Macro Review Topics and Percentages 8-12% Basic Economic Concepts 12-16% Measurement of Economic...

Macro Review

Topics and Percentages8-12% Basic Economic Concepts12-16% Measurement of Economic Performance10-15% National Income and Price Determination15-20% Financial Sector20-30% Inflation, Unemployment, and Stabilization

Policies5-10% Economic Growth and Productivity10-15% Open Economy: International Trade and

Finance

8-12% Basic Economic Concepts

A. Scarcity, choice, and opportunity costsB. Production possibilities curveC. Comparative advantage, absolute advantage, specialization, and exchangeD. Demand, supply, and market equilibriumE. Macroeconomic issues: business cycle, unemployment, inflation, growth

Production PossibilitiesAssumptions:

Full EmploymentFixed Resources and Technology

MovementsAlong curve shows opportunity costOutward shift illustrates economic growth Inward shift indicates destruction of resources

Producing Capital Goods will lead to greater economic growth than producing consumer goods. (Butter will lead to more growth than guns)

Production Possibilities GraphCapital Goods

Consumer Goods

Points A,B,C, are efficient pts.Point D is underutilizationPoint E is economic growth

May Lead to mostFuture growth

May Lead to mostFuture economic growth

F.E. F.E.1

Supply and Demand Factors Demand Changes when:

Income changes Related Products, complements and substitutes, (price or quality

change) Expectations (future price change) Consumers (more or less added) Tastes, Fads, Preferences change

Demand Increase: As Demand Increases, Price and Quantity Increase as well.

Quantity

Demand Decrease: As Demand Decreases, Price and Quantity decrease as well

Quantity

Supply Factors

Supply Changes When: Input prices change (resources and wages) Government (tariffs, quotas, and subsidies) Number of sellers change Expectations (about price and product profitability change) Disasters (weather, strikes, etc..)

Supply Increase: As Supply Increases, Quantity Increases, but Price Falls.

QuantityQ1 Q2

Supply Decrease: As Supply Decreases, Quantity Decreases, but Price Increases.

Quantity

Comparative AdvantageA nation should specialize in producing goods in which it has

a comparative advantage: ability to produce the good at a lower opportunity cost.

Example:Cheese Wine

Spain: 2 pounds 2 Cases

France 2 pounds 6 Cases

Spain should produce cheese (1C = 1W)

France should produce wine (1W = 1/3C)

Currency TermsAppreciationAppreciation: Currency is increasing in demand (stronger dollar)U.S. Currency will appreciate when more foreigners: travel to the U.S., buy more U.S. goods or services, or buy the U.S. dollar to invest in bonds

Currency TermsDepreciationDepreciation: Currency is decreasing in demand (weaker dollar) Being SUPPLIED in exchange for other currency.U.S. Currency will depreciate when fewer foreigners: travel to the U.S., buy fewer U.S. goods or services, or sell the U.S. dollar to invest in their own bonds

Business Cycles The increases and decreases in Real GDP consisting of four phases:

Peak: highest point of Real GDP Recession: Real GDP declining for 6 months Trough: lowest point of Real GDP Recovery: Real GDP increasing (trough to peak)

Business Cycle

Peak -- Greatest spending and lowest unemployment. Inflation becomes a problem.

Contraction/Recession -- Reduction of spending levels and increasing unemployment. Some cyclical unemployment begins.

Trough -- Least spending and highest unemployment Expansion -- Spending increases and unemployment

decreasesWe want to avoid extreme inflation and extreme

unemployment. We want stability!

Full Employment

The two big problems…The two big problems that plague the economy are:

INFLATIONINFLATIONUNEMPLOYMENTUNEMPLOYMENT

People generally prefer steady, stable growth to large “ups” and “downs.” Therefore, government policies, both fiscal and monetary (see later sections), are aimed at flattening the business cycle.

The government wants not only to stimulate the economy when it’s slow, but also to slow it down when it’s growing too quickly.

