Mac Econ

An increase in prices, on average across the economy

A decrese in prices on average across the economy

Price index where Pi = Market baske of goods x current year prices divided by Market basket of goods x Base year prices

• The MBG consumed by the average urban house hold
• cost of living

• The MBG is purchaes by wholesalers
• Costs of production

• Uses final goods and services produced in the economy
• Base year is 100

The value of somthing in term sof current prices

nominal value adjusted for the rate of inflation

• Nominal inerest rate - Rate of inflation
• i - pie
• If rate of inflation is high then real is falling

• Efficiency effect: high inflation can reduce effiecnecy or productivity
• Equity effects: the impact of inflation on real incomes where high inflation reduces real households income

• 1) Deamand Pull
• 2) Cost push
• 3) Expectaion inflation

• High level aggregate demand, pulls price level up
• Too much money chasing too few goods

• Riseing prices of inputs
• Price of oil, increses so all prices goes up

Inflationt hat occures because epople anticipate inflation

If a person has not worked and have not been looking for work during the previous 4 weeks

16 years and older who are working or looking for work

• Is how it is measured
• survey 60000 households a month

• 1) It dons't measure under-emplloyment (can only get partime work)
• 2) Does not measure discouraged workers

• 1) Frictional
• 2) Structural
• 3) Cyclicale

people who are "in between" jobs

Due to structual changes in teh economy like technology they don't have job

Unemployment related to level of aggregate demand

• The rate of unemployment when the ecomony is at capacity
• This is the unemployment that exists when the economy is at capacity
• NR= Frictional + structural
• 5 %

Deviation in actual GDP from potential

• Conraction: downward to trough
• Trough: the lowest point
• Expansion: Upward to peak
• To Peak: highest point

Unemployment rising, Inflation down

Unemployment down, Inflation riseing

• Neoclassical view: Says law, Gov't policy should bre to allow the econmy to self adjust
• Keynesian view: The Gov't whould take an action role in boosting aggregate demand

• The inspiration for this modles is Keynes we assume:
• 1) Prices in the economy are "sticky" ridjid and fixed
• 2) Equilibrium in the economy can gall below full-employment

• Keynes Posts "fundamental psychologicla law"
• Men are disposed as a rulea nd on average, to increase their consumption as their income increases but not by as much as the increase in income.

• Savings = y - c
• If c=y line above consumption then savings which means firms will cout back prodution and income falls; s > 0
• If c=y line below consumption then borrowing and firms will increse production, income will rise; s < 0

45 degree c=y line

• APC = c/y
• As consumption goes up so does income but APC goes down
• APC is 1 at equilibrum is 1

• MPC = Change in c/Change in y
• Additional consumptionf rom additional income
• This is slope of consumption function
• it is constant becaues straight line

• 1) Expectaion of future income
• 2) Changes in financial wealth- value of stock and bonds
• 3) Credit conditions

Consumption function shitfs up so incresase in spending and income goes up

Consumption function moves up because more money and boost consumption

They feel less wealthy and consumption falls

Consumption goes up and GDP goes up because more people can take loans

• It is included exogenously inthe income-expenditures model
• y = C + I
• The spending by business firms on physical capital such as additions to pland, equipment, and inventories

the firm in making an investment considers or compares the rate of return on the investment to the cost of borrowing to undertake investment

• R of R
• Revenue from project - Cost of Project / Cost of project
• A firm will order investment projects in terms of rate of return

• 1) Level of production Capactiy: Excess capacity reduces investment demand
• 2) Expectation future sales: If firms expect future sales to increase, this will increase investment demand

• 1) Irregularity of inovation
• 2) Variability in profits
• 3) Varialiltiy in expectaion- uncertain bout future

• I = Iplanned + Iunplanned
• Y = C + I
• C = Ca + cY and I = Iplanned

• Y > C + I which means aggregate output > AEp (spending): This is Iunplanned and firms will cut back production
• Y < C + I which means aggregate output < AEp: which is negative Iunplanned and frims will expand output

Y - (C + I)

• Add Change in I to formula
• Y = I + Chane in I

• Me = 1/1-mpc
• The larger the mpc the larger Me

• Y = C + I + G + Nx
• No different besides a number added

Total spending from households, firms, gov't, and foreigh sector (Nx)

• Average of prices across economy.
• This is GDP deflator
• Inverse relationship between Price and GDP

• 1) The Real balance effect
• 2) The Wealth effect
• 3) The interest Rate effect

a fall in price level increases real income of households which promotes more spending on GDP

A fall in price level increases the real wealth of households which poromtes more spending

If price level falls then so do real interst rates. If real interest rates fall, then households, firms, gov't can borrow more easily which means more spending

• 1) Changes in Household spending
• 2) Changes in investment spending
• 3) Changes in net exports (exports-inports)
• 4) Changes in Goverment fiscal Policy
• 5) Changes in Monetary policy

• Due to changes in household expenctaion and changes inhoushole wealth
• Ex. Housholds expect incomes to fall...shift left

• Due to expectations of firms
• Ex. Firms expect income to fall...Shift left

• Changes in governemtn spending of taxation
• Ex. Obama passes 400 bil jobs plan...shift right, G up and T down

• Changes in money supply, central bank
• Ex. If Fed increeses supply, more spending...Shift right

Total Production of finaly goods and services produced in the economy

The SRAS curve will indicate a direct relationship between the price level and real GDP (Y)

• 1) Changs in nominal wages: wages up SRAS up
• 2) Changes in input prices (oil): Price up SRAS up
• 3) Changes in productivity: Technology up SRAS down

• The level of AS when prices in the economy are fully flexile
• Yxp indicates potential GDP: economy growing at capacity

• Shows actual GDP can deviate from potential
• Left of Yxp is positive cyclical unemployment and GDP below potential
• Right of Yxp is negative cyclical unemployment and GDP above potential so economy beyond capacity

• 1) Allow prices to self-adjust
• 2) Creat a positive demand shock using monetary or fiscal policy

• Unemployed workers offere labor for lower nominal wage which makes SRAS fall back to LRAS
• Results in lower wages so fims expand productiona nd can sell at lower price per unit
• Puts back at equilibrium

• Increase money suply (monetary) or increase governement spending or reduce taxes (fiscal)
• This would move AD curve back up to origial
• GDP would increse which reduces cyclical unemployment to 0,
• Prices go up so inflation pressue in economy
• Real wages of workers have decreased