Macroeconomics
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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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Macroeconomics

MACROECONOMICS

The Big Picture


Goals of macroeconomic policy

Goals of Macroeconomic Policy

  • Price Stability

  • Economic Growth

  • Full Employment


Inflation

INFLATION

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


Unanticipated inflation hurts lenders and helps borrowers

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 %


Unanticipated inflation hurts lenders and helps borrowers1

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%


Inflation perverse robin hood

InflationPerverse Robin Hood

  • Helps

    • Borrowers

    • Some businesses

    • Home owners


Inflation perverse robin hood1

Inflation Perverse Robin Hood

  • Hurts

    • Lenders

    • Home owners

    • Fixed income earners


Lenders are hurt

Lenders are hurt

$20.00

$20.00


Lenders are hurt1

Lenders are hurt

Interest rate = 5%

$21.00

Inflation rate = 9%

$21.80

Real Interest rate = -4%


Inflation affects others

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


How does inflation deflation affect you

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.


Full employment

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


Change in nonfarm payroll employment

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?


Economic growth

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


Economic growth1

Economic Growth

The rate of economic growth

Real GDP2 - Real GDP1

Real GDP1


The circular flow

THE CIRCULAR FLOW


The expanded circular flow

THE EXPANDED CIRCULAR FLOW


Total expenditures

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)


Main points

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


Main points1

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.


Main points2

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


Main points3

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)


Main points4

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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