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  • 1. Macroeconomicsfor Business
    • Microeconomics
  • Macroeconomics
    • Living Standards (y/pop.)
    • Inflation (P)
    • Unemployment (U)

. 2. Living Standards

  • Cross-Sectional Data
    • North America, Western Europe, Japanvs.
    • South America, Eastern Europe, South Asia, Africa
  • Time-Series Data
    • US over time; Sub-Saharan Africa
    • China; Singapore

3. 4. 5. 6. Inflation

  • Rule of 72
  • Cross-Sectional Data--Venezuela vs. Japan
  • Time-Series Data--Germany Then and Now; USA

7. Consumer Prices 1800 - 2000 price level 1800 1860 1910 1940 1970 2000 8. Unemployment

  • Cross-Sectional Data:
    • Switzerland vs. Belgium
  • Time-Series Data:
    • The U.S. today vs. 1933

9. Y, y: Gross Domestic Product

  • GDPvs.GNP
  • Market Value
  • Final Goods
  • Produced
  • Year

10. Value Added= Sales -Cost of Purchased Materials Cotton $5 5-0 =5 Shirt-Wholesale 15 15-5 = 10 Shirt-Retail 30 30-15 =15 30 Sales Value Added 11. Nominal GDP, Real GDP& the GDP Deflator Nominal (Y)=( P 2005x Q 2005 ) -(P 2005 xQ 2005 ) [sales] [materials] Real (y) =(P 1997x Q 2005 )-(P 1997x Q 2005 ) GDP Deflator =Nominal GDP/Real GDP Base Year?Chain-Weighted Real GDP 12. Alternative Measures of Y,y

  • NDP, NNP
  • National Income
  • Personal Income
  • DPI
  • Personal Consumption
  • Personal Savings
  • Size Distribution
  • Functional Distribution

13. Alternative Measures of P

  • GDP Deflator
  • Consumer Price Index
  • Producer Price Index
  • Inflation vs. the Price Level

14. U = (unemployed/LF) x 100%

  • LF
  • Actively looking
  • Discouraged workers
  • Unemployed but with a job
  • Age
  • Paid work

15.

  • GDP Gap = Y p- Y
  • Spending components of GDP C (70%)
  • I(17%)
  • G (19%)
  • (X-M) (-6%)

16. The Federal Reserve System

  • Board of Governors
    • Chairman
  • District Banks
  • FOMC (12) = 7 + 5
  • Lender of Last Resort
  • Targeting of Federal Funds Rate

17. Money Supply Definitions

  • Monetary Base
  • M1
  • M2

18. The Money Supply: Central Bank Impacts

  • Open Market Operations
  • Discount Rate
  • Reserve Requirements

19. The Money Supply: Private Impacts

  • Currency/Deposit Ratio
  • Excess Reserves
  • Account Shifting

20. CLASSICAL MACROECONOMICSVS. MERCANTILISM

  • Real Assets vs. Money
  • Openness vs. Balance of Trade
  • Free Markets/Free Trade vs. Barriers, Subsidies

Adam Smith 21. COMPETITIVENESS

  • 1.USA
  • 2.Switzerland
  • 3.Denmark
  • 4.Sweden
  • 5.Germany

22. Advantages of Backwardness

  • Copy existing technology
  • Small absolute gains constitute big percentages (12 = 100%)

23. Competitiveness: Main Factors

  • Openness
  • Role of Govt
    • Tax Rates
    • Regulation
  • Labor
  • Financial Sector

24. 25. Classical View ofProduction (y)

  • Background
  • y = F(K,N)
  • N: N D& N S
  • K = K

y N Slope = y/ N = MPN 26. MPN N Rule: Proceed as long asMR > MC Here: MR = P x MPN MC = W N VMP = P x MPN W 0 N D STOP View of Employment (N) 27. What if W Changes? W, VMP N W 0 W 0 N D N D VMP 28. At N D ...

  • W = P x MPN = VMP
  • W/P = MPN
  • Real Wages Around the World

29. N S : Labor Supply

  • Upward Slope Not a Straightforward Matter
  • Immigration
  • LFP: The Changing Nature of Household Production
  • Leisure Time in the US

N W N S 30. Labor Market Equilibrium W N N S N D (P x MPN) W E N E Full Employment? 31. Overall Equilibrium for y, N y N W N y N S N D y E N E 32. What if P Rises?

