Notesale: Turn your study into money

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Macroeconomics
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Self vs Social interest
- Self – interest: good for yourself only
- Social – interest: for society – depends on 2 factors
+Efficiency: Input – at lowest cost+ Quantity – greatest benefit
+ Equity: Fairness
 4 topis generate discussion between self vs social interest
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Climate change
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Opportunity cost of something: the HIGHEST value of alternative that must be
given up to get it
- Opportunity cost of X = Y/X
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4
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Production possibilities frontier (PPF)
- The boundary between the combination of goods and services that can be
produced and those cannot
- Quantity on each axis
- Inside and On PPF – attainable
+ BUT inside – inefficient – possible to produce more of 1 good without less
of the other + resources are either misallocated or unemployed
+ On – trade off
- Outside PPF – unattainable

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*** WHY PPF bows OUTWARD??
- Resources are not equally productive all the time
 PPF bowing outward means: the higher the Q of one good is produced, the higher
the opportunity cost

-

-

Marginal benefit of a good: benefit received of consuming one more unit of
that good – measured by ppl’s willingness to pay for one additional unit of that
good
Marginal benefit curve : Willingness and quantity
Production efficiency

Allocative efficiency

Can’t produce one additional unit of
one good w/o producing less of the
other’s
 Points on PPF

Can’t produce one additional unit of
one good w/o producing less of the
other good that we value MORE
HIGHLY
 A point on PPF ( Marginal cost
= marginal benefit)

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6
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Demand
- Want
- Can afford
- Plan to buy
 SHIFT:
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Quantity demanded
Quantity – plan to buy- given time – particular price
Quantity demanded can be different from quantity ( can exceed)
Affect:
+ Substitution effect
+ Income effect
b
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Supply
- Supply curve shows the lowest price that someone is willing to sell
- If a small unit is produced, the lowest price that someone is willing to sell one unit
is low >< the quantity produced is high, the marginal cost rises, the lowest price
that someone sells it rises
 SHIFT:
1, Expected future price
2, The prices of factors of production
3, Technology
4, The number of suppliers
5, The prices of related goods
6, The state of nature ( weather, disaster)
 MOVEMENT: price

Change in supply

Change in quantity
supplied

A SHIFT of S curve

MOVEMENT

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Expenditure approach ( Y = C + I + G + NX)
b
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GDP ( continue)
- Real GDP: the value of all final goods and services produced at a price of
reference base year
- Nominal GDP: the value of all final goods and services produced at a price of
current year
- Potential GDP: real GDP at full employment
 Real GDP fluctuates around potential GDP
 Potential GDP grows at a steady pace since the factors of production grow at a
steady pace
- Limitation:
1, Underground economy
2, Household production
3, Health and life expectancy
4, Leisure time
5, Political freedom and social justice
6, Environment quality
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Unemployment
- Lost income and production
- Lost human capital
- Working – age – population :>15
+ Ppl in labour force
+Ppl not in labour force
- Unemployment:
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+ Actively looking for a job within 4 weeks including the reference week
+ Waiting to start a new job within 4 weeks (starting at the end of reference
week)

-

-

-

-

Employed:
+ work at least 1hr in the reference week
+ have a job and only temporarily absent
Underemployed workers :
+ Employed
+ Want more hours working
Marginally attached workers:
+ Currently neither working nor looking for a job
+ Available for a job
+ Did look for a job in the recent past
Discouraged workers:
+ Marginally attached workers
+ Stop looking for a job

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Frictional
unemployment

Structural
unemployment

Cyclical
unemployment

Natural
unemployment

-

-

-

-

-

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Unemploymen
t caused by the
normal labour
turnover –
from people
entering and
leaving the
labour force +
ongoing
creation and
destruction
Increase in the
number of ppl
entering and
re-entering the
labour market
+ the benefits
from
unemployment
=> raise
frictional
unemployment
Permanent and
healthy
phenomenon
of growing
economy

-

-

Tech changes
+ foreign
competitions
=> change
skills needed
for work +
location
Last longer
than Frictional
unemployment

The higher
than normal
unemployment
at business
cycle trough +
lower than
unemployment
at business
cycle
expansion :
Cyclical
unemployment

-

Natural
unemployment
rate
Frictional +
structural
unemployment
/ no cyclical
unemployment
 Economy
is at FULL
employme
nt

