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University of Maryland
ECON 305

Macro 1/28/14 9 problem sets, 9 quizzes, drop 3 Bookmark course webpage! Start of class… In the long-run, capacity to produce goods and services (productive capacity) determines the standard of living (GDP/person) (chpt 3,4,5) GDP in the long-run depends on factors of production, amount of Labor (L) and capital (K) and technology used to turn K and L into output. (physical capital- plant/equipment). Can use this with growth rates of GDP as well. Public policy can increase GDP in the long-run only by improving productive capacity of the economy. - Increase national saving leads to larger capital stock - Increase efficiency of labor (education and increase technological progress) In the short-run, aggregate (total) demand influences the amount of goods and services that a country produces (chpt 9,10,13) -monetary and fiscal policy -shocks to the system (business gets scared of spending, less I) GDP= Consumer Spending (C) + Investments (I) +Government Spending (G) + Net Exports (NX) NX= Exports (EX)- Imports (IM) Graph, GDP vs Time (horizontal axis). Straight line F(L,K, Tech) {long run}. In the short run, economy tends to fluctuate b/c of shocks. In the long-run, the rate of money growth determines the rate of inflation, but it doesn’t affect the rate of unemployment. M=money supply. Pi= inflation= % change in price level (P)= {P(t)- P(t-1)} / P(t-1). Chapter 4 High inflation raises the nominal interest rate (real interest isn’t affected) i= nominal interest rate. i= r + pi- the fisher equation r= real interest rate want to come out 2% ahead, there
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