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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

Macro Economics

Big Ideas

(a work in progress)

macro economics big ideas
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
slide3
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
aggregate demand

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)
business cycle
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
business cycle ad

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

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

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

marginal propensity to withdraw
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

the economic problem

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
fiscal policy
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 ($)

monetary policy
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
aggregate supply
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
as and ad
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

shifting aggregate supply
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?
microeconomic ss shifts
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
as shift not asymptote
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

as shift asymptote too
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

as shift asymptote too1
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

your assignment
Your assignment …

Aggregate Supply shifts in history?