ECO 2013 Principles of Macroeconomics Chapter 9 An Introduction to Basic Macroeconomic Markets 7 Learning Goals 1 List the four key markets in the macro economy Chapter heading Four Key Markets Resources Goods and Services Loanable Funds and Foreign Exchange Identify the people or decision makers in each of the four key markets Resources Households and Businesses Goods and Services Consumers businesses and government Loanable Funds Lenders and borrowers Foreign Exchange Foreigners and businesses 2 List Describe the relationship between the general price level and the amount of goods and services demanded Chapter heading Aggregate Demand for Goods and Services Key term Aggregate demand curve Downward sloping curve shows the various quantities of domestically produced goods services purchasers are willing to buy at different price levels Why does the aggregate demand curve slope downward 1 A lower price level will increase the purchasing power of money 2 A lower price level will reduce the demand for money and lower the real interest rate which will stimulate additional purchases 3 Ceteris Paribus a lower price level will make domestically produced goods less expensive relative to foreign goods 3 Describe the relationship between the general price level and the amount of goods and services supplied in the short run and long run Chapter heading Aggregate Supply of Goods and Services Key term Aggregate supply curve Shows the relationship between a nation s price level and the quantity of goods supplied by its producers What are the differences between the short run AS curve and the long run AS curve In the short run some prices particularly those in labor markets are set by prior contract agreements Households and businesses are unable to adjust the prices when unexpected changes occur However the long run is a time period long enough that people are able to modify their behavior in response to price changes 4 Investigate how aggregate demand and supply determine the price level output and employment Chapter heading Equilibrium in the Goods and Services Market Draw at least two different graphs for the Goods and Services market that illustrate different equilibrium points From the following graph identify the relationships between actual GDP and potential GDP and between the actual unemployment rate and the natural rate of unemployment circle the correct relationship P Level LRAS SRAS AD Y 1 2 3 At Point 1 actual GDP is potential GDP At Point 1 the actual unemployment rate is the natural rate of unemployment At Point 2 actual GDP is potential GDP At Point 2 the actual unemployment rate is the natural rate of unemployment At Point 3 actual GDP is potential GDP At Point 3 the actual unemployment rate is the natural rate of unemployment 5 Recognize how the resource market is connected to the goods and services market Chapter heading Resource Market Who demands resources in the labor market Businesses Who supplies resources in the labor market Households 6 Recognize how the loanable funds market is connected to the goods and services market Chapter heading Loanable Funds Market Key terms Money interest rate The Nominal Interest Rate the percentage of the amount borrowed that must be paid to the lender in addition to repayment of principal Real interest rate Money Interest Rate minus inflationary premium the interest rate adjusted for expected inflation Inflationary premium Premium for expected decline in purchasing power of the dollar Who demands loanable funds Borrowers Who supplies loanable funds Lenders What is the formula to calculate the real interest rate Money interest rate inflationary premium 7 Recognize how the foreign exchange market is connected to the goods and services market Chapter heading Foreign Exchange Market Key terms Appreciation an increase in the value of a currency relative to foreign currencies Increases in purchasing power of the currency over foreign goods Depreciation a reduction in the value of a currency relative to foreign currency Trade deficit when a country s imports of goods services are greater than its exports Trade surplus when a country s exports of goods services are greater than its imports Describe in words the following two relationships Imports Capital outflow Exports Capital inflow Imports plus the outflow of capital for investment abroad to foreign countries will equal exports plus the inflow of capital from the investments of foreigners in the US Imports Exports Capital inflow Capital outflow
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