12-16% Measurement of Economic Performance

A. National income accounts1. Circular flow2. Gross domestic product3. Components of gross domestic product4. Real versus nominal gross domestic product

B. Inflation measurement and adjustment1. Price indices2. Nominal and real values3. Costs of inflation

C. Unemployment1. Definition and measurement2. Types of unemployment3. Natural rate of unemployment

Circular Flow of Economic Activity

Households supply resources (land, labor, capital, entrepreneurial ability) to the resource market. Households demand goods and services from businesses.

Businesses demand household resources and supply goods and services to the product (factor) market.

GDP (Gross Domestic Product): The total dollar (market) value of all final goods and services produced in a given year.

Expenditure Formula:

Consumption (C) + Business Investment (I) + Government Spending (G) + Net Exports (Xn)

Gross Domestic Product

GDP: What Counts:Goods Produced but not Sold (I)Goods produced by a foreign country (Japan) in the U.S. (Honda, Toyota)

Government spending on the militaryIncrease in business inventories

GDP: What DOES NOT count: Intermediate Goods (Tires sold by Firestone to Ford) Used Goods Non-Market Activities (Illegal, Underground) Transfer Payments (Social Security) Stock Transactions

Shortcomings of GDP: Leading to GDP being understated.

Nonmarket activities: (services of homemakers) does not count.

Leisure: Does not include the value of leisure.

Does not include improvements in product quality.

Underground economy

GDP: Overstated Includes damage to the environment

Includes more spending on healthcare-Americans being unhealthy.

Includes money spent to fight crime-more police officers, more jails, etc…

Real GDP Real GDP= Nominal GDP adjusted for inflation. Calculation:

Real GDP = Nominal GDPPrice Index in Hundredths( deflator)

Example: U.S. 2005 Real GDP= $12,4558 (billions)

1.1274 (based on 2000)$11.048 Trillion

Real GDP Per Capita

Most commonly used to compare and measure each country’s standard of living and overall economic growth.

Real GDP/Nation’s Population

InflationInflation Rise in the general level of prices Reduces the purchasing power of money Measured with the Consumer Price Index (CPI)

Reports the price of a market basket , more than 300 goods that are typically purchased by an urban household

Calculating Inflation

CPI in Recent Year – CPI in Past YearDivided by CPI in Past Year

(Number then Multiplied by 100)

Example: 2002 CPI = 179.9 2001 CPI = 177.1

Rate of Inflation: 179.9-177.1 = 1.58%177.1

Types of InflationTypes of Inflation

Demand Pull InflationDemand Pull Inflation: ‘too much money chasing too few goods.”

AD Curve will shift to the right, resulting in a higher Price Level and greater Output (until reaching Y*

Cost-Push InflationCost-Push Inflation: Major cause is a supply shock-OPEC cutting back on oil production

AS Curve will shift to the left resulting in a higher Price Level and a decrease in Real GDP.

Real and NominalNominal TermsReal Income = Nominal Income

Price Index (Hundredths)

Real Interest Rate = Nominal Interest Rate – Inflation Rate

Nominal Interest Rate = Real Interest Rate + Inflation Premium

(anticipated inflation)

InflationInflation: WinnersWinners & LosersLosers

WinnersWinners:Debtors who borrow money that will be repaid with

“cheap” dollars.Those who have anticipated inflation

LosersLosers:Savers (especially savings accounts)Creditors (Banks will be repaid with those “cheap” dollarsFixed-Income Recipients (retirees receiving the same

monthly pension)

UnemploymentUnemploymentCalculation: Number of Unemployed

Labor Force

(Multiplied by 100 to put as a %)

The Labor Force is the total of employed and unemployed workers.

