Final Exam Pt Ch 8 Ch 15 23 04 2013 16 54 00 Finish Chapter 8 Relation between money supply and prices Positive relation as money supply increases prices increase Nominal GDP would get larger but real GDP would not o Inflation How to calculate the rate of inflation Percent change in CPI Formula Types of inflation 2 1 Anticipated inflation Inflation sustained increase in the average price level o Current CPI Previous CPI Previous CPI 100 o We know the inflation is coming o We can take steps to counteract this inflation o Exante Expost After loan is over 2 Unanticipated inflation o Totally unexpected o Can help the borrower if the anticipated inflation is lower than the actual Chapter 9 An Introduction to Basic Macro Markets Summary There are only four major macro markets o We will only do 3 Finding aggregate supply and aggregate demand of 3 major macro markets Fiscal Monetary Policy Fiscal Policy o Changes in government spending or taxes debt Relation between the two Fiscal budget Anything government spends money on G Any tax revenue government earns T If G T balanced budget If G T surplus budget hardly happens If G T deficit budget generally happens Funded through borrowing Fed sells bonds through US Treasury Deficit annual Debt aggregate sum of deficits Fiscal budget Change in G Change in T Debt if we re in a deficit o Treasury is in charge of making the budgets Congress comes up with it and the president signs off on it Treasury has to manage it Aggregate Supply and Aggregate Demand and the 3 Major Macro Markets Monetary Policy o Handled by the Federal Reserve o Changes in the money supply Three Major Macro Markets o 1 Goods Services o 2 Resource Market o 3 Loanable Funds Market Goods and Services Market o Everything made and or purchased in the US Everything produced Aggregate supply AS Everything purchased demanded consumed Aggregate demand AD AD C I G X M Real GDP I business investment purchases C consumer purchases G Government purchases X M Exports Imports o Aggregate demand graph APL AD C I G X M RGDP o Aggregate supply graph APL LRAS SRAS RGDP o Short run aggregate supply SRAS At least one factor of production is fixed usually something like factor size Costs are more in the producer s control in the short run they try to fix as many variables as they can Pi profit TR TC usually total cost is fixed in the short run TR Price Quantity or P Q Price price the consumers are paying Quantity goods sold TC Cost quantity or C q Cost cost the producers are paying quantity quantity of resources Always want profit to be positive Two ways to increase profit 1 Decrease costs 2 Increase revenue In the short run as APL average price level rises SRAS rises as well if the costs are fixed If things are under contract you are in the short run There is a positive relationship between the APL and RGDP real GDP in the short run o Long run aggregate supply LRAS Amount of time where every factor of production is variable can be changed Pi profit TR TC where TC is not fixed As you can see there is no relationship between the APL and real GDP during the long run for suppliers Rise in APL ha no impact on long run output Anything that affects PPC will affect LRAS So since prices do not have an affect on the long run what does Resources Technology Same things that affect the PPC LR Capacity Anything that affects how much something can change Q is a long run change The LRAS is based on what theory Based on the PPC curve theory What influences LRAS Anything but price o Figures 1 5 The Resource Market Figure 6 o How many resources are there 4 What are they Land Labor Figure 7 Capital Entrepreneurship o Y Axis Generally on a supply and demand graph the y axis is price however for the resources market each resource has its own y axis Land Rent Labor Wages Capital Interest Entrepreneurship Profit o Demand for resources where does it come from The demand for resources is a derived demand derived from the end product that the particular resource is going to help produce o Europe s unemployment rate vs US unemployment rate Government safety nets in Europe Very generous unemployment compensation More months of benefits US benefits expire after 6 months Europe s benefits expire after 2 3 years Job tenure tenure once hired you are guaranteed a job for life you cannot be fired unless you do something very extreme People with tenure have less incentives to go do well than people without tenure o Because they cannot really be fired for doing a poor job just something radical In Europe mainly France there is high tenure In the US tenure is mainly only present in education Unemployment for young people in France is very high because most employers would rather higher someone with experience over a young person if they are going to have to have them employed for life because the young person is too much of a wild card o Where does demand for a resource come from It is derived from the demand for the good or service it produces The Loanable Funds Market o Loanable Funds Market Graph Figure 8 o The y axis is the Real Rate of Interest R I R Real Interest Rate o The supply the saver or the lender They give possess the supply of money that can be borrowed As the RIR increases the supply increase The saver or lender is encouraged to save when the RIR increases because they will get more money back in return o The demand the borrower o Real Interest Rate RIR Federal Reserve They want to keep the RIR low because we just gout out of a recession Good if you re a borrower Bad if you are relying on income from the RIR from the money you lent out Your cost punishment is the RIR for being impatient Borrower Saver Your reward is the RIR you receive for being patient o The loanable funds market is a subset of the total money supply Money Supply Loanabl e funds Money Supply o The loanable funds market is also referred to as the capital market This is the one time the capital is financial and not physical o Shows the relationship between the funds RIR and the quantity of loanable funds o Changes in the LFM Figure 9 o Components of the interest rate Nominal IR Nominal IR real IR inflation i expected Real IR opportunity cost of lending compensation or i expected rate of inflation Nominal IR real IR inflation risk Ex ante Real IR default risk chance they won t pay it back Real IR nominal IR inflation risk Ex post Things to know about the IR Nominal interest rate money rate RIR nominal inflation NIR RIR inflation All interest rates tend
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