Chapter 8 - Chapter 8 - Introduction to Basic Macroeconomic...

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Chapter 8 - Introduction to Basic Macroeconomic Markets Quote - "Macro. ... 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 economy. 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 checks. 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).
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Resource markets - labor, land, physical capital. Households supply all resources in the economy to businesses and governments - labor, land, capital in the form of the supply of credit. All resource payments flow to households in the bottom of the graph in the form of wages, rents, interest and dividends. Business spending is in three forms: 1) investment expenditures on final goods and services (I in GDP), 2) taxes and 3) resource payments. Resource payments are equal to National Income. The S/D at the top represents GDP - the market for goods and services. Notice that the four arrows leading into GDP are C + I + G + net X. This is also called the Aggregate Demand for final goods/services. Also, notice that National Income can only go to: C + S + T. After taxes have been paid, we have disposable income. Disp Inc can only go to C and S. Savings = deferred consumption. Household savings go into the Loanable Funds Market, Credit Market, Stock Markets, Banks, etc. Loanable funds go for Business Borrowing and Govt Borrowing. The price of loanable funds is the interest rate. The int rate coordinates borrowing and lending activities. Equilibrates S and D for loanable funds. Notice:
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This note was uploaded on 11/18/2011 for the course ECON 101 taught by Professor Gottlieb during the Fall '08 term at Rutgers.

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Chapter 8 - Chapter 8 - Introduction to Basic Macroeconomic...

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