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Lecture 2, September 11th 2012.docx

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McGill University
Economics (Arts)
ECON 319
Kenneth Ragan

9/11/2012 9:04:00 AM Economic Crises: Past, Present, and Future US recession and recovery is the worst in the last 15 years The range of recovery from recession is far greater than the US current cycle Big 5 Modern financial crises: Spain (1977), Norway (1987), Finland (1991), Sweden (1991), and Japan (1992) Described by Reinhart and Rogoff (2008) Potential output grows as the labour force and technology grows Potential output grew at a faster rate than the current rate of output Section 1: Review of Core Macroeconomic Theory Canada is growing at about 1% GDP per year - What drives potential GDP? o Labour force growth o Capital accumulation o Productivity growth - What drives actual GDP? - Demand and Supply shocks - Demand shocks relate to households wanting to buy goods - Supply shocks relate to producers being able to create goods Monetary and Fiscal policy - Fiscal expansion is an injection of demand by the government to stimulate the economy (or changing of tax rates) - Tend to alter demand – NOT supply - Output gap = -0.5% in Canada - Output gap is the difference between actual and potential GDP o Low output gap = higher unemployment rate Expenditures - Consumption of final goods - Investments by firms o Investment in capital to use for further use to production o NOT the purchase of a share or - Government purchases of goods and services o NOT government expenditures; difference is transfer payments. o Welfare, pensions, subsidies, retirement funds are government expenditures; no transaction for these goods - NX = Net exports: Exports – Import GDP = CIGX – M: Consumption + Investment + Government + Exports – Imports - Must subtract imports due to possible consumption of consumption or investment of foreign goods - CIGNX are combined to determine Aggregate Demand - The intersection of AD and Aggregate Supply is given as Output (GDP) - The output gap drives the inflationary gap The Keynesian Cross (the goods market) - Slope of the consumption curve is called the marginal propensity to consume - AE function’s slope is the marginal propensity to spend - Desired AE: AE = C + I + G + NX = Auto + Ind(Y) - Eq
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