-ACROECONOMICS 3TUDY 3HEET
MACROECONOMICS x GDP from the income side: ĺ The output gap widens.
Factor payments + depreciation + indirect taxes ĺ Adjustments in factor prices bring the factor
x Macroeconomics studies the determination of (net of subsidies). utilization rate back to it normal level.
economic aggregates. x Implicit GDP deflator ĺ The output gap closes.
▯ Output tends to rise in the long run (long- = Nominal GDP * 100
term economic growth), but fluctuates in Real GDP $
the short run (business cycles). C ONSUMPTION Expenditures by households
on goods and services. Potential GDP
Expenditures on capital Positive
Potenlia equipment and buildings by output Actual GDP
ReaGDP Expenditures on new homes
Trough by households. Negative
Change in business output
Expenditures on goods and
G OV T
services by all levels of the
Time (G) Does not include transfer
S HORT TERM FLUCTUATIONS IN OUTPUT AND payments! Time
EMPLOYMENT BUSINESS CYCLE )
ROSS DOMESTIC PRODUCTe of exports minus value Potential GDP and actual GDP
G (XA– IM A of imports.
- In the short run, employment fluctuates with outputGDP from the Expenditure Side THE SIMPLEST S HORT -R UN M ACRO M ODEL
ĺ Unemployment rate = percentage of people in the
labour force who are unemployed. W AGES , x Aggregate desired expenditure (AE) = C + I + G
- Inflation refers to the process of rising prices. SALARIES,AND Total payments by + (X – IM).
SUPPLEMENTAR firms for labour x Assume that consumption expenditure (C) is
ĺ Inflation rate = annual percentage change in the services. solely determined by disposable incomD (Y).
price level. Y LABOUR - C(Y ) = autonomous consumption + MPC *
- The real interest rate is equal to the nominal INCOME D
interest rate, adjusted for inflation. Net interest YD.
- The exchange rate is defined as the number of payments to C
NTEREST AND households. Slope = MPC
units of domestic currency required to purchase one MISCELLANEOUS = 150/200 C(Y D
unit of foreign currency. INVESTMENT Payments for the 500 = 0.75
C use of land
Households INCOME (incl. rent for 400
S M ǻC = 150
Total profits made 300
by corporations. ǻYD = 200
Financial .NCOME AT FABUSINESST Net income of 200
sector I farmers and non-
Abroad PROFITS farm 100
ET DOM unincorporated consumption
NT Government G N .PRODUCT AT MARKET PRICESbusinesses
To account for the 100 200 300 400 500 YD
X NDIRECT TAXES difference between
Y LESS SUBSIDIES factor cost and Marginal Propensity to Consume: Slope of the
ET DOM consumption function
Firms N market prices. C
CAPITAL To account for the
C+I+G+N CONSUMPTION difference between 45°
Circular flow of income and expenditure (Y = C + I + ALLOWANCE net and gross
G + NX). ROSS DOMESTIC PRODUCT 500 Saving C(Y D
Morefreestudysheetandpracticetestsat: G DEPRECIATION ) domestic product.
THE MEASUREMENT OF GDP from the income side 400
SHORT RUN VS. LONG RUN
x GDP = value of all final goods and services MACROECONOMICS 300
produced in an economy during a specified Dissaving
period of time Volumes
x Potential GDP depends on the amount of 200
x Value of domestic output (GDP) = value of the factors available, the normalfactor utilization
expenditure on that output = total claims to 100
income that are generated by producing that rate, and factor productivity.
output. ĺ Changes in any of these variables change
ĺ Three alternative ways to measure income. potential and actual GDP.
ĺ There is little, or no effect on the output gap. 100 200 300 400 500 YD
x GDP by value added: x Actual GDPmay differ from potential GDP
Value of a firm´s production – value of The Consumption Function: Savings and Dissavings
intermediate goods bought from other firms. because the factor utilization rate is different
x GDP from the expenditure side: from its normal level. x Aggregate desired expenditure depends on
Ca+ Ia+ Ga+ (Xa– IM a. ĺ Changes in aggregate demand change the national income.
factor utilization rate.