Ex; worker laid
off – recession =>
rehired expansion

Labour force = Unemployed + employed workers
Unemployment rate = Unemployment/ labour force
Employment – to – population ratio = employment/ working – age – population
Labour force participation rate = Labour force/ working – age – population

-

Labour force = Unemployed + employed workers
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- Unemployment rate = Unemployment/ labour force
- Employment – to – population ratio = employment/ working – age –
population
- Labour force participation rate = Labour force/ working – age –
population
Substitute

Complement

Replace

Conjunction

a
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Natural unemployment rate
Factors influence:
1, The age distribution of population ( more young ppl => more ppl seek for a job => frictional
unemployment increases/ more old people => less seeks for a job => frictional unemployment
decreases)
2, The real wage rate
3, Unemployment benefits
4, The scale of structural change ( upgrade machines => skill performs lost values)
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CPI – consumer price index
- Average prices
- Paid by urban consumers
- Fixed basket ( fixed quantity)
 1, New good bias
2, Quality change bias

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3, Substitution bias
4, Outlet bias (customers go to discount stores more)

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CPI = Cost of CPI baskets at a current prices / Cost of CPI baskets at the base year
Inflation rate = CPI this year – CPI last year/ CPI last year
= GDP deflator this year – GDP deflator last year / GDP deflator last year

*** GDP deflator is broader compared to CPI/ GDP includes income, expenditure, exports,
imports – as a cost of living – too broad
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Economic growth
- The growth of real GDP ( one shot rise or recover from recession is not growth)
- Real GDP growth rate = ( Real GDP current year – GDP previous year)/ GDP previous year
- Real GDP/person ~ per capital real GDP
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Aggregate production function

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Curve – we use our most productive hours first, more hours worked – less productive
b
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Financial market
a
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Stock market
c
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Demand for Loanable funds
- Expected profits
- Interest rates

Money multiplier = change in the quantity of money/ change in monetary
base
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Money
-

 3 functions:
Medium of exchange
Unit of account
Store of value
 Money in Australia today:
Currency
Deposits at banks and other financial institution
 Types of money
M1: currency and current deposits of companies and households at bank
M3: M1 + other deposits of households and companies at banks
Broad money: M3 + other deposits of households and companies at financial
institutions ( like credit union, building society) rather than banks
 All of these are quickly converted in money => called “ Money’
** Cheques, credit and debit cards – NOT money

a
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Money creation process

*** When bank makes loan and creates deposits, the extra deposits lower

excess reserves (actual reserve – desired reserve) for 2 reasons:
-

Increase in deposits -> increase in desired reserves
The currency drain decreases total reserves

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Money market
a
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When interest rate rises, people buy more interest – bearing assets
like bonds rather than holding money – doing nothing=> hold less money)
Real GDP – aggregate expenditure- income- spend less, hold more
Financial innovation ( like EFTOS) : lower the opportunity cost of holding money
and buying interest – bearing assets
b
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Money supply

-

Fixed by RBA
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-

-

-

Only shift if there’s a change inpolicy
 In the short run:
Above the equilibrium: S > D => people have more money than they want=> buy
bonds to earn more=> interest rate falls ( MD shifts to the left)
Under the equilibrium: D > S => people sell bonds to hold more currency=>
interest rate rises (MD shifts to the right)
 In the long run:
MS is adjusted => to attain equilibrium ( If increase in MS – shifts to the right =>
S> D => interest rate dalls + people have more money than they want => buy
bonds => increase in demand for bonds => bond’s price rises)
Bond’s price and interest rate move inversely

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Interest rate parity
When the rate of return of two currencies are equal (1% interest rate in Japan = 3%
in Australia if yen is expected to appreciate by 2% vs A$
...
Purchasing power parity
When two currencies can buy the same quantity of goods and services
𝑹𝒆𝒂𝒍 𝒆𝒙𝒄𝒉𝒂𝒏𝒈𝒆 𝒓𝒂𝒕𝒆

