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Macro Economics

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Montana Gray

on 18 April 2014

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Transcript of Macro Economics

Policies To Influence it
Aggregate Model
Price Levels
Demand Side
Supply Side
GDP = Y = C + I + G + NX
CPI: Consumer Price Index
basket of goods
measures cost of living
comparable between years
INFLATION: when CPI increases
DEFLATION: when CPI decreases
but slower than before
CPI Problems:
new products
change in quality
regional differences
different ppl = different baskets
Increase in PL = decrease in value of $
Decrease in PL = increase in value of $
Redistribution of wealth
creditors --> borrowers
ppl who save
fixed pensioners

Uncertainty of businesses and consumers

Cost of change in Menu

Money Illusion
new year = income raises = spend more bc think you have more money = don't because INFLATION
Effects of Inflation
Effects of Deflation
Uncertainty of businesses and consumers

Cost of change in Menu

Deflationary spiral
when ppl delay purchases bc think that $ will keep going down
Therefore decrease in C+I
Unemployed = ppl actively looking for work but
who do not have a job

Labour force = all ppl looking for a job or working
Unemployment Rate = Unemployed / Labour force
BUT it doesn't take in account
underground economy (stay at home parent / self construction / nanny...)
regional and demographic variations (ethnic minorities / different cities...)
Unemployment due to fluctuations of the business cycle
Natural Rate of Unemployment
(1) Seasonal: ski lifter in summer

(2) Frictional: workers between jobs

(3) Structural: when supply and demand of labour do not match up - location, skills, technological...
Cyclical Unemployment
GDP = Y = C + I + G + NX
It is a measure of the output of an economy = stuff x prices

Real - adjusted for inflation
Nominal - current value ( :[ because cannot tell if prices go up or if stuff produced goes up)
Per capita - takes in account population of country
Circular Flow of Money and Stuff
Aggregate Demand
Slopes downwards because?
Wealth effect
- low PL --> increase real wealth --> increased spending (C)
Interest rates effect
- low PL --> decrease in i --> increased spending (I)
Exchange rate effect
- low PL --> decrease in exchange rate --> increase on spending on net exports (NX)

Curve shifts because?
Changes in C - RIGHT -->
tax cut, consumer confidence :)
LEFT --> tax increase, :(
Changes in I - RIGHT -->
decrease in i, decrease in firm taxes
LEFT --> increase in i, increase in firm taxes
Changes in G - depends on govt priorities
increase in spending

LEFT --> decrease in spending
Changes in NX - RIGHT -->
boom overseas
LEFT --> recession overseas

Aggregate Supply
Slopes downward because?
Sticky wages - low PL --> increase real wage
--> firms hire less or produce less
Sticky prices - low PL -->
Misperception - low PL -->

Curve shifts because?
Changes in Labour - RIGHT -->
decrease unemployment
LEFT --> increase unemployment
Changes in Capital - RIGHT -->
more machines...
LEFT --> less machines...
Changes in Resources - RIGHT -->
increased availability
LEFT --> decreased availability
Changes in Technology - RIGHT -->
LEFT --> :(
IB Economics
Unit 2
Macro Goals:
Low unemployment
Low and stable inflation
Growth in GDP:
Shifting the
PPC curve
Equity in income distribution:
Flattening the
Lorenz Curve
Do not confuse with GNP which is all the output made by workers from the NATIONALITY of the county, whether they are within he country or they are abroad.
PPC Curve
Lorenz curve
Gini Coefficient: area between red and green / area under green
0 < GC < 1 - Where 0 = , 1 ≠

Fairness - when get what you deserve - it doesn't happen on purpose (ex: born in poor family)
Sameness - everyone
would get average wage
Not everybody values things the same
way --> different types of wealth
Income distribution is more equal than wealth distribution (wealth can accumulate from generation to the other)
We have to interfere!
Can increase equality by making gini coefficient closer to 0
Solutions to poverty:
minimum wage
food stamps = subsidies
transfer payments = Robin Hood
investment in public goods
not being able to afford basic necessities
:) for = but :( because ≠ efficiency
Model Basics
D - Fiscal Policy
D - Monetary Policy
Goal: flatten business cycle (see unemployment section)
Implemented by the government - income from taxes and selling things -
spending on paperclips and aircrafts...

Government Budget:
DEFICIT - when T < G
BALANCED - when T = G
SURPLUS - when T > G
To remedy to deficit: can borrow from
american people - BONDS
people abroad - FOREIGN BANKS
1) Government Spending
2) Investment
Government influences it bu changing business taxes

Government influences it by changing tax burden
1) Progressive Taxes
Recession --> decease in income --> decrease in tax revenue

2)Unemployment Benefits
Recession --> increase in u.b. --> increase in G
Shift AD to RIGHT
Increase in G or decrease in T

Shift AD to LEFT
Decrease in G or increase in T
Pros Cons
Pulls out of recession for
Can target specific sectors
Helps moderate inflation
Long run growth
Direct impact on AD --> G
Politics can get in the way
Time lags - pass bills and stuff
Tax cuts can be ineffective at shifting AD to RIGHT because behavior
Hard to fine tune
Crowding out:
deficit spending (G > T)
--> borrows money by selling bonds
--> less money in banks
--> increase interest rates
--> decrease in investment
--> decrease in AD

There is 1/country and they are more or less independent of the government

Functions: govt's bank - commercial banks' bank and regulator - conducts Monetary policy!
Influence the AD by changing the I factor of GDP
1) Shift AD to the RIGHT
Increase money supply by buying bonds
Increase savings
Decrease interest rates
Increase Investments

2) Shift AD to to the LEFT
Decrease money supply by selling bonds
Decrease savings
Increase interest rates
Decrease Investments
Central Banks
Can control inflation
No crowding out
No secondary effects
Aimed LR --> ≠ politics
Quickish action ≠ fiscal
Can fine tune
Somewhat indirect
Can be ineffective in deep recession - because :( behavior
Still has some time lags
Can only lower i.r. to 0
Cannot do much in stagflation --> either improve GDP or inflation
Goal: improve growth = make potential output line steeper
(Targets LRAS)
S - Interventionist
Govt. intervention --> Keynesian
Need to improve quantity / quality of factors of production:
Human - improve health, education, training...
Physical - invest in public goods...
Technology - invest in R and D
Provide incentives for others to invest - brakes in taxes
S - Market Based
Trying to make market better at correcting it-self
1) Encouraging Competition
Privatization: more incentives to reduce costs - more incentives to make profit - more efficient --> because govt employees have fixed wages
Enforce Anti-Monopoly Legislation: more incentives to be efficient (costs down so that have a competitive price)
Deregulation: regulation is expensive ...
Private Financing: when govt asks private company to do stuff for it --> they all compete to have the lowest price to be hired --> increase in efficiency
2) Labour Market Reforms
Abolishing minimum wage: ≠ price floor - ≠labour surplus
Weaken labour unions:
more incentive to hire
Reduce unemployment benefits: more incentives to find work
Reduce job security (severage packages): more incentives to be a good worker
3) Incentive Related Policies
Taxes --> less taxes - each additional hour of work has more value - increase in output
Capital gains and interest
Neoclassical View
Keynesian View
Full transcript