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551-9 - Chapter 9 Introduction to Basic Macroeconomic...

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Chapter 9 - Introduction to Basic Macroeconomic Markets Quote p. 189 - "Macro .... 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 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 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, etc. 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 payment. 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). Resource markets - 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 Professor Mark J. Perry 1
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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.
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