U.S. unemployment should be about 5%

EmployedEmployed You are considered to be employed if:

You work for 1 hour as a paid employee (so part-time workers count) You are temporarily absent from work (illness, strike, vacation) You work 15 hours or more as an unpaid worker (family farms are common)

UnemployedUnemployed Must be looking for work (at least 1 attempt in the past 4 weeks) Are reporting to a job within 30 days Are temporarily laid off from their job

Not In Labor ForceNot In Labor Force

A person who is not looking for work: Full-time students Stay at home parents Discouraged workersDiscouraged workers: those who have given up hope of finding

a job. Retirees

UnemploymentUnemployment100% of the people will never be employed, so the

government considers 4-6% unemployment to be “full employment.”

Types of Unemployment Frictional - temporary and unavoidableStructural - results from changes in technology or

a business restructure (ex. Merger)Seasonal- occurs when industries slow or shut

down for a season Cyclical - results from a decline in the business

cycle.We can never be at Full Employment if there is

any percentage cyclically unemployed.

10-15% National Income and Price Determination

A. Aggregate demand1. Determinants of aggregate demand2. Multiplier and crowding-out effects

B. Aggregate supply1. Short-run and long-run analyses2. Sticky versus flexible wages and prices3. Determinants of aggregate supply

C. Macroeconomic equilibrium1. Real output and price level2. Short and long run3. Actual versus full-employment output4. Economic fluctuations

Consumption and Saving

As income increases, both consumption and savings will increase.

The determinants of overall consumption and savings are: (More money or a positive outlook will increase consumption and reduce savings. Less money or a negative outlook will increase savings and reduce consumption.Wealth (financial assets)Expectations about future prices and incomeReal Interest RatesHousehold DebtTaxes

Marginal Propensities

Marginal Propensity to Consume (MPC) and the Marginal Propensity to save (MPS) must equal 1.

The MPS is used to derive the spending multiplier, which equals: 1_

If the MPS is .2, the spending multiplier is 5.

Any increase in spending must be multiplied by 5 to determine the overall increase in Real GDP.

Aggregate DemandAggregate Demand

AD (C + I + G + X)

PriceLevel

Real GDP

Downward sloping:1. Real-Balances Effect: change in purchasing power

2. Interest-Rate Effect: Higherinterest rates curtail spending

3. Foreign Purchase Effect: Substitute foreign products for U.S. products

Aggregate DemandAggregate Demand

Determinants of AD:C + I + G + Xn (Yes, its GDP)An increase in any of these, due to lower interest rates

or optimism will increase AD and shift the curve to the right.

A decrease in any of these: more debt, less spending, tax increase, will cause a decrease in AD and shift the curve to the left

Aggregate Demand DeterminantsAggregate Demand Determinants Consumption

Wealth Expectations Debt Taxes

Investment Interest Rates Expected Returns

Technology Inventories Taxes

Government Change in Gov. spending

Net Exports National Income Abroad Exchange Rates

Aggregate Supply Factors:Aggregate Supply Factors:R: resource prices (The CELL/ wages and materials, as well as OIL)

E: environment [legal-institutional] (Taxes, Subsidies, more regulation)

P: productivity (better technology)

Aggregate SupplyAggregate Supply Short Run:

Assumes that nominal wages are “sticky” and do not respond to price level changes.

Is Upward sloping as businesses will increase output to maximize profits

Generally considered to be a year or less.

Long Run: Curve is vertical because the

economy is at its full-employment output.

As prices go up, wages have adjusted so there is no incentive to increase production.

Generally considered to be longer than a year.

Aggregate Supply GraphPrice Level AS

Recession Growth

InflationShort Run Long Run

Extended vertical lineIllustrates the LRAS andY* (Full-Employment)

Real GDP

Another look as ASPL

LRASSRAS

Changes that lead to a new equilibrium on the left of LRAS = Recession

Changes that lead to a new equilibrium on the right of LRAS = Inflation (AKA “an overheated economy”)

NOTE!!For the AP exam, assume that there are only two

determinants that simultaneously affect BOTH short term aggregate supply and aggregate demandbusiness tax changes and foreign currency changes.

A change in business taxes shifts AD and AS in the same direction

A change in FX sends both curves in the opposite directions.

