Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Section 2: Macroeconomics
Define AD
Total spending on domestic goods and services per period of time
Components of AD
AD = C + I + G + (X-M)
C: Consumer expenditure on goods and services
I: Investment
G: Government spending
X: Exports of goods and services
M: imports of goods and services

●
○
○
○
○
○
●
○
○
○
○
●
○
○

Determinants of AD
Changes in consumers:
Spending
Wealth
Expectations
Indebtedness
Personal income taxes
Changes in investment spending
Changes in profit expectations on investment projects
Changes in interest rates
Changes in business taxes
Improvements in technology
Changes in government spending
Changes in political priorities (military VS infrastructure)
Efforts to influence AD (demand side policies)

Define AS
The total supply of goods and services in an economy

●
●

●

●

Alternative views of AS
Keynesian (has three sections)
In the horizontal section, GDP is low; the price remains constant as real GDP increases
...

In the slightly curved section, when real GDP increases, prices also increase
...
Wages and other resource prices also
begin to increase, increasing the cost of production, and therefore prices
...

Employment protection laws that make it expensive to fire workers (firms will choose workers
carefully, therefore many would not be employed)
Frictional
Exists when people are in between jobs (actively seeking for a job, switching jobs)
Seasonal
Exists when demand for labor changes on a seasonal basis based on need variations
Cyclical (demand deficient):

2

●

When a country is in a recession → AD falls → rGDP falls → less workers hired →
unemployment

Inflation, disinflation and deflation
Inflation: Sustained upward movement in the average level of prices
Disinflation: Reduction in the rate of inflation
Deflation: Sustained reduction in the general level of prices

●
○
○
○
●
●

●

●
●

●
●
●

●
●

Consequences of inflation
Redistribution effect occurs when some groups lose their purchasing power
Fixed income groups: As price increases, a larger portion of their income will be spent on the
goods/services
Workers that are on a contract
Pensioners that have fixed pensions
Landlords that have fixed rent income
Savers: If they receive a level of interest rate that is lower than the rate of inflation → the real
value of their savings decline
...
8% in 2013 because of increase in government spending for the
Olympics/World cup and high demands for food and transportation
Cost push: Sustained rise in prices because of rise in production costs

●
○
○
○
●

Increase in AS because:
Increase in wages or labor cost that leads to firms hiring fewer workers
External shocks like rise in oil prices that lead to increase in cost of production
Fall in exchange rates because it results in direct increases in price of imported goods
Increase in price → decrease in full employment level of income → decrease in rGDP
Example:
Egypt inflation of 7
...
More people served in the war than
produced food
...


Relationship between unemployment and inflation

5

●
●

AD1 (green):
When the economy is in recession, there are high levels of unemployment
...

The Phillips curve shows that there is a constant negative relationship between the two
variables, there is a trade off/opportunity cost of either fixing unemployment of inflation
...

If the government tries to decrease high unemployment levels, there may be an inflation
...
These policies try to counteract the effect that businesses
and consumers have by bringing the AD to full employment of real GDP or potential GDP
...

Government revenue sources:
Taxes
Sales of goods/services (from government owned businesses)

●
●
●

What can the government do?
Change its level of spending
The level of investment can be changed
The level of consumption (AD) itself
...
(The change in
quantity of AD will depend on the graph,
Keynesian VS new classical)
●
How:
●
Increase government spending
●
Decrease personal income taxes
●
Decrease business taxes
Combination of increasing spending and
decreasing taxes
...

How:
Decreasing government spending
Increasing personal income taxes
Increasing business taxes
Combination of decreasing spending and
increasing taxes
...


New Classical
Increase in rGDP (smaller increase than
●
Keynesian horizontal section because of the
slope of the SRAS curve)
●
Definite increase in price levels

New Classical
Smaller decrease than the sticky prices
section of Keynesian
Definite decrease in price levels

Japan - 2009
$150 billion fiscal stimulus package to boost
struggling companies, for infrastructure
(airport runways, train networks, road
extensions), health and welfare
...
It included increases in
several utility and public service rates, limits
on wage raises, limits on imports, and a
reorganization of state enterprises
...
8 trillion quantitative easing
program where it buys bonds in order to push
down interest rates and boost the economy
...


China- 2010- After the economic boom in
2009, China experienced some pressure on
the price level due to the labour tightening
...
Businesses
do not want to lower interest rates anymore
...
They are
sorted into “workfare” and training schemes to promote working

---