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Economics (Arts)
ECON 295
Christopher Ragan

-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 $ (C) Expenditures on capital Positive Potenlia equipment and buildings by output Actual GDP firms. ReaGDP Expenditures on new homes INVESTMENT (I) Trough by households. Negative Change in business output inventories. Expenditures on goods and G OV T services by all levels of the EXPENDITURES government. 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 housing). 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 Autonomous 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 NATIONAL INCOME 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. More free Study Sheets and Practice Tests at: More free study sheets and practice tests at - C, I, and IM tend to increase as national x The government expenditure multiplieris Desired income increases. smaller than the government tax multiplier. AE 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 Aggregate 1,200 planned Government …1… exp. Planned exp. < real 45° expenditure (simple) 1 – z 1,000 E 1,000 AE multiplier 0 ǻA 800 Government tax - MPC 800 multiplier 1 – z Planned exp. = real Balanced budget 1 – MPC 600 600 multiplier 1 - z 400 Multipliers Planned exp. > real Y0 Y 1 Real GDP 200 OUTPUT AND PRICES IN THE SHORT RUN 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. E1 110 ADDING GOVERNMENT AND Aggregate TRADE TO THE SIMPLE MACRO planned 45° 100 MODEL exp. Decrease in AE 2 1,400 price level x Public saving = net taxes (T) – government AE 0 90 AD 0 ǻY purchases (G). 1,200 AE 1 ĺ Public saving increases as eqm national Y0 Y 1 Real GDP income rises. 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 prices constant. … desired national saving = national asset formation. 600 800 1,000 1,200 1,400 Real GDP ĺ Changes ininput pricesresult in a shift of SRAS. Aggregate Price planned Price level Increase in level exp. Desired AE < Y 45° price level 1,000 130 AE 800 120 Morefreestudysheetandpracticetestsat: Desired AE = Y Decrease in 600 110 price level 400 100 Desired AE > Y 90 200 AD 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. Helpingstudentssince1999 More free study sheets and practice tests at 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. level 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 real GDP. ĺ Real GDP returns to potential GDP through Price Excess level adjustment in input prices. Price LRAS SRAS level 1 P 0 Excess AD SRAS 0 P0 Y 0 Real GDP P1 E1 P2 E2 AD 0 x Aggregate demand and aggregate supply P1 E shocks result in shifts of AD and SRAS, 1 P0 AD1 respectively. ĺ The steeper SRAS, the smaller the size of the multiplier. AD 0 Y 0 Y 1 Real GDP Price Aggregate New short-run Y 0Y* Y 1 Real GDP level planned eqm if price level was fixed5° Expansionary AD Shocks exp. AE 1 AE 2 1,400 Price LRAS AE 0 level SRAS 0 1,200 New short-run SRAS P1 1 eqm P0 1,000 E0 Long-run 800 eqm P0 E0 AD0 AD 0 P1 600 P2 AD 0 Y 0 Real GDP Y0 Y 1 ´1 Real GDP Long run and Short Run Equilibrium AD 1 Price SAS 0 x Fiscal policy may be used to stabilize output level Y1 Y0=Y* Real GDP and employment. 130 Contractionary AD Shocks ĺ Discretionary fiscal policy: Change in government expenditure or taxes
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