Demand-Pull InflationDemand-Pull Inflation

AD1 (C + I + G + X)

Price Level

Real GDPY*

Cost-Push InflationCost-Push Inflation

Price Level

Real GDP

AD1 ( C + I + G + X)

Demand-Pull InflationDemand-Pull Inflation

Cost-Push InflationCost-Push Inflation

DEMAND-PULL INFLATIONDEMAND-PULL INFLATION

Real domestic output

COST-PUSH INFLATIONCOST-PUSH INFLATION

Occurs when short-run AS shifts left

Government response with increased AD

Evenhigherpricelevels

55COST-PUSH INFLATIONCOST-PUSH INFLATION

If government allows a recession to occur

Nominal wages fall &AS returns

to its originallocation

15-20% Financial Sector(Money and Banking)

A. Money, banking, and financial markets1. Definition of financial assets: money, stocks, bonds2. Time value of money (present and future value)3. Measures of money supply4. Banks and creation of money5. Money demand6. Money market7. Loanable funds market

B. Central bank and control of the money supply1. Tools of central bank policy2. Quantity theory of money3. Real versus nominal interest rates

Money Supply Terms

M1= Checkable Deposits and Currency M2= M1 + Savings deposits, money market accounts, small time

deposits (less than $100,000) Velocity of Money Equation:

MV = PQ ( GDP) (M= Money Supply and V = Velocity (number of times per year the average dollar is spent on goods and services.

Banks and Balance SheetsAssets Liabilities

Reserves $15,000 Checkable Deposits $100,000Securities $15,000Loans $70,000

If the current reserve requirement is 10%:

1. What is the amount of new loans this bank can generate?Answer: $100,000 Checkable deposits X a 10% reserve requirement =

$10,000 required reserves. If the bank has $15,000 in reserves, $5,000 of those are excess reserves and can be loaned out .

2. How much in new loans can be generated by the entire banking system?

Answer: Money Multiplier = 1/Required Reserve Ratio=1/.1010 X $5,000 = $50,000

FED and the Money Market

MS1 MS2

Nominal InterestRate

Quantity of Money

Vertical curve-Supply controlledBy the FED. An increase in MSleads to a rightward shift andlower nominal interest rates.

Interest Rate-Investment Expected Rate of Return: Amount of Profit (expressed as a percentage)

a business expects to gain on a project/investment. This rate must be greater than the interest in order to be profitable. The Real Rate of Return is most important. An expected profit of 10%, that

costs 5% in interest = The real rate of return: 5%.

Investment Demand Curve: 62

Quantity of Investment

Real Rate ofReturn

At lower real interest rates businesses will Increase investment , leading to an increaseIn AD (aggregate demand). At higher rates ofInterest, less money will be invested

Shifts of the Investment Demand Curve

Expected Rate of Return

( Real Interest Rate.)

Quantity of Investment

A shift from ID1 to ID2 Represents an increase inInvestment demand. A shiftFrom ID1 to ID3 represents adecrease in investment Demand.

Loanable Funds Market and Expansionary Fiscal Policy

Used for FISCAL POLICY (Government spending-Deficit Spending)

Quantity of Funds

Real Interest Rate

An increase in Gov. spending increases the demand for loanable funds and raises real interest rates

Loanable Funds Market and Contractionary Fiscal Policy

Used for FISCAL POLICY (Government spending-Deficit Spending)

Quantity of Funds

Real Interest Rate

A decrease in Gov. spending decreases the demand for loanable funds and lowers real interest rates

Nominal:with Inflation

Real:without Inflation

Nominal GDP: GDP measured in terms of current Price Level at the time of measurement. (Unadjusted for inflation)

Real GDP: GDP adjusted for inflation; GDP in a year divided by a GDP deflator (Price Index) for that year

68INCOMEINCOME

NOMINAL INCOME: number of dollars received by an individual or group for its resources during some period of time

REAL INCOME: amount of goods and services which can be purchased with nominal income during some period of time; nominal income adjusted for inflation

69INTEREST RATE (I%)

