Transcript Macroeconomics Notesx - North Allegheny School District

Macroeconomics
• Macro meaning Large
• Micro looks at Individual choices – Indiv and Business
– C + I = GDP
• Macro looks at Big Picture” of how the whole economy
functions – C+I+G+(X-M) = GDP
• Consumers + Businesses + Gov’t + Foreign Trade
• Aggregate – Total – combination of all individual
choices
• 3 BIG graphs to know
• Aggregate Demand = Total of all individual choices
• Aggregate Supply = Total of all individual business
choices
• Business Cycle shows when economy is growing
and shrinking
• Measures 2 BIG issues –
– Level of Unemployment or Employment
– Level of Inflation or prices
Key Macro Tools
• Aggregate Demand – Total Demand of entire
economy
• Combo of ALL indiv demand
• Affected by same things as indiv Demand
• Aggregate Supply
• Total Choices of ALL business
• Affected by costs
This graph shows the Demand for
ALL products
Effects –
Production has increased from Yn
to some new amount..RESULT:
Prices have risen – called Inflation
This is tied to the Business cycle
since these 2 effects ONLY happen
if the economy is growing
More Jobs => More Demand =>
increased production and Increased
prices
In this version, AS – AD causes a fall
from AD1 to AD2
1.)Price and Productivity fall
2.)Unemployment increases and
Demand falls
This only happens in a Recession
• Periods of growth called expansion
– Bus expand – Hire new workers => workers spend wages
=> more expansion => Peaks
– Aggregate D (AD) ↑
– As AD ↑ => ↑ P – due to more people want stuff
– As AD ↑ => ↑ AS – Bus see larger profits as P ↑
– “Snowball effect” – economists call “the Multiplier Effect”
– as AS ↑ => need for more workers => eventual ↓ availability
of skilled workers => ↑ P of each new unit of “Skilled Worker”
– ↑ D of goods and ↑ wages for new skilled labor => ↑ P
-This causes Inflation – General rise in Prices
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Understanding the Business Cycle
2 main period expansion and recession
A long period of Recession => Depression or “Panic”
Key economic issues to examine;
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Yd – Disposable Income – Income after taxes
AD – Aggregate Demand – C Consumption
AS – Aggregate Supply – I - Investment
Employment
Prices
i – Interest rates
• Expansionary period and Multiplier Effect–
• Economy is ↑ “Heating Up”
– From the Business side (I) - I is ↑ - Expansion =>
↑ Employment => AS ↑ (Curve Shift out)
– From the Consumer side (C) – As Employment ↑, =>
↑ Consumer Yd => AD ↑ => ↑ prices due to ↑AD (Curve shifts out)
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From a Banking side (i) – since more people have jobs they tend to
save more => banks have a lot of money to lend => i (The price of $ ↓) –
This makes it cheaper to borrow => ↑ I => ↑ Employment => ↑Yd => both
AD & AS ↑
But ↑ prices act like a “Brake” to the expansion- slowing the I as i slowly ↑
as more and more companies want to I and fewer and fewer people save
as P ↑ => Inflation and an “overheated economy”
Recessionary Period (opposite happens)
• As Prices ↑ = ↓ YD = ↓ AD => Surpluses
• As Business starts to ↓ production => ↑
unemployment => further ↓ AD which forces I
to ↓
• On the good side in banks i is also ↓
• USD buys less in global markets => Imports
become more expensive, but exports rise bc
foreign currencies buy more USD
As Bus ↑ => higher Demand for loans to expand => higher
Price of loans => Interest (i)
High rate of expansion => Higher i (interest) rates as Bus want
more loans
• i – The price of $ - how much it costs to borrow
–Plans of a better future => more loans => increasing i
• Stock Market increases as bus profits grow
• People see a better future => ↑ willingness to consume
–People want to buy profitable stocks as companies expand
–Costs fall w/ Economies of Scale => ↑ ∏
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Peaks
– Low Unemployment and increased inflation
– High D b/c of high employment
– “Too much money (high wages) chasing too few
goods”(Excess Demand)
• Bus. not able to keep up w/ Demand => Inflation
– Inflation – General Rise in P
– Measured against a “Base year” – This year vs some past
years prices on a “Market-basket” of goods
– Market Basket – sample of products usually bought by
consumers
• When economy slows called a Recession
• Recession – 2 or more consecutive low growth
periods
• During Recession – bus. “Lay off workers” => ↓
Investment (I) due to ↓ AD