=

𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝒆𝒙𝒄𝒉𝒂𝒏𝒈𝒆 𝒓𝒂𝒕𝒆

𝑫𝒐𝒎𝒆𝒔𝒕𝒊𝒄 𝒑𝒓𝒊𝒄𝒆 𝒍𝒆𝒗𝒆𝒍
𝑭𝒐𝒓𝒆𝒊𝒈𝒏 𝒑𝒓𝒊𝒄𝒆 𝒍𝒆𝒗𝒆𝒍

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-

In the short run, the ratio between domestic and foreign price level changes slowly
( fixed) so the change in real exchange rate is equivalent to the change in nominal
exchange rate
- In the long run, the ratio between domestic and foreign price level changes due to
the change in the demand and supply
...
Balance of payment account (3)
- Current account ( current account balance = NX + net interest and investment
income + net transfers) ( NX = S – I + T –G ) – refer to chapter 23 lecture note for
more detail if needed
- Capital and financial account = Investment in Aus – Investment abroad
- Reserve assets account ( records the change in government reserves)

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Aggregate Demand ( the relationship between P and real GDP demanded)
 Slope downward ( 3)
Base on Y = I + C + G + NX (G –const due to the policy)
-

-

-

P level and C => the Wealth effect
P level rises => decreases the real value of money one holds => worse off
=>Buy less => C falls
P level and the Interest rate=> the Substitution effect
P level rises=> one’s worse off=> quantity of money demanded rises =>
interest rate rises => Investment falls
P level falls=> one’s better off => quantity of money demanded falls=> interest
rate falls=> investment rises
P level and the Exchange rate effect
P level falls => the real value of money falls in the foreigner market (goods
produced is cheaper => bought more => Export rises => NX increases
 AD shift (4)

-

Change in G
Change in NX
Change in C
Change in I: Optimistic about the future=> consume more
 Policies that affect AD
Fiscal policy: Government raises or lowers taxes => Affect C and I
Monetary policy: RBA increases or lowers interest rate => affect C and I

b
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Macroeconomics should of thoughts
Classical ( no government)
Keynesian (need
government)
- Economy is self- Economy can’t
regulating and
achieve full
always at full
employment if
employment
being left alone (
- T – the most
fiscal and monetary
significant that
policy is required)
change AD, AS
- Expectations of
- RGDP = potential
investor – mostly
GDP – money wage
affect AD – herd
rate adjusts quickly
instincts (
- Taxes is considered
pessimism about
as an inefficiency
future profit -> fall
thing
in AD -> recession
- Wages don’t
quickly adjust

Monetarist (need money)
-

-

-

Economy is selfregulating and
always at full
employment,
provided the money
policy isn’t erratic
and the pace of
money growth is
steady
Q of money is the
main reason for
economic
fluctuation
Tax – inefficiency

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Planned aggregate expenditure – what people planned to spend
AE( aggregate planned expenditure) = C + G + I + NX
b
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Disposable income ( YD)
- Aggregate income (Y) = real GDP
- YD – depends on real GDP ( since aggregate income = real GDP)

YD= Y – T (income – net taxes- transfer payments, taxes or social welfare)
= S + C (the amount of money that is used for saving and consumption)
-

-

Consumption function: the relationship between YD and consumption
expenditure
Saving function: the relationship between YD and savings
Autonomous expenditure: are sum of expenditures of households, business,
governments and foreign (C, I , G, NX)
Autonomous consumption: when YD =0
Induced expenditure: consumption expenditure is induced by the increase in YD
45 degree line: the height of which measures YD/ a reference line which shows
the equilibrium points between two variables

D – equilibrium point => at A,B,C => consumption expenditure > YD -> don’t
saving anything – dissaving////// at E, F < YD -> saving
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 The 45 degree line graph = Keynesian cross: the graph with APE on
vertical axis and RGDP on horizontal axis

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Autonomous expenditure
- Sum of those components of aggregate planned expenditure that are not influenced
by real GDP/ income ( real GDP = income)
- Autonomous expenditure = sum of ( I, G, X) and the autonomous parts of ( C, M)
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Government budget and fiscal policy
a
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Government budget sources
 Revenue sources
- Tax on individuals
- Tax on companies
- Indirect and other taxes
- Non- tax revenue
 Expenditure items
- Transfer payments
- Expenditure on goods and services
- Debt interest and other payments
c
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Fiscal stimulus (2 types)
- Use of fiscal policy to increase production and employment
- Focus on AD
* Automatic policy: without government action
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*Discretionary policy: initiate by parliament (focus on Demand mostly)
e
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g

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