NOMINAL I%: interest rate expressed in terms of annual amounts currently charged for interest; not adjusted for inflation

REAL I%: interest rate expressed in dollars of constant value (adjusted for Inflation) and equal to the NOMINAL I% minus the EXPECTED RATE OF INFLATION

NominalInterest

RealInterest

InflationPremium

ANTICIPATED INFLATIONANTICIPATED INFLATION

71WAGES NOMINAL WAGES: amount of

money received by a worker per unit of time (hour, day, etc.);

Money Wage

REAL WAGES: amount of goods and sevices a worker can purchase with their NOMINAL WAGE; purchasing power of the nominal wage.

(Real = Nominal – Inflation rate)

NOMINALNOMINAL/REAL TIPs

If nominal rates INCREASE and Price Level INCREASE, the CHANGE in Real is “indeterminable.”

If nominal Wage rates do NOT change and Price Level fall. REAL WAGES increase.

NOMINAL RATES “PIGGY-BACK” REAL RATES & NOT VICE VERSA.

20-30% Inflation, Unemployment, and Stabilization Policies

A. Fiscal and monetary policies1. Demand-side effects2. Supply-side effects3. Policy mix4. Government deficits and debt

B. Inflation and unemployment1. Types of inflation

a. Demand-pull inflationb. Cost-push inflation

2. The Phillips curve: short run versus long run3. Role of expectations

Fiscal PolicyFiscal PolicyUsing Taxes and Government spending to stabilize the

economy.

Controlled by the President and Congress

Discretionary Fiscal Policy: Congress must take action (change the tax rates) in order for the action to be implemented.

Automatic Stabilizers: Unemployment benefits, Progressive Tax System, these changes are implemented automatically to help the economy.

FISCAL POLICY CHANGES AD …. EXCEPT when the question specifically states

there is a change in business taxes.

Types of Fiscal PolicyTypes of Fiscal PolicyExpansionaryExpansionary Used to Fight a Recession LOWER TAXES INCREASE GOVERNMENT

SPENDING

ContractionaryContractionary Used to fight Inflation RAISE TAXES DECREASE GOVERNMENT

SPENDING

Expansionary Fiscal PolicyExpansionary Fiscal Policy

Price Level

Real GDPAD1 ( C + I + G + X )

Contractionary Fiscal PolicyContractionary Fiscal Policy

Raising taxes or reducing government spending to fight inflation and stabilize the economy.

Price Level

Real GDP

Tax Multiplier [-MPC/MPS]Tax Multiplier [-MPC/MPS] Remember, if the government decreases taxes, the result is not as great

as a spending increase, since households will save a portion (MPS) of the tax cut.

The Tax Multiplier = -MPC /MPS-MPC /MPS Example: If the MPC is .8 and the MPS is .2 Spending Multiplier = 1/.2 or 5

Tax Multiplier = -.8 /.2 or -4-.8 /.2 or -4

Crowding-Out EffectCrowding-Out EffectAn Expansionary Fiscal Policy as previously

diagrammed will lead to higher interest rates.At higher interest rates, businesses will take out

fewer loans and there will be a decrease in INVESTMENT (I)

At the same time there will be a decrease in CONSUMER SPENDING (C) as they will take out fewer loans as well.

This CROWDING OUT EFFECT will reduce the gain made by the expansionary fiscal policy.

Net Export Effect & Expansionary Fiscal Policy

Government spending has led to an increase in interest rates.

At higher interest rates, foreigners demand more U.S. dollars to invest in bonds.

This leads to an appreciation of the U.S. dollar. This leads to a decrease in Net Exports, as foreigners now

have to exchange more of their currency for the U.S. dollar to buy exports.

This decrease in Net Exports will reduce AD and counter to some extent the expansionary fiscal policy.

Net Export Effect & Contractionary Fiscal Policy

A decrease in government spending has led to a decrease in real interest rates.

At lower interest rates, foreigners demand less U.S. dollars to invest in bonds.

