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Chapter 19

ECON 102 Chapter Notes - Chapter 19: Interest Rate, Nominal Interest Rate, Aggregate Demand

Course Code
ECON 102
Ying Kong

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TEXTBOOK NOTES 1/20/2013 2:12:00 PM
- There are two different aspects to the economy:
Short-run behaviour of variables
o We call this fluctuation trend the business cycle
Long-run behaviours of the same variables
o This slowly fluctuating trend explains how investment and
technological change affect out living standard over long
periods of time we call this economic growth
- There are two ways of looking at/studying the economy:
1. Looking at microeconomic foundations
firms, workers and consumers are optimizers
economists look at the choices these people make regarding work
effort, consumption, and investment
the aggregate choices of these optimizing people result in the
macroeconomic model
wages and prices are very flexible and adjust to economic changes
the economy find equilibrium quickly after change
2. Looking at the relationships of consumption, employment and investment
between firms and consumers of the economy
empirically tested
wages and prices are not flexible and adjust slowly to economic
changes the economy can be in disequilibrium for long periods of
Output and Income
- the production of output generates income
- all economic value produced, ultimately belongs to someone in the form of
an income claim on that value ($100 of something is produced, $100 of
income is generated and belongs to the producer) NATIONAL PRODUCT =

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- Nominal national income is measured by multiplying the dollar value a
product by every unit of that product sold
- Nominal national income can change if quantity of product increases, or
value of that product increases
- Real national income measures change in quantity measure value of
ind outputs at the prices of a base period
- comparing real national income from different years tells you the changes
in real output
- a recessionary gap occurs when actual output is less than potential
output (Y<Y*) the output gap measures the market value of goods and
services that are not produced b/c economy is not fully employed
- an inflationary gap occurs when actual output exceeds potential output
(Y>Y*) the output gap measures the market value of production in
excess of what the economy can produce on a sustained basis
Y* can exceed Y when workers work overtime
Causes upward pressure on prices
- an upward economic trend can be caused by increases in:
labour forces
capital stock
level of technological knowledge
- Trough
characterized by unemployed resources
low output level
substantial amount of unused productivity
business profits are low to negative
firms are unwilling to invest b/c future looks so bleak
- Recovery
moves economy out of the trough
rundown or obsolete equipment it replaced
rise in employment, income, consumption

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investments begin to be made b/c they don’t seem so risky
production increases by using the unused capacity and labour force
Existing capacity used to a high degree
Labour shortages develop
Particularity in categories of key skills
Shortages of essential raw material
Significant slow down after a peak
Downturn in economic activity fall in GDP for 2-3 successive
Fall in output, employment and household income
Profits drop financial difficulty for firms
Investments become risky again
Deep and long lasting recession
Falling half of the cycle
Rising half of the cycle
- recessions (Y<Y*) result from failure to use the economy’s resources at
their normal intensity
- booms can be problematic in that they can result in inflation
- when income per capita grows, each generation can expect a higher living
standard (on average)
may be a disadvantage for some people ex. shift from agriculture
to manufacturing
Employment, Unemployment, and the Labour Force
- productivity and employment are related in that if more is to be produced:
more people must be employed rise in employment
more work is to be done by present workers rise in productivity
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