Macroeconomics - Reference Guides

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Published on 4 Jun 2015
New York University
Business and Political Economy Program
Macroeconomics is the study of the entire economic picture
(i.e., an economy’s total consumption, price levels, and investment)
• Macroeconomics is concerned with recessions, growth, inflation rates,
unemployment, exchange rates, deficit, and balance of payments
• The Gross Domestic Product (GDP) measures the final output of
goods and services generated within the physical confines of the
country (whether produced by the country or by foreign nations)
Notes: Final products are those actually consumed (not raw or
intermediate goods) Goods and services will be referred to as goods
• The GDP has been the primary measure of U.S. production since 1992
• Major components that make up the GDP include consumer
spending on goods, net exports, government expenditures, and
investment in capital goods
• The Gross National Product (GNP) is the total market value of
everything that is produced by a country in a fiscal year (including
income that is earned by overseas workers)
• The Net National Product (NNP) is determined by subtracting
capital equipment (depreciation) from GNP
• The National Income is determined by subtracting indirect taxes
(e.g., excise and sales taxes) from NNP
• A deficit occurs when a country takes in less in taxes than it spends in
a year, and the government must issue more bonds in order to meet
its required budget, thereby increasing its debt
• Conversely, a surplus allows the government to buy back outstanding
bonds (debt)
• The National Debt represents the total stock of outstanding claims
(in bonds) on the government
• The debt is a direct consequence of past deficits
• An economy’s growth
rate represents the
rate at which the GDP
grows or declines
• The GDP changes
when available
resources (capital and
labor) change
• Growth is dependent
on an increase in the
quality and quantity of
several factors
Capital goods
(requiring investment)
Labor force
Natural resources
• Aggregate demand
must be high enough
to ensure the full use of
increased production
• The Business Cycle measures growth,
inflation, and unemployment
• The Output Gap measures the
difference between potential output and
actual output
• During a period of economic
expansion, the gap decreases
• Eventually, the gap can become
negative, leading to overemployment
and heavier use of machinery (which,
in turn, speeds up depreciation)
where t1represents a peak, t2represents
a trough (depression), t3represents a
recovery, and t4represents a recession
• The timing and output levels of the
business cycle are not regular or
• The Consumer Price Index measures the rate of change of
prices for a bundle of goods, which consists of typical
consumer purchases over a period of time
Stagflation occurs
when both
unemployment and
inflation rise
• When unexpected
monetary policy shifts
AD1to AD2, prices
and output rise from
Ato B
• Consumers react to
higher prices (P2) and
the government slows
inflation, contracting
aggregate demand
• Consumers are still adjusting to price increases at B;
in the short run, AS1shifts up to AS2at the same time that
AD shifts in
• As the economy shifts from B to C, consumers face higher
prices and decreased output on stagflation
Example: The owner of a $100 bond or $100 in currency
will lose 10% of the bond’s (or currency’s) purchasing power
if inflation increases by 10%
• Inflation lowers purchasing power; therefore, consumers
pay a higher opportunity cost when they hold money
• As inflation translates into higher interest rates
(see Interest Rates), consumers want to reduce their
money holdings either through investments or the
purchase of durable goods (e.g., buying a home or car at
the early stages of inflation)
• In periods of inflation, a consumer with either money or
investments is affected by an inflation tax
(see Inflation Tax)
Hyperinflation, caused by printing money rapidly to
finance government spending, often occurs in wartime or
immediately post-war period when pent-up demand for
goods causes extreme shortages
• Hyperinflation causes loss of confidence in currency,
forcing consumers to barter
Investment refers to money spent on machinery and
construction in industry; it also includes consumer
purchases of durable goods (e.g., cars, major appliances)
• Investment does not include transfer of assets, such as
purchases of houses and cars that already exist
MACROECONOMICS • A-635-11© 1997-2012 Mindsource Technologies Inc.
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