This leads to a depreciation of the U.S. dollar. This leads to an increase in Net Exports, as foreigners now

have to exchange less of their currency for the U.S. dollar to buy exports.

This increase in Net Exports will increase AD and further strengthen the contractionary fiscal policy.

Criticisms of Fiscal PolicyCriticisms of Fiscal PolicyTiming Problems

Recognition Lag: identifying recession or inflationAdministrative Lag: getting Congress/President to agree

to take actionOperational Lag: Time needed to see the results of the

fiscal policyPolitical Business Cycles: Politicians may take

inappropriate action to get reelected (lower taxes during an inflationary period). Plus it is difficult to raise taxes

The Federal Reserve System (FED)The Federal Reserve System (FED)

Control Monetary Policy Headquartered in Washington D.C. 12 Federal Reserve Districts Board of Governors (7 members) is the central authority Members are appointed by the President and confirmed by the Senate

Federal Open Market Committee Federal Open Market Committee (FOMC)(FOMC)

Made up of 12 people: Board of Governors + New York FED President + 4 other regional presidents (who rotate)

Meets regularly to direct OPEN MARKET OPERATIONS (buying or selling of bonds) to maintain or change interest rates

FED and the Money MarketFED and the Money MarketMS1 MS2

Quantity of Money

Vertical curve-Supply controlledBy the FED. An increase in MSleads to a rightward shift and

lower interest rates.

Easy Money Policy on AD/ASEasy Money Policy on AD/AS Buying Government Bonds, lowering the discount rate, or lowering

reserve requirements, to fight a recession, by decreasing interest rates, increasing investment spending and/or consumption and increasing AD.

Price Level

Real GDPQ1

AD1 (C + I + G + X)

Effects of an Easy Money PolicyEffects of an Easy Money PolicyLOWER INTEREST rates which will lead to an

INCREASE in INVESTMENT and CONSUMPTION.The U.S. dollar will DEPRECIATE, leading to an

increase in NET EXPORTS as well.These effects STRENGTHEN the overall

monetary policy (opposite of fiscal policy’s crowding-out and net export effect

FED and a TIGHT Money PolicyFED and a TIGHT Money Policy

MS2 MS1

Quantity of Money

Vertical curve-Supply controlledBy the FED. A decrease in the Money supply, shifts the MS curve to the left and raises interest rates.

Tight Money Policy and AD/ASTight Money Policy and AD/AS Selling bonds, raising the discount rate, or raising reserve requirements

to fight inflation which will raise interest rates, decrease investment and/or consumption and decrease Aggregate Demand (AD).

Price Level

Real GDP

Effects of a Tight Money PolicyEffects of a Tight Money Policy

At the higher interest rates, INVESTMENT SPENDING, and CONSUMPTION will decrease.

At higher interest rates, the U.S. dollar will APPRECIATE (foreigners demand more U.S. securities). This will lead to a DECREASE in NET EXPORTS.

Again, the Monetary Policy is STRENGTHENED as a result, unlike the effects of a contractionary fiscal policy.

Extended AD-AS ModelThis is the other way to graph the AD-AS Model

Price Level

Real GDPY*

The intersection of the 3 curvesIs the Full-Employment Equilibrium

Extended AD-AS Model and Demand-Pull Extended AD-AS Model and Demand-Pull InflationInflation In Demand-Pull Inflation, the AD curve has shifted to the right of the

LRAS and SRAS intersection.

Price Level

Real GDPY*

The Price Level and Real GDP has increased.

Extended AD-AS and Demand-Pull InflationExtended AD-AS and Demand-Pull Inflation

Mainstream economists will fight inflation as previously discussed: with either a tight monetary policy or a contractionary fiscal policy. The goal would be to move the aggregate demand curve to the left.

Classical economists would argue to DO NOTHING. As nominal wages rise, the SHORT-RUN AS curve will shift to the left (resources and wages are becoming more expensive), restoring the economy to its full-employment output level, but with a higher Price Level.

