Resource Market

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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