Introduction to Microeconomics -Basics of Macroeconomics

8/13/2019 Introduction to Microeconomics -Basics of Macroeconomics

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Prabudda Missaka s3211475 Page 1

MACROECONOMICS

TERMINOLOGY

Aggregate demand; Total demand for goods and services in an economy Nominal interest rate; Value of the interest rate Real interest rate; Adjusted value of the Nominal interest after adjusting for the inflation Liquidity; Amount of capital that is available for investment and spending Money supply; The total amount of monitory assets available in an economy. Government bond; Bond issued by national government promising to pay certain

amount of money in certain amount of time

Open market operations; Any buying of selling of government securities.

Volatility; Frequency the price changes in a mrket.(Higher the volatility higher the risk Liquidity; The degree asset that can be converted in to cash quickly without affecting

with minimal impact to the price bought.

Eg; Bank account High liquidity investmentReal estateLow liquidity investment

Price level = Price of the goods and services . Crowding out effect = low aggregate demand caused due to higher public spending Purchasing power ; Amount of goods and services that can be bought with a unit of

currency


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TREE REASONS FOR THE DOWNWARD SLOPE OF AGGREGATE DEM AND CURVE

1. Wealth effect2. Interest rate effect3. Exchange rate effect

WEALTH EFFECT

Inflation risePurchase power decreaseOutput demanded Decreases

INTEREST RATE EFFECT

Increase in savingsIncrease in loanable fundsDecrease in real interest rates Increase

investmentIncrease the aggregate demand

EXCAHNGE RATE EFFECT

Inflation increasesinterest rates increaseForeign investment increases due to high interest

ratesDemand for dollar increasesDollar appreciates in Foreign exchangeForeign goods

become cheaperDomestic imports increases, Export decreasesLow demand for domestic

output


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CROWDING OUT EFFECT

Increase in government spendingIncrease in interest ratesReduce private investment

MAIN CAUSES OF INFLATION

1. Demand pull inflationDemand for goods goes up

2. Cost push inflationSupply goes downmonopoly, natural disasters, depletion of natural resources

3. Monitory expansionWAYS OF EXPANDING MONEY SUPPLY

1.

Reducing federal reserve requirement2. Reducing fed funds rate3. Printing money

WHAT CAUSES BUSINESS CIRCLE

1. Supply and demand2. Liquidity (availability of capital)

** money supply of a country is controlled by RBA through open market operations


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EFFECTS OF LOW INTEREST RATES

1. Economy grows faster2. People spend more3. High inflation

THEORY OF LIQUIDITY PREFERENCE

** As interest rates rise demand for money decreases (People get more money

by keeping money in banks)

**As interest rates decrease demand for money increases (Can loan money for

low interest rate)

MONEY SUPPLY


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EQUILIBRIUM IN THE MONEY MARKET

MULTIPLIER EFFECT

Every time there is a new demand on to the circular floor the is likely to be a multiplier effect

Eg, If the MPC is 3/4, then the multiplier will be:

Multiplier = 1/(1 3/4) = 4

In this case, a $5 billion increase in government spending generates

$20 billion of increased demand for goods and services.crouding effect

Formula for the spending multiplier

Multiplier = 1/(1-MPC)

MPC= mar inal Pro ensit to consume


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TXATION AND AGGREGATE DEMAND

Changing tax rates affect the consumer spending . This cause a shift in aggregate demand

FACTORS EFFECT THE UNEMPLOMENT

1. Minimum wage laws2. Market power of unions3. Effectiveness of job seach

MARKET POWER

Ability of a firm to change the market price of a good

SHORT RUN TRADE OFF

Inverse relationship of two factors

Eg. Short run trade off between Inflation and Unemployment

(Low unemployment higher spending Higher inflation )

THE PHILLIPS CURVE

Relationship between Inflation and unemployment


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PHILLIPS CURVE IN THE SHORT RUN

PHILLIPS CURVE IN THE LONG RUN

There is no connection between unemployment and inflation in the long run.

So in the long run Phillips curve is a vertical line


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NATURAL RATE OF UNEMPLOYMENT

NAIRU (the non-accelerating inflation rate of unemployment).

UNEMPLOYMENT RATE

STABILISING THE ECONOMY

There are lags in fiscal and monitory policies Government can use stabilisation policy to stable the economy

AUTOMATIC STABILISERS

Ta x system Unemployment benefit

Unemployment rate = Natural Rate of unemploymenta (Actual inflationExpected inflation)

Documents

Introduction to Microeconomics -Basics of Macroeconomics