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- C, I, and IM tend to increase as national x The government expenditure multiplieris Desired
income increases. smaller than the government tax multiplier. AE
x Eqm occurs when aggregate desired ĺ Balanced-budget increase in government AE 1
expenditure = actual national income. purchases has a mild expansionary effect. 1,400 E1
- This condition implies that desired saving = ĺ However, effect is smaller than that of deficit-
desired investment. financed increase in expenditure. AE 0
planned Government …1…
exp. Planned exp. < real 45° expenditure (simple) 1 – z 1,000 E
1,000 AE multiplier 0
800 Government tax - MPC 800
multiplier 1 – z
Planned exp. = real Balanced budget 1 – MPC 600
600 multiplier 1 - z
Planned exp. > real Y0 Y 1 Real GDP
200 OUTPUT AND PRICES IN THE
200 400 600 800 1,000 ReaGDP Price
Aggregate planned Expenditure vs. Real GDP level
x The aggregate demand curve (AD) illustrates
x An increase in autonomous expenditure results the negative relationship between eqm real 130
in an even larger increase in real GDP. GDP and the price level.
ĺ Changes inAE (other than changes in the
- Multiplier effect. 120
x Multiplier = 1/(1 – slope of AE) > 1. price level) result in a shift of AD.
ADDING GOVERNMENT AND Aggregate
TRADE TO THE SIMPLE MACRO planned
MODEL exp. Decrease in AE 2
1,400 price level
x Public saving = net taxes (T) – government AE 0 90 AD 0
purchases (G). 1,200 AE 1
ĺ Public saving increases as eqm national Y0 Y 1 Real GDP
x Net exports (NX) = exports (X) – imports (IM). 1,000 Shifts in the AD curve (aggregate demand shocks)
ĺ Net exports decrease as eqm national 800
income rises. x The short-run aggregate supply curve
x Eqm national income occurs where … 600 (SRAS) illustrates the positive relationship
… desired aggregate expenditure (AE) = actual Increase in AD 0 between price level and quantity of aggregate
national income (Y). price level output supplied, holding technology and factor
… desired national saving = national asset
formation. 600 800 1,000 1,200 1,400 Real GDP ĺ Changes ininput pricesresult in a shift of
level Increase in level
exp. Desired AE < Y 45° price level
Desired AE = Y Decrease in
Desired AE > Y
200 400 600 800 1,000 Real GDP 600 800 1,000 1,200 1,400 Real GDP
Y0 Real GDP
Expressing desired aggregate expenditure as a Aggregate Demand Curve
function of Y as well. Supply side of the Economy
x Macroeconomic equilibrium:
x The presence of imports and income taxes ĺ Intersection of AD and SRAS.
reduce z and thus the size of the multiplier:
ĺ z = (1 – t)MPC – m.
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Price ĺ Potential output is equal to an economy´s x Long run eqm is given by the intersection of
long-run aggregate supply (LRAS). AD and LRAS.
x Both aggregate demand and aggregate ĺ LRAS is vertical at Y = Y*.
SRAS supply are subject to continual random ĺ In the long run, total output is determined
shocks. solely by conditions of aggregate supply.
ĺ These shocks lead to temporary changes in
ĺ Real GDP returns to potential GDP through Price
adjustment in input prices.
Excess AD SRAS 0
Y 0 Real GDP P1 E1
P2 E2 AD
x Aggregate demand and aggregate supply P1 E
shocks result in shifts of AD and SRAS, 1
ĺ The steeper SRAS, the smaller the size of
the multiplier. AD 0 Y 0 Y 1 Real GDP
Aggregate New short-run Y 0Y* Y 1 Real GDP level
planned eqm if price
level was fixed5° Expansionary AD Shocks
exp. AE 1
1,400 Price LRAS
level SRAS 0
New short-run SRAS P1
800 eqm P0 E0 AD0
P2 AD 0 Y 0 Real GDP
Y0 Y 1 ´1 Real GDP
Long run and Short Run Equilibrium
Price SAS 0 x Fiscal policy may be used to stabilize output
Y1 Y0=Y* Real GDP and employment.
130 Contractionary AD Shocks ĺ Discretionary fiscal policy:
Change in government expenditure or taxes