• As wages ↓ => “Snowball Effect “ Multiplier” of
slowing Consumption (C)
• 2 main Types of Inflation
• Demand Pull Inflation – increased Demand due to growing
economy => rising prices
– Increased D => increased P
• Cost Push – Increased Prices due to increased costs of
production
– Usually CoP rise due to increasing costs of FoP – (Land, Labor, or taxes
=> costs are “Passed on” to consumers)
– ↑CoP => ↑P
– ↑ oil P => ↑CoP => ↓π and ↓Agg. D => ↓ economy
• Special Types –
– Administrative – usually assoc w/ oligopoly or Monopoly – Bus raises
price to increase profits
• Sectional inflation a special type of Cost Push
– Costs rise in only one sector of the economy => affects other parts
– Gas prices rise => increased transportation costs that increases costs in
other areas not connected to gas like pizza – costs more to get supplies
and deliver
• Seasonal Inflation – P ↑ due to ↑ seasonal Demand – sandels
in summer, Uggs in winter
• Stagflation – special case of cost push – increased costs =>
rising unemployment, but Prices↑
– Economy is slowing, but Prices are rising
– Real problem for gov’t
• Increased Gov’t spending => more jobs but ↑P
• Lowering inflation w ↑ Gov’t spending => ↑ unemployment
• General rule on inflation
– If economy is growing there will be inflation
• Some level of inflation is acceptable
• Usually 3-4% - shows 3-4% economic growth
• ↑P can be met by current wages
– If economy is declining there will not be inflation unless stagflation is
happening
• But there will be unemployment
• Some level of unemployment is acceptable and unavoidable
• Usually 3 – 5% - usually Structural & Frictional
– To reduce inflation slow economy down
– To reduce unemployment speed economy up
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Both require some Gov’t involvement
• Worst Case – Hyperinflation – Rates over 1,000%
• Increases in wages can’t keep up w/ increased Prices
• Money becomes worthless => People blame gov’t
• Gov’t instability is typical in this situation
• Deflation happens in the opposite direction
• Prices fall => Bus less profitable => ↓ willingness to
produce
• Supply shifts in => Contraction
• Bus Cycle show GDP growth (C+I)
• Expansion => Inflation
– both Demand Pull and Cost Push – Why?
• Peak – Economy is “Overheating” => inflation
• Cost Rises => ↓ ability to buy => excess inventory => layoffs
and ↓ Prices (Sale) to “Clear” inventory => Economy ↓
(recession)
• Trough – Economy “Bottoms Out” – Excess Inventory cleared
=> increased production => hiring => ↑ ability to consume => ↑
economy – Cycle starts over (recovery)
• Unemployment
• ∆ Employment caused by ∆ in Supply
– If D > S => shortage => ↑ QD => ↑ D for labor =>
Employment
↑
– If D < S => Excess Inventories => ↓ QD => ↓ need for Labor
=> ↓ Employment
• Unemployment - defined as those actively looking for work
– Most economist agree - 4– 5% = full employment
– Reasons
• Job Skills don’t meet labor needs
• Loss of market due to competition
Types of Employment/Unemployment
• Structural –due to ∆ in the market
– ∆ in needs - education, tech, or skills
– ∆ s in Taste => ∆ in D (↑ willingness)
• Your company makes food– The Surgeon General announces that
your food may cause cancer => ↓ D => ↓ Employment
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Seasonal - Special kind due to seasonal needs
– Summer or Holiday jobs
• Frictional – People voluntarily unemployed
– Changing jobs
– Re-entering the workforce after school or child-rearing
– Move to another city for personal reasons
– Choose a new career
• Cyclical – due to the cyclical nature of the economy
– Being laid off during a recession with hopes of being called
back
– Recession => High Unemployment
• Underemployment – Those who are working at jobs requiring
less than their skill set
– College Phd working at Macy’s
• If you aren’t actively looking for a job the gov’t has no way of
tracking your efforts
• Special types of employment - not measured in national totals –
– Black Market or “non taxable” (Working “under the table”)
Federal Reserve System
Structure
• Board of Governors –
heads of the FED
• 12 Regional Reserve
Banks
• Most Important
Committee - Federal
Open Market
Committee (FOMC)
Board of Governors
• Seven members
– Appointed by president
– Confirmed by Senate
– Serve staggered 14-year
terms
• Work includes:
– Analyze problems
– Supervise and regulate the
member Banks
– Responsible for the nation’s
payments system
Where is my Fed?
