Unformatted text preview:

Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Real interest rateSlide 34Slide 35Slide 36Slide 37Slide 38Slide 39Fiscal policy deals with taxation of businesses & populationMonetary policy deals with regulation of the quantity of money in the domestic economyIssuance of new loans by banks through the creation of additional depositsEquilibria on the market for money1SENIOR OUTCOMES SEMINAR(BU385)ECONOMICS (cont)2 BASIC CONCEPTS IN ECONOMICS II •Nominal, real, and potential GDP•Recessions•Types of unemployment•Standard stabilization policy versus Supply-side Economics•Growth policy•Equilibrium of aggregate demand and supply3 BASIC CONCEPTS IN ECONOMICS II •Real interest rate and real wage•Inflation•Presence and absence of trade-offs between inflation and unemployment•Fiscal policy •Monetary policy4Gross Domestic Product (GDP)• Final goods and services• Nominal and real• Domestic economy• Produced over a year5Gross National Product (GNP): GDP - + = GNPFinal goods & services produced by foreign producers Final goods & services produced by AmericanproducersabroadFor the U.S. economy, GDP ≈ GNP6Deflators of GDP Consumer Price Index (CPI) = Nominal GDP/Real GDPMore comprehensive deflator =Consumer Price Index (CPI) + Producer Price Index (PPI)7Logic of Computing Real GDP Step 1. Compute Nominal GDP based on statistics of sales of final goods and services in market (current) pricesStep 2. Compute a deflatorStep 3. Compute Real GDP = Nominal GDP/ Deflator8Logic of Computing Real GDP The essence of the logic: Only Nominal GDP is a directly observable variable. Deflators and Real GDP are not directly observable variables. They are constructed based on the statistics of Nominal GDP.9Difficulties with understanding deflators and real GDP stem from the fact that elements of deflators and real GDP are not physically observable. They are economic models fitted by real-life statistics. In sharp contrast, elements of nominal GDP are physically observable. A new edition of the old textbook, published in 2007, is a part of 2007 nominal GDP. However, one cannot physically observe this new edition when it is transformed – through deflation – into a part of 2007 real GDP10Potential GDPis a hypothetical real GDP produced under 4% unemployment and about 85% utilization of production capacities.Potential GDP  Actual real GDP11The idea behind potential GDPIt is believed that the 4% unemployment rate is neutral towards inflation and recession:• it is high enough to prevent inflation• it is low enough to prevent recession.Neutrality means that under 4% unemployment rate chances of inflation and recession are 50:50.12The idea behind potential GDPNeutrality means that under 4% unemployment rate chances of inflation and recession are 50:50.Employment at 4% unemployment rate is called full employment13Recessions• Units of measurement: real GDP• Time units: quarters• Dynamics: reduction of absolute value of real GDP during a quarterDefinition:Recession is reduction of absolute value of real GDP during three consecutive quarters14Interpretation of recessions• Negative growth of real GDP.• This negative growth can coexist with positive growth of nominal GDP.• Elimination of surplus production capacities. These capacities are surplus relative to existing demand.15Interpretation of recessions (cont)• Elimination of surplus capacities tends to produce cyclical unemployment.• In the U.S. economy, recessions tend to be progressively less harmful. • Recessions happen in spite of all-out efforts to prevent them.16Types of unemploymentFrictional: people who are fired/left on their own possess marketable skills, whichmake finding their new employment virtually assured. At any moment of time (except recessions), approximately 50% of unemployed Americans are frictionally unemployed. Frictional unemployment is a major vehicle of mobility on the labor market.17Types of unemploymentStructural: people who are fired because their functions are either eliminated or fulfilled through automated processes. Their skills are not marketable, and finding new employment is extremely difficult. Due to their age, most of structurally unemployed experience major difficulties with acquisition of new skills.18Structural unemploymentAt any moment of time, structurally unemployed comprise between 25 and 40% of unemployed Americans. Structural unemployment is an important positive sign of economic development. However, on a family/personal level, structural unemployment is close to a tragedy.19Cyclical unemploymentresults from elimination of surplus capacities during recessions. For people with marketable skills, it could take a form of frictional unemp-loyment. For people without marketable skills, it could take a form of structural unemploy-ment.20Stabilization policyrepresents government programs whose goals are • to keep inflation at bay• to soften recessions. Standard stabilization policy is implemented through increase/decrease in aggregate demand due to increasing/decreasing government expenditures.21Standard stabilization policy for fighting inflationPAD, ASP is absolute price level =deflator of GDP = index of inflation22Standard stabilization policy for softening recessionPAD, ASP is absolute price level =deflator of GDP = index of inflation23Trade-off between inflation and unemployment in the short run when AS curve is relatively flatP AD, AS (real GDP=G)P2P1G1 G2Increase in inflationP1 to P2Increase in employmentG1 to G224Trade-off between inflation and unemployment in the long run when AS curve is steepP AD, AS (real GDP=G)P2P1 G1G2Increase in inflationP1 to P2Increase in employmentG1 to G225Trade-off between inflation and unemployment is • Favorable in the short run when the AS curve is relatively flat• Unfavorable in the long run when the AS curve is steep.26Reagan’s supply-side alternative to standard stabilization policyP AD, AS (real GDP=G)P1P2G1 G2Decrease in inflationP1 to P2Increase in employmentG1 to G227Reagan’s supply-side alternative to standard stabilization policy (cont)• Rightforward shift of AS curve is achieved through accelerated investments•


View Full Document

Caldwell BU 385 - ECONOMICS II

Download ECONOMICS II
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view ECONOMICS II and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view ECONOMICS II 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?