1. GDP: Spending Y = C + I + G + NX
Money MV = PY
Circular flow
Spending—Output—Income
Measuring GDP and Price Indexes
Unemployment Rate
Laborforce
Natural rate
Interest rate: nominal and real
Consumption function
C = C0 + mpc x Yd
Aggregate Demand: C + I + G + NX
Shifts
Aggregate Supply: Short-run—Long-run
AD—AS Equilibrium
Automatic adjustment via price
Keynesian intervention
Fiscal Policy
Money
Functions
Money creation in banking system
Monetary Policy
Tools
Effects
Phillips Curve
Inflation—Unemployment Tradeoff ?
Expectations and “natural rate”
Economic Growth
Factor growth—investment
Technology

2. GDP = C + I + G + NX MV = P Y (= $GDP)
Macro - Review
GDP = C + I + G + NX
MV = P Y (= $GDP)

3. Circular Flow

4. GDP: Real and Nominal
Gross Domestic Product (GDP): the market value of all final goods and services produced within a country during a year.
GDP = C + I + G + Ex – Im
= C + I + G + NX
Real GDP adjusts for inflation
$GDP = P x Q
$ GDP = GDP Deflator x Real GDP
Real GDP = Q = $GDP/P
= Nominal GDP divided by
(deflated by) the GDP Price Deflator

5. Price Indexes (Base Year = 100)
Consumer Price Index (CPI)
cost over time of a typical bundle of goods and services purchased by households.
CPI = Cost of Typical Market Basket Now
divided by
Cost of the Same Basket in Base Year
Inflation Rate = {Change in CPI} ÷ {Initial CPI}
GDP Price Deflator (GDP Price Index)
measures average prices over time of all goods and services included in GDP.

6. 2006 2007 Quantity Price Cars Computers Oranges 10 4 1,000 $2,000
$1,000 $1 12 6
$3,000
$500
$GDP in 2006 = $GDP in 2007 =
% Growth =
2006 Base Prices
GDP in 2006|2006= GDP in 2007|2006=
P in 2006|2006 = P in 2007|2006=
2007Base Prices
GDP in 2006|2007= GDP in 2007|2007=
P in 2006|2007 = P in 2007|2007=
2006 – 2007 Average Price Base
GDP in 2006|avg P= GDP in 2007|avg P=
P in 2006|avg P = P in 2007|avg P=

7. Unemployment rate: % of labor force not working.
number unemployed
number in the Labor Force
Rate of Unemployment =
Unemployed persons: not working and looking
Labor force: Employed + unemployed noninstitutionalized persons 16+ years of age
Underemployed workers are treated as employed
Discouraged workers are not in the labor force
“Natural” or normal rate of unemployment (NAIRU)
Seasonal Unemployment
Frictional Unemployment: searching for jobs
Structural Unemployment: Imperfect match between employee skills and requirements of available jobs.
Cyclical Unemployment : Results from business cycle

8. Interest Rates: Nominal and Real
Nominal Interest Rate (i): the interest rate observed in the market.
Real Interest Rate (r): the nominal rate adjusted for inflation ().
r = i - 
Low real interest rates spur business investment spending (the I in C + I + G + NX)

9. C = C0 + mpc * Yd Consumption Function C0 = Autonomous Consumption
mpc = Marginal Propensity to Consume
mpc+mps = 1 [what’s not consumed is saved]
Yd = Disposable Income

10. Aggregate Demand Curve
AD = C + I + G + NX

11. AD = C + I + G + NX Factors that Shift AD Consumption Income Wealth
Interest Rates
Expectations/Confidence
Demographics
Taxes
Investment
Technology
Cost of Capital Goods
Capacity Utilization
Government Spending
Net Exports
Domestic & Foreign Income
Domestic & Foreign Prices
Exchange Rates
Government Policy

12. Aggregate Supply: Short – Run & Long – Run

13. Aggregate Demand and Supply Equilibrium: Short-run and long-run responses to increase in aggregate demand : : Automatic Adjustment via Price Change

14. Macroeconomic Viewpoints Laissez - Faire. Classical. Monetarist
Macroeconomic Viewpoints Laissez - Faire Classical Monetarist New Classical Activist/Interventionist Keynesian New Keynesian

15. Demand-Side Policy: Greater Spending Means Higher Prices
(c) Aggregate Demand and Supply in the classical range of AS curve. (Prices rise without significant improvements in output and employment.)
Price Level
AD1 AD
Y?
Real GDP

16. Fiscal Policy: Some Definitions
Fiscal policy: government spending and taxing
Demand-side policies
Supply-side policies:
Discretionary Fiscal Policy:
Automatic Stabilizers:
Progressive taxes
Unemployment insurance
Welfare payments / other transfer payments

17. Functions of Money Medium of exchange Unit of account Store of value
Standard of Deferred Payment
Store of value 6

18. 16

19. Multiple Creation of Bank Deposits  M1 Fractional Reserve Banking System: r = .1 Deposit expansion multiplier = 1/r (when banks lend all excess reserves and public redeposits proceeds of loans into the banking system  no leakages)
Instructor Notes:
1) When a bank receives deposits, it keeps 25 percent in reserves and lends 75 percent.
2) The amount lent becomes a new deposit at another bank.
3) The next bank in the sequence keeps 25 percent and lends 75 percent, and the process continues until the banking system has created enough deposits to eliminate its excess reserves.
4) The running tally tells us the amounts of deposits and loans created at each stage.
5) At the end of the process, an additional $100,000 of reserves creates an additional $400,000 of deposits. 59

20. 3) Open market operations Manage the public’s expectations
The Fed’s Policy Tools
1) Reserve Requirements
2) Discount rate
“primary credit rate”
3) Open market operations
Manage the public’s expectations
Inflation Targeting? 23

21. How Money Supply Changes Affect GDP

22. Aggregate Demand and Supply  Phillips Curve

23. Expectations and the Phillips Curve
Starting at (1): 5% unemployment and 3% inflation. People believe inflation will continue at 3%  Curve I.
Then Fed hypes inflation to 6%  unemployment falls to 3% (Point 2 on Curve I).
Expectations adjust to 6% inflation  Wage demands up  Economy moves to point (3) Unemployment returns to 5%.
If expectations adjust instantly, e.g., anticipating Fed’s policy, economy moves directly from (1) to (3).

24. Determinants of Economic Growth
Economic growth: an increase in Real GDP.
Small changes in rates of growth
 Big changes over many years
Per Capita Real GDP: real GDP divided by population.
Determinants of Economic Growth
Size and quality of the labor force
Capital
Land/Natural Resources … are not a necessary condition for economic growth … they can be acquired through trade.
Technology