Federal Reserve Banks
• Operate a national payments
system
• Distribute the currency and coin
– Money is Printed by Treasury Dept,
not the FED
• Supervise and regulate member
banks and bank holding
companies
• Central Bank - Serve as banker
for the U.S. Treasury
• Control Credit Card regulations
Research
• Gather and analyze
regional, national and
international economic
data
• Design and test
econometric (Computer
Regression) models used
to produce data used in
making monetary policy
decisions
Monetary Policy
• Choices made by the
Fed to increase or
limit the money
supply (MS)
• affect money supply
and credit.
• Actions => short and
long-term effects
Federal Open Market
Committee FOMC
• Most Important power
• Done by Seven governors +
• Five FED presidents (New
York and four others on a
rotating basis)
• Nonvoting presidents give
opinions
• Final interest rate decision is
made by the 12-member
Federal Open Market
Committee (FOMC)
Goals of Monetary Policy
Full
Employment
Stable Prices
Sustainable Economic
Growth
Federal Open Market Operations
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Fed’s Power to buy and sell US Bonds on the “Open Market”
If the Fed sells Bonds – Promises to repay at a future time
People buy bonds (Fed Sells bonds) Gov’t receives money
Since Consumers choose Bonds, they can’t spend that $ on
anything else => Takes away Disposable Income => Slows the
economy
If the Fed Buys Bonds – Consumers receive money from their
bond – Consumers receive money => More disposable income
Stimulates the economy
Preferable to sell to your own people => Domestic Debt
If Selling to foreign nations => Foreign Debt
Today Quantative Easing – Fed is Selling Large amounts of
Bonds (Mostly to foreign) receives money => Using that money
to increase funds in banks => Keeps Interest rates low
Very controversial b/c => ↑ Future Debt
History of Econ Thought
• called- “Supply Side” Economics
• 1776 – 1930’s Adam Smith – “Wealth of Nations”
– “Laissez-Faire”, “Says Law”, Ricardo
– Called “Classical Economics”
Goals
• “Balanced Budget” - Taxes = spending
• Little Deficit Spending
• Allow Business to make ↑ profits
• known as “Trickle Down” economics – Wealth “Trickles down”
from business success
• Recessions caused by Businesses expenses ↑ (Cost Push
Inflation) during expansion => ↑P => Surplus Q
• Surplus => Slowly ↓ P until all surplus is gone => new
production, hiring and expansion cycle
• Trickle Down was NOT working – Business failures =>
– 25% unemployment => loss of trust in gov’t
Beginning of Keynesian Economics
– Demand Side Economics
•John Maynard Keynes – book “General Theory on
Money and Interest”
•Supported Gov’t involvement = G to replace C and I
– use of Fiscal Policy
– Called “Priming the Pump”
• Keynes –
• recessions can be due to ∆ Bus. cycle –
– Small recessions fix themselves
– Economy essentially re-primes itself
• When inventories get too low (Stuff on the shelf) companies make more =>
re-hiring (↑ I) =>↑ C => ↑ GDP
• Some Recessions are caused by ↓ (AD)
• If AD ↓ => No one wants to buy =>↓C => ↓I => ↓GDP
• Psychological effect
– People fearful – Not spending – “pump doesn’t re-prime”
– Key reason – Wages and Prices are “sticky downward”
– Need ↑ G to replace ↓C &↓I => ↑ GDP