MacroeconomicsSemester 2

C = all household consumption on durables, non-durables and services I = firm’s replacement investment (spending on capital to maintain productivity) or induced investment to

increase production G = all government spending X-M = spending by foreigners on exports less domestic spending on imports

Business Cycle

Peak

Trough

Trough

ExpansionPeak

Real GDP

Potential GDP

A recession is when the economy experiences two consecutive quarters of falling GDP.

Recession

Government Spending + Taxation

Macroeconomic Goals

Growth

Employment

Price Stability

External Stability

Income Distribution

Inflation

Is a sustained increase in the general level of prices and a fall in the value of money

LRASAS

AD

Deflation

Is a persistent fall in the average level of prices in an economy.

Demand Pull inflationIs inflation that is caused by increasing AD in an economyThat shifts the AD curve to the right

AD1AD2

AS

Cost Push inflationIs the inflation that is caused by a increase inThe cost of production in the economyThat shifts the SRAS curve to the left.

AD

AS1

AS2

UnemploymentIs a situation that exists when people who are willing and able to work cannot get a job

Full employmentExists when the number of jobs available in an economy is equal to or greater than the number of people actively seeking work

Underemployment

When workers are carrying out jobs for which they are over qualified, that is they are not using their full skills and abilities or when workers are employed part time, even though they are available for full time employment, or when workers in a planned economy are undertaking jobs that would not exist in a free market

Demand deficientOr

Cyclical unemploymentIs unemployment that exists when there is insufficient AD in the economy and real wagesDo not fall to compensate for this

Direct taxationIs taxation imposed on people’s income or wealth, and on

firms profit.

Indirect TaxationIs tax on expenditure. IT is added to the selling price of a good or service