Chapter 8 - Introduction to Basic Macroeconomic Markets
... Those essentials lie in the interactions among the goods, labor and
asset markets of the economy."
Three main markets in the economy: 1) goods and services, 2) labor/resources and 3)
financial assets (stocks, bonds, credit, loanable funds, etc.).
In Ch 6 and 7, we look at how to measure econ performance - GDP, real GDP,
inflation, un rate, etc. We will now look closer at econ performance and study the
factors that influence econ performance.
We will develop a macro model of the economy using the concepts of Aggregate
Demand and Aggregate Supply, the S and D conditions for the aggregate, or Macro
To start, let's define some basis concepts:
1. Fiscal policy
- conducted by the Congress and President. Involves tax policy,
spending policy, regulations, etc. Activity of Congress and President to try to stabilize
and regulate the economy. Promote growth, low un.
2. Monetary Policy
- conducted by the Federal Reserve or central bank. They control
the money supply and attempt to stabilize the price level. They can influence the
money supply directly, and int rates and ex-rates indirectly.
3. Money supply
- narrow definition - M1. Cash, checking accounts and traveler's
To simplify our model, we will first assume that fiscal policy and monetary policy are
fixed or constant. MS is fixed. Simplifies the model, allows us to concentrate on the
econ without the influence of policy changes.
3 KEY MKTS:RESOURCES,LOANABLE FUNDS AND GOODS/SERVICES
Exhibit 8-1 on page 193 shows graphically the circular flow of income in the
economy. There are three S/D diagrams representing the three markets. There are also
three units in the economy - households (C), businesses (I) and governments (G).