Extended AD-AS Model and Cost-Push InflationExtended AD-AS Model and Cost-Push Inflation

Price Level

Real GDPY*

SRAS2 LRAS

Cost-Push inflation occurs when the SRAS has shifted to the left Of the LRAS and AD intersection.

Here the Price level has Increased and REAL GDP

has decreased.

Extended AD-AS and Cost-Push InflationExtended AD-AS and Cost-Push Inflation

Mainstream economists must decide whether to target the Price Level or Unemployment, before taking any action.

Classical economists would argue to DO NOTHING. Eventually, wages and resource prices must decrease and when they do the SRAS curve will shift back to the right, restoring the economy to its full-employment output level and the original Price Level.

Extended AD-AS Model and RecessionExtended AD-AS Model and Recession In a recession due to a decrease in AD, the AD curve is to the left of the

LRAS and SRAS intersection; showing a decrease in both the Price Level and Real GDP.

Price Level

Real GDPY*

Extended AD-AS and RecessionExtended AD-AS and Recession

Mainstream economists will fight a recession as previously discussed: with either an easy money policy or an expansionary fiscal policy. The goal would be to move the aggregate demand curve to the right.

Classical economists would argue to DO NOTHING. The decrease in wages and resource prices will shift the SRAS curve to the right, restoring the economy to its full-employment output level, but with a LOWER price. (SELF-CORRECTION)

Short-Run Phillips CurveShort-Run Phillips CurveSuggests an inverse relationship between the inflation rate

and the unemployment rate.InflationRate(percent)

Unemployment Rate (percent)

When the unemployment rate isLow (2%), the inflation rate willMost likely be high (8%).

When theUnemployment rateIs high, inflation willlikely be low.

Short-Run Phillips CurveShort-Run Phillips Curve When the Government fights unemployment, typically higher inflation

will result. When the Government fights inflation, typically, more unemployment will result. Thereby, we move along the Short-Run Phillips Curve. (Changes in AD = movements on the SRPC.

InflationRate(percent)

Unemployment Rate (percent)

Shifting the Short-Run Phillips CurveShifting the Short-Run Phillips Curve

The Short-Run Phillips curve can also shift, this would mean that both the unemployment rate and inflation rate are changing at the same time. (A change in AS)

Stagflation, unemployment andInflation occurring together (OPEC decreasing Oil supply,causes this type of shift)

Inflation Rate%

Unemployment Rate %

Shifting the Short-Run Phillips CurveShifting the Short-Run Phillips Curve The Short-Run Phillips curve can also shift, this would mean that both the

unemployment rate and inflation rate are changing at the same time.

When Supply increases (productivity surge in 90s)more than demand, prices willfall, while GDP and employmentIncrease; shifting the curve to the left.

Inflation Rate %

Unemployment Rate %

The SRPC is a mirror image of AS – If AS moves right, SRPC moves left.

Long-Run Phillips CurveLong-Run Phillips Curve The Long-Run Phillips Curve is vertical, like the Long Run Aggregate

Supply Curve. So, in the long run there is no tradeoff between inflation and unemployment. Only the Price Level will change.

Inflation Rate%

Unemployment Rate %5

Laffer CurveLaffer Curve What is the optimal tax rate? A tax of 0% will provide no tax revenue. A

tax rate of 100% will also lead to no tax revenue (no incentive to work). Answer must be somewhere in between.

Tax Rate

Tax Revenue0

Economic PhilosophiesClassical: Believes that the government SHOULD NOT

interfere in the economy. And believes in self-correction of economic problems.

Keynesian: Believes that GOVERNMENT SHOULD interfere in the economy (taxes, government spending). Most “mainstream” economists are Keynesians

Rational Expectations: Believes that monetary and fiscal policy have certain effects on the economy and take action to make these policies ineffective.

5-10% Economic Growth and Productivity

A. Investment in Human CapitalB. Investment in Physical CapitalC. Research and development, and technological progressD. Growth Policy

Economic GrowthEconomic Growth

Five Factors connected to long run economic growth.

