Global Macro Economic Environment

8/3/2019 Global Macro Economic Environment

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GLOBAL &

MACRO

ECONOMIC

ENVIRONMENT



•

Price Index

over

given

period

of

Time

= –

Last Period

CPI



•

matching qualified

workers

with

job

openings

the

skills

to

match

newly

created

jobs• Cyc ica : Recession p ase o usiness cyc e,

economy producing at less than capacity



A firm’s demand for labour is increased by –

1. Increase in

price

of

the

firm’s

output

2. Increase in price of a productive input that is a

3. Decrease in price of a productive input that is a

complement to

labour

The supply of labour is influenced by –

1. Substitution effect: Increase in wage rate causes

2. Income Effect: Increase in income increases worker’s

demand for leisure



MONETARY & FISCAL POLICIES



MONEY, THE PRICE LEVEL AND

INFLATIONThe goals of the Central Bank are –

1. Keep

inflation

low2. Promote economic growth and full employment

.

Central Bank targets the Overnight Rates

Balance Sheet

of

the

Central

Bank

‐

1. Assets: Government Securities, Gold and Foreign

Deposits, and loans to Banks

2. Liabilities: Reserve Notes / Currency , Reserves on

Deposits



Open Market Operations: Most Often used

1. RBI buys government securities for Cash Reserves Increase Money

Supply Increases

2. Selling Securities decreases the Money Supply

1. Reducing required reserve percentage increases excess reserves and

increases the money supply

2. Increasing required

reserve

ratio

decreases

the

money

supply

Discount Rate:

1. It is the interest rate member banks pay the RBI for borrowed assets

2. By raising the discount rates, Fed discourages banks from borrowing

,

money supply)

3. Decreasing the discount rate tends to increase the money supply



• The demand for mone is lar el determined is

largely determined

by

interest

rates

• Interest that could be earned on money deposited

in savings account or money market fund is the

opportunity cost

of

holding

money

• The supply of money is determined by the central bank and is independent of the interest rate

IR

i Money Supply

Demand for Money

Real Money



•

price level

Real GDP

• Financia Innovation as ecrease t e

demand for money on balance



• Mone Su l Increase

• Nominal and

Real

Interest

Rates

decrease

•

purchases of durable goods

• Forei ners invest

less,

exchan e

rate

falls,

im orts

down, exports up, net exports increase

• Aggregate demand , Real GDP, and Price Level

increase in

the

Short

Run

• In long run, full employment GDP



• =

Money Supply

× Velocity

= Price

× Real

Output

Since velocity and real output are relatively constant:

Increases in

the

money

supply

lead

to

proportional increases in

the price level



•

level in

an

economy

at

a point

in

time

level. There are two types ‐

1. Deman Pu In ation AD Up

2. Cost Push Inflation (SRAS Down)



High Inflation, even when well anticipated,

imposes costs on an economy. It can:

1. Divert resources

to

deal

with

inflation

2. Decrease value of currency as store of value

3. Distort investment returns (because of tax effects), reducing

capital investment and potential GDP

Nominal Rate = Real Rate + Expected Inflation Higher Inflation Higher Expected Inflation

Higher Nominal Rates

Faster Money Supply Growth Higher Inflation

Higher Nominal

Rates

With higher expected inflation:1. Expected nominal returns on business investment will be higher

( increased demand for financial capital)

2. Savers require

greater

return

on

savings

(decreased

supply

of

financial capital)



•

Wage demands

lag

actual

inflation,

real

wage

, ,

• W en actua in ation < expecte in ation:

Wage demands exceed actual inflation, real

wage rises,

unemployment

increases,

output

falls



•

while aggregate

demand

(AD)

growth

fluctuates

• When AD grows faster than LAS: Cyclical

Expansion, Real

GDP

above

potential

Real

GDP, Unemployment Falls, Inflationary Gap

• When AD grows more slowly than LAS: Cyclical

contraction, Real

GDP

less

than

potential

GDP,

Unemployment Rises, Recessionary Gap



•

confidence (Animal

Spirits)

•

and consumption , caused by (inappropriate)

fluctuations money

supply

growth

• New Classical Cycle Theory: Only unexpected

fluctuations in AD causes cycles

• New Keynesian

Cycle

Theory:

Both

expected

and unexpected changes in AD cause cycles



•

Documents

Global Macro Economic Environment