  • Labor Demand Shifts Right
  • Labor Supply Shifts Left
  • N is Unaffected
  • So y Is Also Unaffected

y P y s P 0 P 1 y A B 33. Key Classical Assumptions

  • Wages Adjust Flexibly to Equilibrium
    • Contracts?
    • Incomplete Information--Inertia?
  • Workers Understand Their Real Wage and Base Their Labor Supply Decisions on It

34. View of Inflation

  • Equation of Exchange
    • MV = PT
    • MV = Py
  • Quantity Theory of Money

35. Consumer Prices 1800 - 2000 price level 1800 1860 1910 1940 1970 2000 36. Classical View of y d P y y d Monetary vs. Nonmonetary Factors 37. The Classical Theory of Interest Rates R NPS, I E R E NPS Key Factors: 1) Net Private Saving 2) Gross Investment I 38. Suppliers and Demandersof Loanable Funds

  • Households
  • Businesses
  • Government
  • Foreigners

39. The Impact of the GovernmentsBudget R R B R A A B S (NPS) D (I + PSBR) I LF I A I B 40. Budget Surplus NPS S (NPS+ SURPLUS ) R I R A R B A B LF I A I B 41. 42. Role of R: Classical View

  • Coordinate Present vs. Future
  • Prevent Nonmonetary Events from Affecting V, Total Spending, y D
  • y D= c + i + g; suppose deficit spending
    • Crowding Out

43. J.M. Keynes (1883-1946)

  • View of Capitalism
  • W E ? R E ?
  • S = I (ex ante)
  • Uncertainty, herd mentality,animal spirits, instability

44. Keynesian View (contd.)

  • Quantity Adjustment vs. Price Adjustment
  • Y = E (Keynesian equilibrium)
  • E = C + I + G
  • Y = C + I + G
  • Fiscal Policy vs. Monetary Policy

45. Simple Keynesian Multipliers: No Crowding Out k E= 1/1-b k T= -b/1-b k BB= 1 Closing the GDP Gap 46. Housing Bubble 197519952005 HOUSING CONSUMER GOODS 47. Keynesian y sCurve P y y d y d y s A B y A y B =y p P 48. What if P Rises?

  • Labor Demand Shifts Right
  • Labor Supply Shifts Left
  • N is Unaffected
  • So y Is Also Unaffected

y P y s P 0 P 1 y A B 49. Classical, but with W = W P y y s P 0 P 1 y 0 y 1 50. The Liquidity Preference Theory of Interest Rates R M M S M D= L(R,Y) R E E Note Bond Marketand LF 51. The Federal Reserve: June 2004 R M M D M S M S E E 1.00% 1.25% 52. y D -y SAnalysis

  • y Sslope*
  • y Dshifts (IS-LM events)*
  • y Sshifts
  • y Dslope

53. What if P Rises?

  • Labor Demand Shifts Right
  • Labor Supply Shifts Left
  • N is Unaffected
  • So y Is Also Unaffected

y P y s P 0 P 1 y A B 54. Keynesian y sCurve P y y d y d y s A B y A y B =y p P 55. Classical, but with W = W P y y s P 0 P 1 y 0 y 1 56. y SShifts:Note Production Costs

  • Transition from SR to LR
    • Wage adjustment
    • Disappearance of money illusion (P e )
  • Supply shocks (energy, strikes, etc.)
  • Supply-side economics? (tr, regulation)
  • VLR: K, population, tech.

57. Restrictive Monetary Policy y D y D y S SR y S SR y S LR P y A B C 58. Stimulative Monetary Policy P y y D y D y S SR y S SR y S LR A B C 59. Monetarism

  • M S -->Y SR andLR
  • M S -->y SR
  • M S -->P LR
  • Fiscal Policy?
    • y D ? (Note slopes)
    • LR y S(role of govt)

Milton Friedman (1912-) 60. Name That Economist

  • Classical
  • Keynesian
  • Neo-Keynesian
  • Supply-Sider
  • Monetarist

Robert Mundell Supply-Sider 61. The Phillips Curve 62. Phillips Meets Friedman PC SR U P The Natural Rate of Unemployment PC LR Why Increased Inflation Can Only Temporarily Reduce Unemployment . A B C 63. Phillips Curve Movements 64. Types of Unemployment

  • Natural