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ECON 1P92 Lecture Notes - Monetary Policy, Money Supply, Black Market

Course Code
Professor Cottrel

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Chapter 19- Macroeconomics 1/24/2011 5:38:00 AM
Macroeconomics- studies the overall or aggregate economy
- the overall price level, not individual prices
- total production in the economy, not the production by individual firms
- adjustments to changes across the whole economy
Business cycles
Exchange rates
Economic growth
Gross domestic Product (GDP)- Total output produced is the total value of all
goods and services produced
- Production of output generates income
- The quantity of total output is measured in dollars
Nominal National Income: (current dollar)- the dollar value of total output
Real GDP- measures income at base-period prices (constant dollars)
Nominal GDP Inflation = Real GDP
- if price level changes over time are removed
- only changes in production remain
Changes in Real GDP- measures changes in production
Potential GDP (Y*)- Potential national income (output)
- what the economy could produce if all resources were employed at their
normal levels of utilization
- often called full-employment income
Output gap- the difference between potential and actual output
Output gap = Y* - Y
Denote potential output Y* and actual output by Y
Recessionary gap- when actual income (output) is less than potential income
Inflationary gap- when actual income (output) exceeds potential income

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When GDP is below potential- output and incomes are lost, can never recover
these losses
When GDP is above potential- can generate inflation, growth in potential GDP
can increase future incomes
-Although increase in average income doesn’t mean increase for all- not all
Employment- number of adult workers (15 and over) who hold jobs
Unemployment- number of individuals not employed but actively searching for
a job
Labour force- total number of people who are either employed or unemployed
Unemployment rate- percentage of the labour force that is unemployed
Unemployment rate= # of people unemployed/ # of people in the
labour force X 100
Full employment (Y = Y*): some unemployment exists- frictional and
Frictional unemployment- caused by normal turnover of labour (retirement,
quits, etc.) hiring takes time
Structural unemployment- occurs because of a mismatch between available
workers and jobs. Some examples of structural changes include track tapes,
floppy disks, tube TVs, VCRs, records
Full employment- occurs when all unemployment is frictional and structural
- there is no cyclical unemployment
- at potential GDP (Y*)
- Natural rate of unemployment (U*) exists at Y*
Unemployment (U) changes over the business cycle
During recessions: U rises above U*
During booms: U falls below U*
Cyclical unemployment- when U>U* which exists at Y*
Seasonal U: U may rise by 0.3% points in January
- stats can seasonally adjusts figure to remove this

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- can see trends more clearly
Effects of unemployment:
Economic problems- loss of output, loss of skills, etc.
immense human suffering- illness, breakdowns, etc
social problems- homelessness, crime
Price level- the average level of all prices in the economy
Inflation- the rate at which the price level is changing
Consumer Price Index (CPI)- the most common measure of the price level
- based on the price of typical consumer basket of goods and services
- CPI for the base period is set to 100 ALWAYS
- CPI in later years shows prices as a ratio of the price in the base period
CPI=auto sum PtQo
Auto sum PpQo X100
in the economy of ultimate pleasure, the typical urban household consumes the
following goods and service
base year= quantity X price
current year= quantity X current price
= Total expenditures for the base year, and current year
a) what is the value of expenditures in the base year and current year?
Base year $5600 and current year $6600
CPI in the base year = 100
B) find the value of the CPI in the current period.
CPI current = 6600/ 5600 X100
CPI current 117.86
C) what is the inflation rate between the base and current years?
Inflation rate= (P2-P1/P1) X100
Eg. (117.86-100/100)x100=17.86%
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