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Chapter objectives
Learn macroeconomic in general To evaluate government policies and tools To know the Aggregate Demand and Aggregate
Supply
Arrow Process
MACROECONOMICS IN GENERAL
SUMMARY
-How does it affects price level and real GDP? - Factors that shift AD curve - Factors shift AS curve
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Continuous Assessment
CA Quiz Test Tutorial Case study End of Chapter Total Minimum 3 Minimum 2 Minimum 2 Minimum 1 Minimum 1 Chapter Chapter 1, 4, 7 Chapter 1,2,3 Chapter 5&6 Chapter 2&3 Chapter 6 Chapter 4 or 5 % 20 30 15 25 10
inflation will affect you in future? Are you curious to know why it is sometimes hard to find a job? Why are some people rich and others poor? Why foreign like Japan or Korea can produce goods so much cheaply than America? Why countries like Russia and China are moving from plan to a market economy? Are you curious to know how the global marketplace works?
What is macroeconomics?
What is macroeconomics?
Macroeconomics can be best understood in contrast
to microeconomics Macroeconomics considers the larger picture which is the sum of all decision An understanding of microeconomics is crucial to understand macroeconomics "Macroeconomics is the branch of economics concerned with aggregates, such as national income, consumption, and investment "
What is macroeconomics?
The branch of economics that studies decision
making for the economy as a whole (inflation, unemployment, economic growth, money supply, national incomes, business cycle)
Recession and unemployment Supply shock; stagflation Economic growth Government spending
Macroeconomics vs Microeconomics
Microeconomics
Studies individual income Analyzes demand for and supply of labor Deals with households and firms decisions
Macroeconomics
Studies national income Analyzes total employment in the economy Deals with aggregate decisions
Analyzes demand and supply Analyzes aggregate demand of goods and aggregate supply
Micro and Macro aims Goals Macroeconomic aims/goals Full employment Price stability Economic growth Income distribution
Macroeconomic Goals
Price stability Economic growth Full employment
Distribution of income
Price Stability
A situation in which prices in an economy dont
change much over time This refers NOT to the prices of individual products, BUT to the price level as a whole A RISE in the overall price level is called inflation, a FALL is called deflation Would mean that an economy would not experience inflation or deflation However, it is not common in economy to have price stability
Economic Growth
The most talked about macroeconomic goal Growth occurs when the total amount of goods and
services an economy produces increases from year to year A positive change in the level of production of goods and services by a country over a certain period of time Nominal growth is defined as economic growth including inflation Real growth is nominal growth minus inflation Economic growth is usually brought about by technological innovation and positive external forces
Full Employment
A situation in which all available labor resources are
being used in the most economically efficient way Does NOT mean every single person has a job Means that most people who want to work are working
Headline News
distributed between the upper and lower classes in society Some tax systems are designed to achieved more equitable income distribution
Distribution of income
Macroeconomics Problems
Undesirable situations that exist in the macro
economy One or more of the macroeconomic goals are not satisfactorily attained The primary problems are unemployment, inflation, and stagnant growth Macroeconomic theories are designed to explain why these problems emerge and to recommend corrective policies
Macroeconomics Problems
Stagflation Inflation Deflation
Hyperinflation
Recession Unemployment
STAGFLATION
Wikipedia - In economics, stagflation is the situation
when both the inflation rate and the unemployment rate are persistently high.
STAGFLATION
STAGFLATION
1970s global stagflation Causes :
Yom Kippur war in 1973 Iranian revolution of 1979
What is inflation?
Inflation
An increase in the price you pay for goods The rate at which the general level of prices for goods
and services is rising, and, subsequently, purchasing power is falling How do we do when it is inflation?
By using CPI
BNM estimate inflation 2.5% to 3.5% Fiscal policy cut in government subsidy (gasoline and sugar) Monetary policy
BNM increase Overnight Policy Rate (OPR) at 3% the rest of the year ; and increase statutory reserve requirement to 3%
Inflation 2011
As reported by Malaysian Institute Economic
effects of quantitative easing in the U.S., geopolitical tensions in the Middle East and North Africa, and on the reconstruction of Japan.
