Chapter 9 An Introduction to Basic Macroeconomic Markets fiscal policy changing taxes or government spending by congress and the president with the purpose of achieving macroeconomic goals monetary policy changing the money supply by the Federal Reserve System with the purpose of achieving macroeconomic goals goods and services market market encompassing the flow of all final user goods and services produced within a country during a specific time period usually a year o aggregate demand curve shows the relationship between the price level and the quantity of domestically produced goods and services that all households businesses governments and foreigners are willing to purchase an increase in price level will decrease the quantity of goods and services demanded a higher price level will decrease the purchasing power of money a higher price level will increase the demand for money and raise the real interest rate which will reduce additional purchases a higher price level will make domestically produced goods more expensive ceteris paribus o aggregate supply curve shows the relationship between the price level and the quantity of domestically produced goods and services that businesses are willing to sell in the short run increase in price level will increase quantity supplied an unanticipated increase in the price level will increase the profitability of businesses assumes that resources are sticky or slow to adjust in short run equilibrium buyers are willing to purchase all the units that sellers are willing to supply at the current price level in the long run increase in the price level will have no impact of quantity supplied vertical because once people have enough time to adjust contracts the price level will not impact output in long run equilibrium buyers are willing to purchase all the units that sellers are willing to supply at the current price level the economy is at full employment the anticipated price level is the actual price level actual output potential output actual unemployment rate natural rate of unemployment o o o o o o o o o temporary equilibrium happens when predictions about price level are incorrect leads to booms busts output can be higher or lower than potential employment can be higher or lower than full boom expansion actual price level is higher than predicted short run resource costs are low output prices are high producers earn higher than normal profits long run contracts are negotiated resource prices rise profits return to normal levels bust contraction actual price level is lower than predicted short run resource costs are high output prices are low producers earn lower than normal profits long run contracts are renegotiated resource prices fall profits return to normal levels resource market flow of ingredients like labor services raw materials machines and other factors of production households supply labor and other resources businesses demand labor and other resources o o o lending supply higher resources prices wages give households greatest incentive to work for firms demand higher resource prices wages increase the cost of production and make it less profitable loanable funds market the flow or borrowing and net capital inflow of foreign capital saving lending by foreigners in U S institutions net capital outflow of foreign capital borrowing by foreigners from U S institutions lenders savers supply loanable funds borrowers demand loanable funds supply higher interest rates give an incentive to save lend money demand higher interest rates reduce the quantity of loanable funds demanded borrowing o money interest rate percentage of the amount borrowed that must be paid to the lender in addition to the repayment of the principle nominal interest rate real interest rate the interest rate adjusted for expected inflation indicates change in purchasing power real interest rate money interest rate inflationary premium inflationary premium the expected rate of inflation foreign exchange market flow of foreign currency Americans use their dollars to demand foreign currencies foreigners supply foreign currencies to be exchanged into dollars o supply as the dollar price of foreign currency rises foreign currency becomes more valuable foreigners want to supply more of their currency to be used to buy U S goods which have become cheaper U S exports rise demand as the dollar price of a foreign currency rises the dollar becomes less valuable domestic residents demand a smaller quantity of foreign currency to buy foreign goods which have become more expensive U S imports fall appreciation an increase in the value of a currency relative to foreign currencies increase in purchasing power depreciation a decrease in the value of a currency relative to foreign currencies decreasing the purchasing power imports capital outflow exports capital inflow trade deficit imports exports net capital inflow trade surplus exports imports net capital outflow o o o o o o
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