Econ 102 - Macroeconomics - Beginning Only

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Published on 27 Sep 2011
ECON 102
Chapter 19 - what macroeconomics is all about
Macroeconomics studies how the economy behaves in a broad outline. It considers economic aggregates,
like total output, total investment, total exports, price level, etc., and how gov’t policies influence these
aggregates. Gives the big picture, doesn’t dwell on little details. It is important because it a!ects the
‘health’ of industries in which people work, and the prices of goods that we purchase.
Considers 2 di!erent aspects of the economy:
Short-run fluctuations of macroeconomic variables like output, employment, inflation, and how gov’t
policy can influence these variables. Concerns study of business cycles.
Long-run trends of the same variables concerned with explaining how investment and technological
change a!ects our material living standard in the long-run.
Key macroeconomic variables
National product the value of a nation’s total production of goods and services. All wealth produced
belongs to someone, i.e. A firm produces $100 of ice cream, that $100 ultimately becomes income for the
firm’s workers and bosses. Thus national product is equal to national income.
National income/GDP the final market value of all goods and services produced in the economy during
a defined period of time (usually from April - April). Final not double counted. Market Value what the
market will pay for it. Goods and services material goods and services like teachers teaching. Produced
in the economy must be produced in the fiscal year of its GDP.
Aggregating (measuring) total output
Multiplies the # of units of each good produced by the price at which each unit is sold to come up with a
dollar value of production for each good.
Adding up these values for all the di!erent goods produced gives the current dollar value of national
output (equal to total national income), aka nominal national income (NNI). NNI is a!ected by change in
quantity or price that the unit is sold for.
Real national income Measures value of current output in constant dollars using a set of prices from a
base period (specific time period used as a benchmark in measuring data). The price is held constant so
that changes in RNI from year to year reflect only changes in quantity. Used to figure out what percentage
of NNI change was due to quantity change.
Econ notes
As prices increases, the demand for money, Md increases (moves to the right) b/c you need more money
to buy the same things. Where Md = Ms is the new interest rate. Increase Md means people sell bonds to
acquire $, bidding down the price of bonds (implying a higher bond-yield, or higher i-rate). Eventually i-
rate rises to a point where ppl no longer want to sell bonds.
Increase in Ms WHEN YOU’RE ALREADY AT POTENTIAL, causes i-rates to go down, investment goes up, AE
goes up, causes AD to move right, entering an inflationary gap.
When you have an inflationary gap Y>Y*, what will happen to the SRAS? SRAS will move left, b/c workers
are being paid overtime (since they’re producing above normal), implies excessive demand for labour,
which increases wages, unit costs increase, SRAS shifts left, back to Y* at a higher price level chain back
September 2010 Econ 102 Jess Giang
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