2009
4.0
Tutorial 1
Find out inflation situation in 2012 What are the factors? Discuss
What is deflation?
Deflation
In general, deflation is when the average price of
goods goes down When the inflation rate falls below zero, showing negative inflation, we know that there has been deflation
What is
hyperinflation?
Hyperinflation
Extremely rapid or out of control inflation Germany after World War I (inflation rate 322) In Hungary after World War II - Between August
1945 and July 1946 the general level of prices rose at the astounding rate of more than 19,000 percent per month, or 19 percent per day Cause war and increase in money supply
Hyperinflation in Hungary
Sweeping up the banknotes from the street after the Hungarian peng was replaced in 1946
Hyperinflation in Germany
Germany, 1923: banknotes had lost so much value that they were used as wallpaper.
What is recession?
Recession
Period of general economic decline, defined usually
as a contraction in the GDP for six months (two consecutive quarters) or longer. In usual dictionary definition is a period of reduce economy activity The NBER define a recession as a significant decline in economic activity lasting more than a few months.
Recession
Marked by high unemployment, stagnant wages,
and fall in retail sales a recession generally does not last longer than one year and is much milder than a depression
Causes of recession
Currency crisis Energy crises Financial crises
What is Unemployment?
Unemployment
The general economic definition of unemployment is
defined as:
a state in which there are qualified and who do not have jobs.
workers
Unemployment
as defined by the International Labour Organization
(ILO)
occurs when people are without jobs and they have actively looked for work within the past four weeks
Unemployment Rate
The unemployment rate is a measure of the
prevalence of unemployment it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labour force.
Government Policies
In order to stimulate economic growth, price level
and aggregate demand (AD) To combat recession and inflation Two types:
Fiscal Policy (tax and government spending) Monetary Policy (money supply)
Government Policies
Fiscal Policy
Monetary Policy
Contractionary
Expansionary
Contractionary
Expansionary
Tax G Tax G
Money Supply
Money Supply
Fiscal Policy
The use of government spending and taxes to
influence the nations spending, employment and price level Falls in to two types:
equally
Monetary Policy
The government tool to control level of money
supply in the economy Changes in money supply can led changes in interest rate How Federal Reserves power to change money supply can also alter the interest rate Two types:
reduce interest rates Spending and borrowing would increase Resulting increase in consumption and investment to stimulate economic growth
interest rate How? Withdrawing funds from the banking system and raising interest rates The higher interest rates will encourage people to save more and spend less More expensive for people to borrow money
Aggregate Demand
The total amount of goods and services demanded in
the economy at a given time period. Describe relationship between price levels and aggregate output Negative relationship Also known as total spending Formula: AD = C+I+G+(X-M)
Aggregate Supply
A total supply of goods and services produced in the
economy at given overall price level at given time period Positive relationship between price and output Also known as total output
AD AS curve
Shifts in AD
Consumer expect a recessions Foreign income rises Foreign price levels fall
Shifts in AD
Consumer expect a recessions They will not spend as much money today as to save for a rainy day Thus, if spending has decreased, then AD must decrease Shown shift to the left
Shifts in AD
Foreign income rises We would expect that foreigners would spend more money both in their home country and in ours A rise in foreign spending and exports increase AD AD curve shift to the right
Shifts in AD
Foreign price levels fall If foreign price fall, then foreign goods become cheaper We expect that consumers in our country are now more likely to buy foreign goods and less likely to buy domestic made goods Thus, fall in AD AD curve shift to the left
Shifts in AS
Size and quality of labor Technological innovations Increase in wages
Technological improvements
Shift in AS
Workers expect inflation and negotiate higher wages
now
If the cost of hiring workers has gone up, then companies will not want to hire as many workers AS would shrink, and AS curve shift to the left Reduction in real GDP as well as increase in the price level The expectation of future inflation has caused price level to increase today
The end