
- Some businesses
- Home owners

- Hurts
- Lenders
- Home owners
- Fixed income earners

$20.00

$20.00

Interest rate = 5%

$21.00

Inflation rate = 9%

$21.80

Real Interest rate = -4%

- Distorts price signals
- Those living on fixed incomes
- Businesses with fixed contracts
- Property owners with fixed leases
- Businesses who can raise prices
- COLA’s

- 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.

- 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

- 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?

- 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

The rate of economic growth

Real GDP2 - Real GDP1

Real GDP1

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

- 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

- 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.

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

- 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)

- 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.