Quote p. 189
... Those essentials lie in the interactions among the goods, labor and asset
markets of the economy."
Four main markets in the economy: 1) market for final goods and services, 2) market for
resources/inputs (labor mkt.), 3) market for financial assets (stocks, bonds, credit, loanable funds) and
4) foreign exchange.
In Ch 7 and 8, we looked at how to
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
of the economy using the concepts of
, the D and S conditions for the aggregate, or entire (macro) economy.
To start, let's define some basic concepts:
1. Fiscal policy
- conducted by Congress and the President. Involves tax policy, spending policy,
regulations, social security, Medicare, etc. Fiscal policy is the activity of Congress and President as
they try to stabilize and regulate the economy, to promote national goals like economic growth, low un,
2. Monetary Policy
- conducted by the Federal Reserve or central bank of the country. The Fed
controls the money supply and attempts to stabilize the price level. It can influence the money supply
directly, and interest rates, ex-rates indirectly, price level, inflation, economic growth indirectly.
3. Money supply
- most narrow definition of money is M1. Cash, checking accounts and traveler's
checks, only counts money items that can be used to make final payment for goods and services.
Doesn't count money in savings accounts for example, since those funds can't be used directly for final
To simplify our Macro model of the economy, we will first assume that fiscal policy and monetary
policy are fixed or constant and the MS is fixed. Simplifies the model, allows us to concentrate on the
economy without considering the influence of policy changes. After setting up the basic model, we
will come back and investigate fiscal policy and monetary policy in later chapters.
4 KEY MARKETS: RESOURCES, LOANABLE FUNDS AND GOODS/SERVICES
Exhibit 1 on page 191 shows graphically the
circular flow of income
in the economy. There are four
S/D diagrams representing the four key markets. We also assume that there are 3 units in the economy -
households (Consume), businesses (Invest) and governments (Govt. Spending).
- labor, land, inputs, natural materials, raw materials, physical capital, etc.
Households supply all resources in the economy to businesses and governments - labor, land, and
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.
MGT 551: BUSINESS ECONOMICS CH – 9