SEMESTER 2 PORFOLIOSonny Bautista

Macroeconomic Models

Economic growth and development

Full employment

Price stability

Circular Flow of income

A simplified model of the economy that shows the flow of money through the economy

House Holds

Government

Firms

T

T G

G

YC

S M

S MX I

Gross Domestic Product

The total money value of all final goods and services produced in an economy in one year

Real GDP: Adjusted for inflation

Nominal GDP: not adjusted for inflation

Boom and Bust Cycle (Business cycle)

In developed economies, we often see a cyclical pattern to growth in real GDP, following four phases: boom, recession, trough, and recovery

DEPRESSION

RECOVERY

BOOM

RECESSION

TROUGH

BOOM

factors of GDP

C + I + G + (X – M)

Private Consumption: The value of goods and services acquired and consumed by households

Investments: Includes business investments on equipment

Government Expenditure:The sum of government spending

Exports and Imports:Represents gross exports and imports of an economy

Demand-Side Policy: Fiscal

Fiscal Policy: The use of government spending and taxation to influence AD, raise revnue, redistibute income and influence consumption patterns.

Problems: Time lags, financial inflexibility, budget deficits, and crowding out

Demand-Side Policy: Monetary

Monetary Policy: the use of the rate of interest predominantly to influence AD (the money supply control can also be used)

Problems: Investment is interest inelastic, one policy fits all, disintermediation

Supply-side Policies

Aim: To increase economy’s productive potential Increasing labour mobility Increasing incentives/decreasing disincentives to work Increasing the productivity of labour Increasing investment, innovation and enterprise

Unemployed

Unemployed: People who are registered as willing, able and available for work at the market clearing wage, but who are unable to find work.

ARTICLE: http://www.bbc.co.uk/news/business-13568334

Housing market fears due to unemployment

Cost of unemployment

Loss of output

Waste of productive potential

Government finances

Social problems

Loss of consumer spending

Involuntary Unemployment

People fired involuntarily from jobs

Article: http://www.floridatoday.com/article/20110528/BUSINESS/105280324/Engine-maker-lay-off-69

Engine markets lay-off 300 employers in florida

Cures for Involuntary Unemployment

Fiscal Policy Cut Taxes Increase government spending

Monetary Policy Reduce rate of interest Increase money supply

Supply-Demand Work-Force Diagram

Real Wage

Labour

Labour Force

AS labour

W1

L1 L2

AD labour

Inflation

A constant rise in prices over a given time period

Costs of Inflation: Redistribution of income Devaluation of money Reduction of investment Reduction of international competitiveness menu costs

Cost-Push Inflation

Cost-Push Inflation: When there is an increase in the costs of factors of production, such as wage increases or increases in oil prices, then firms’ costs are pushed upwards, the SRAS curve shifts from SRAS1 to SRAS2, and the average price level rises from P1 to P2.

SRAS2 SRAS1

P2

P1

Y2 Y1

Avera

ge P

rice

Level

GDP

Demand-pull Inflation

An increase in AD, caused by a sustained increase in any of the components of AD will shift the AD curve from AD1 to AD2 and the average price level will rise from P1 to P2.

SRAS1

P2

P1

Y1 Y2

Avera

ge P

rice

Level

GDP

AD2AD1

Inflation/Unemployment Trade-off

Stagflation: with a standard se tof AD and AS curves, there is an inverse relationship with inflation and unemployment. Keynesian theorist, increase AD to reduce unemployment

Caused -> Stagflation

Stagflation

Stagflation: A persistent high inflation combined with a high

unemployment and stagnant demand in a countries economy

SRAS2

SRAS1

P2

P1

Y2 Y1

Avera

ge P

rice

Level

GDP

AD1

Viewpoints: Monetarist

Beliefs: Markets work Economies tend towards full employment Inflation is caused by excessive money supply growth Governments should intervene really only to control

inflation by controlling money supply growth

Monetarist AS curve

Price level

GDP

LRAS

SRAS

AD will be purely inflationary in the long run, and so policy should focus on increasing AS

Viewpoint: Keynesian

Beliefs: Markets are slow to adjust (time lags) An economy can be in equilibrium below full employment Governments should and can effectively intervene to

stabilize an economy Fiscal is more effective than monetary policy

Keynesian AS curve

Price level

GDP

LRAS

SRAS

AD will increase output/income without increasing inflation as long as the economy is below full employment.