Short The Run Keynesian Aggregate Supply and Demand Model (chapter 4)
The Birth of Macroeconomics
-Three central questions of macroeconomics
1. Why do output and employment sometimes fall, and how can
unemployment be reduced?
2. What are the sources of price inflation, and how can it be kept
under control?
3. How can a nation increase its rate of economic growth?
Objectives and Instruments of Macroeconomics
-Objectives: Output, employment, and stable prices
-Instruments: Monetary policy & fiscal policy
Measuring Economic Success
-Output
-the best measure of an economys total output is GDP
-GDP is the measure of the market value of all final goods and
service
produced in a country during a year
-Two ways to measure GDP
-Nominal GDP is measure in actual market prices
-Real GDP is calculated in constant or invariant prices.
-% growth rate of Real GDP in year t:
100 x (GDPt - GDPt-1)/GDPt-1
-Potential GDP represents the maximum sustainable level of
that the economy can produce.
-High Employment, Low Unemployment
-The unemployment rate is the percentage of the labor force that is
Price Stability
-Price Indexes: measures of the overall price level
-CPI: measures the trend in the average price of goods and services
bought by consumers
-Inflation rate is the percentage change in the overall level of
prices from one year to the next
-Rate of inflation in year t: 100 x (Pt - Pt-1) / Pt-1
-The goals of macroeconomic policy are:
1. A high and growing level of national High output
2. employment with low unemployment
3. A stable or gently rising price level
The Tools of Macroeconomic Policy
-Fiscal Policy consists of government expenditure and taxation
-Government expenditure influences the relative size of collective
output
unemployed
spending and private consumption
-Taxation subtracts from incomes, reduces private-spending, and
affects private saving.
-It also affects investment and potential output
-Fiscal policy is used to affect long-term economic growth through
its impact on national saving and investment
-It is also used to stimulate spending in deep or sharp recessions
-Monetary Policy, determines short-run interest rates
-affects credit conditions, including asset prices
International Linkages
-The international economy is an intricate web of trading and
financial connections among countries.
Aggregate Supply and Demand
Definitions of Aggregate Supply and Demand
-Aggregate supply refers to the total quantity of goods and services
that the nations businesses willingly produce and sell in a given
period
-Aggregate demand refers to the total amount that different sectors in
the economy willingly spend in a given period
Aggregate Supply and Demand Curves
-Downward sloping demand curve represents what everyone in the economy
would buy at different aggregate price levels.
-Upward sloping supply curve represents the quantity of goods and
services that business are willing to produce and sell at each price
level.