Supply Factors: Increase in natural resources (quantity and quality) Increase in human resources (quantity and quality) Increase in capital goods Improvements in technology

Demand Factors: Increase in consumption by households, businesses, and

government

Illustrating Economic GrowthIllustrating Economic Growth Production Possibilities Curve

Capital Goods

Consumer Goods

Illustrating Long Run GrowthIllustrating Long Run GrowthCan also be illustrated with the extended AD-AS Model.

Real GDP

Price Level

AD1AD2

SRAS1 SRAS2LRAS1LRAS2

10-15% Open Economy: International Trade and Finance

A. Balance of payments accounts1. Balance of trade2. Current account3. Capital account

B. Foreign exchange market1. Demand for and supply of foreign exchange2. Exchange rate determination3. Currency appreciation and depreciation

C. Net exports and capital flowsD. Links to financial and goods markets

International TradeInternational Trade

Comparative Advantage and Specialization allows for economic growth and efficiency. (More of each good can be obtained by trading-Trading line illustrates this)

Trade barriers create more economic loss than benefits.Today there is a trend towards free trade and a reduction in

trade barriers.Strongest arguments for protection are the infant industry

and military self-sufficiency arguments.WTO oversees trade agreements and disputes, but has

become a target of protesters lately.

Exchange Rates and International MarketsExchange Rates and International Markets

An increase in the value of a currency is called appreciationappreciation. A decrease in the value of a currency is called depreciationdepreciation. Multinational firms convert currencies on the foreign exchange

market, a network of about 2,000 banks and other financial institutions.

The value of a foreign nation’s currency in relation to your own currency is called the exchange rateexchange rate.

Types of Exchange Rate SystemsTypes of Exchange Rate SystemsFixed Exchange-Rate SystemsFixed Exchange-Rate Systems A currency system in which

governments try to keep the values of their currencies constant against one another is called a fixed exchange-rate system.

Flexible Exchange-Rate Flexible Exchange-Rate SystemsSystems

Flexible exchange-rate systems allow the exchange rate to be determined by supply and demand.

Foreign Exchange MarketForeign Exchange Market

Let’s say a U.S. citizen travels to Japan. This transaction will provide a supply of the U.S. dollar and result in a demand for yen. It will become cheaper for the Japanese to buy the dollar and more expensive for Americans to buy the Yen. The Yen is Appreciating and the dollar is Depreciating.

Quantity of U.S. Dollars Quantity of Yen

Yen Price of dollar(Y/$)

Dollar Price

of Yen($/Y)

Balance of PaymentsBalance of Payments: The sum of all transactions between U.S. residents and residents of all foreign nations

Current Account: Shows U.S. exports and U.S. imports of goods and services.

Capital Account: Shows the U.S. investment (financial as well as capital-plants and factories) abroad and Foreign investment in the U.S.

Credits: A credit are those transactions for which the U.S. receives income (exports, foreign purchase of assets)

Debits: Those transactions that the U.S. must pay for: imports and purchasing of assets abroad.

Balance of Payments [continued]The Current Account and Capital Account must be equal.

Official Reserves Account: The Central Banks of all nations hold foreign currency to make up any deficit in the combined capital and current accounts.

If the U.S. has more credits than debits it finances this difference by dipping into its reserve account.

Let’s Do This !!!

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Macro Review Topics and Percentages 8-12% Basic Economic Concepts 12-16% Measurement of Economic...

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Chapter 13 Percentages - Prestwick Academy · 2019. 12. 1. · ©TeeJay Publishers Homework for Level D book Ch 13 - Percentages this is Chapter Thirteen page 68 PERCENTAGES 47 100

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Economic Case for Bulk Energy Storage · The Economic Case for Bulk Energy Storage in Transmission Systems with High Percentages of Renewable Resources ... technologies may become

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A Playing the percentages - Covington & Burling › - › media › files › corporate › ... · Playing the percentages 12 ROUNDTABLE 23 May 2016 Mark Templeman QC ... Lockton

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