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Economics II

January – June 2011

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Mid term

Overview Macroeconomics Measuring Economic Activity

Consum tion and Investment 

Business Fluctuations and theTheory of Aggregate Demand

Financial Markets and the SpecialCase of Money

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Final exam

Central Banking and Monetary Policy Unemployment and the Foundations

of Aggregate Supply

Ensuring Price Stability

Policies for Growth and Stability

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Macroeconomics

What is Macroeconomics? Is thestudy of the behavior of the economyas a whole. It examines the forces

t at a ect rms, consumers, anworkers in the aggregate.

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Macroeconomics

Two central themes will run throughour survey of macroeconomics:

The short-term fluctuations in output,

employment, financial conditions, andprices that we call the business cycle.

The longer-term trends in output and

living standards known as economic growth.

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Objectives inMacroeconomics

Output: High level and rapid growth of output

Em lo ment:

High level of employment with lowinvoluntary unemployment

Stable prices:

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Macroeconomicsinstruments

Monetary policy: Buying and selling bonds, regulating

financial institutions

Fiscal policy: Government expenditures

Taxation

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Measuring EconomicSuccess

Output: the ultimate objective ofeconomic activity is to provide thegoods and services that the

popu at on es res. The most comprehensive measure of

the total output in an economy is the

gross domestic product (GDP)Producto Interno Bruto (PIB)

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Measuring EconomicSuccess

GDP is the measure of the market value ofall final goods and services produced in acountry during a year.

Nominal GDP is measured in actual market

prices. Real GDP is calculated in constant or

invariant prices.

Potential GDP represents the maximumsustainable level of output that the economycan produce.

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Real GDP

GDP in 2006 was $ 11,294.8 billion GDP in 2007 was $ 11,523.9 billion

2000 rices for both amounts 

What was the real growth?

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High Employment

The unemployment rate is thepercentage of the labor force that isunemployed.

The labor force includes all employedpersons and those unemployed

individuals who are seeking jobs.

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Price stability

Price indexes: are measures of theoverall price level; e.g. consumerprice index (CPI) (Indice de precios al 

consum or , otro pue e ser e IPC de la bolsa de valores Indice de precios y cotizaciones).

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Price stability

Economists measure rice stabilit b

looking at the inflation or inflation rate.

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Goals of macroeconomicpolicy:

A high level and growing level ofnational output.

High employment with low

unemployment. A stable or gently rising price level.

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Tools of Macroeconomicpolicy

Fiscal Policy: denotes the use of taxes andgovernment expenditures.

Government expenditures can be of two

Government transfer payments. Taxation, which affects the overall economy

in two ways: taxes affect people’s income;

and taxes affect the prices of goods andfactors of production and thereby affectincentives and behavior.

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Tools of Macroeconomicpolicy

Monetary policy: The governmentconducts it through managing thenation’s money, credit, and banking

system. n ex co s an e y t eBanco de Mexico (BM) in the U.S. bythe Federal Reserve Bank (Fed).

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Aggregate Supply andDemand

Aggregate Supply refers to the totalquantity of goods and services thatthe nation’s business willingly produce

an se n a g ven per o . t epen supon the price level, the productivecapacity of the economy, and the level

of costs.

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Aggregate Supply andDemand

Aggregate demand refers to the totalamount that different sectors in theeconomy willingly spend in a given

per o . ggregate eman equa stotal spending on goods and services.It depends on the level of prices, as

well as on monetary policy, fiscalpolicy, and other factors.

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Aggregate Supply andDemand

Components of Aggregate Demand: Consumption

Investment

Government purchases Net Exports