Ch. 8 condensed ppt

# Ch. 8 condensed ppt - 3 Major Questions of Macroeconomics 1...

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3 Major Questions of Macroeconomics 1. What causes unemployment 2. What explains rate of inflation 3. What determines rate of growth of GDP over Long-term # 3 discussed in chapter 7…and later in book ■ #1 Found that unemployment went up in recessions and down in booms à So what causes recessions and booms? i.e. what causes Cyclical fluctuations of GDP around its trend growth rate, or PGDP ? APPROACH: Build models of GDP cycles to explain business cycles & in turn, unemployment 3 Main Markets in the Story (Goods, Money, and Labor) aggregate output The total quantity of goods and services produced (or supplied) in an economy in a given period (i.e. GDP) aggregate income The total income received by all factors of production in a given period aggregate output (income) ( Y ) A combined term used to remind you of the exact equality between aggregate output and aggregate income. In any given period, there is an exact equality between aggregate output (production) and aggregate income. You should be reminded of this fact whenever you encounter the combined term aggregate output (income). When we talk about output ( Y ), we mean real output, not nominal or dollar output (GDP) Y=REAL GDP = NOMINAL GDP/ GDP Deflator Personal Saving ≡ Aggregate Income – Consumption saving ( S ) The part of its income that a household does not consume in a given period. Saving ≡ income − consumption S ≡ Y − C this is an identity Something that is always true What is the main determinant of Consumption or Consumer Spending, C? Disposable Income, Y d the amount of income the consumer has to spend Y d = Y – T where T= Net Taxes= taxes paid – transfers received consumption function The relationship between consumption and income. A Linear Aggregate Consumption Function

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Ch. 8 condensed ppt - 3 Major Questions of Macroeconomics 1...

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