Aggregate Demand (AD)
Real GDP desired at each price level
Determinants of aggregate Demand
Changes in C,I,G,Xn
Lowers with recession
Fed Gov't begins Fiscal SPending
As G decreases, AD decreases
As G increases, AD increase
Federal Reserve lowers interest rate
Multiplier effect
Aggregate Supply (AS)
Total real output produced at each price level
changed via changes in production costs, productivity, etc.
World Price
WP
WP>Domestic, Export
Trade
Import Quotas
places a hard limit on incoming imports
Tariffs
Decreases consumption
protective tariff
Revenue tariff
Trade agreements
GATT
NAFTA
WTO
EU
Resource Endowment
Capital intensive
Land intensive
Labor-intensive
Comparative advantage
Case for Trade
more products available for consumers
Standard of living increases
Prices for consumers go down
Terms of trade
Interest Rates
Inversely related to bond prices
Demand for Money
Money
M2
Small denominated time deposits
MMMFs
MMDAs
near monies
M1
Checkable Deposits
Currency
Functions of Money
Used to buy and sell goods
Unit of Account
Store of Value
Money is Liquid
The Public
Federal reserve Banks
Thrift Institutions
Commercial Banks
Monetary Policy
Restrictive Monetary Policy
Feds sell Bonds, increase the reserve ratio, increase the discount rate, etc.
excess funds rate increases, reserves decrease
money supply shrinks and interest increases
investment spending decreases, AD decreases
Inflation decreases
Expansionary Monetary Policy
Feds Buy Bonds, lower the interest ratio, decrease the discount rate, etc.
increases excess in reserves, decreases the funds rate
this increases the money supply, interest rate falls
investment spending increases, AD increases, GDP increases
Interest on Reserves
Discount Rate
Last case scenario
Reserve Ration
Multiplier
Open Market Operations
Repos and reverse repos
Buying and selling bonds
When fed sells securities, commercial bank reserves are reduced
Influences money supply
Expansion
Trough
Recession
Unemployment
three types
Cyclical
Frictional
Structural
Unemployment rate
=unemployed/labor forcex100
Peak
Business Cycle
Prices "Sticky" Downwards
In Recessions, leads to unemployment
Inflation
Cost-Push and Demand Pull Driven
Consumer Price Index
CPI goes down as inflation goes up
=General rise in Price Level
Household Spending
Disposable income
Personal Income
National Income
GDP
Net Domestic Product
GDP gap= Actual GDP-Potential GDP
Nation's aggregate output
Income Approach
Expenditure Approach
GDP=C+Ig+G+Xn
Production Possibility Curve, to determine max benefit
PPC increase with international Trade
Scarcity
Choice must be made
There is no Free Lunch
Wants always exceed production
Economizing Problem= limited income, unlimted wants
The Government
The Federal Reserve
Manages interest rates
Lends money to banks
Sets Reserve Requirement
Prints Money
Manages inflation
Government Debt/Surplus
Fiscal Policy
Problems
political cylces/interests
Operational lag
Administrative Lag
Recognition Lag
Contractionary Policy
Increases taxes, decreases spending
creates surplus
For demand-pull inflation
Expansionary policy
Decreases taxes, increases spending
Creates deficit
for use in recessions
Designed for
encouraging full-employment
controlling inflation
encouraging growth in the economy
Changes in Government Spending
Changes in taxes
Equilibrium Price and Quantity
Price Ceilings
Shortage=Qd-Qs
Price floors
Surplus=Qs-Qd
Determinants of supply
E.g. change in technology
Amount Producers are willing and able to sell at a given price
Determinants of demand
Changes consumer demand,
e.g. change in income
Supply
Demand
Amount Consumers are willing
and able to purchase at a given price
Law of diminishing marginal utility
Markets
local
National
International
The Circular Flow Model
Product Market
-Businesses sell
-Households buy
Households
Buy Products
Sell Resources
Households Sell
Businesses Buy
Opportunity Cost
Marginal Analysis
Marginal Cost
Law of increasing opportunity costs
Marginal Benefit
How we Maximize Utility on the Margin
Utility at the cost of other utility
Utility=Happiness
Resource Market
