1. IMBA Managerial Economics Lecturer: Jack Wu
Basic Macroeconomics
IMBA Managerial Economics
Lecturer: Jack Wu

2. Recent Hot Macroeconomic Issues in the World
Sovereign Bond Crisis in Europe
QE policy in America
Debt Ceiling and Fiscal Cliff in America
Soft Landing in China
Abenomics in Japan

3. Major Macroeconomic Problems
National Income: Low Economic Growth Rate
Employment Opportunity: High Unemployment Rate
Cost of Living: High Inflation Rate

4. How to Measure National Income?
Gross Domestic Product (GDP)
Gross National Product (GNP)
GDP (Purchasing Power Parity)

5. Gross Domestic Product
Gross domestic product (GDP) is a measure of the income and expenditures of an economy.
It is the total “Market value” of “all final” “goods and services” “produced” “within a country” in a “given period of time”.

6. Formula of GDP GDP (Y) is the sum of the following: Y = C + I + G + NX
Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)
Y = C + I + G + NX

7. Components: C and I Consumption (C): Investment (I):
The spending by households on goods and services, with the exception of purchases of new housing.
Investment (I):
The spending on capital equipment, inventories, and structures, including new housing.

8. Components: G and NX Government Purchases (G): Net Exports (NX):
The spending on goods and services by local, state, and federal governments.
Does not include transfer payments because they are not made in exchange for currently produced goods or services.
Net Exports (NX):
Exports minus imports.

9. GDP(PPP)
Gross Domestic Product (GDP) at Purchasing Power Parity (PPP)

10. Gross National Product
GNP is the total income earned by a nation’s permanent residents. It differs from GDP by including income that citizens earn abroad and excluding income that foreigners earn here.

11. Unemployment Rate

12. Why Are There Always Some People Unemployed?
Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs. In other words, it takes time for workers to search for the jobs that are best suit their tastes and skills.
Structural unemployment is the unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.

13. Consumer Price Index
The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer.

14. Calculating CPI: steps
Fix the Basket
Find the Prices
Compute the Basket’s Cost
Choose a Base Year and Compute the Index

15. Calculating Inflation Rate
Compute the inflation rate: The inflation rate is the percentage change in the price index from the preceding period.

16. HOW CAN GDP INCREASE? Consumption increases Investment increases
Government purchase increases
Net export increases

17. Consumption Autonomous consumption spending
Derived consumption spending
=c*(disposable income)
C: marginal propensity to consume
Disposable income= income - tax

18. Investment Domestic or Foreign Direct investment
Investment is affected by real interest rate (nominal interest rate – inflation)
Portfolio investment (ex: buying shares) is considered as Saving
National Saving = Private Saving +Public Saving

19. The Market for Loanable Funds
Real
Interest
Rate
Supply of loanable funds
(from national saving)
Demand for loanable
funds (for domestic
investment and net
capital outflow)
Equilibrium
quantity
real interest
rate
Quantity of
Loanable Funds
Copyright©2003 Southwestern/Thomson Learning

20. Nominal Interest rate and Money Market
Money supply
Money demand

21. Fiat Money in the Economy
Currency is the paper bills and coins in the hands of the public.
Demand deposits are balances in bank accounts that depositors can access on demand by writing a check.

22. Money Supply M1:Narrowly defined money supply _ M1A _ M1B
M2: Broadly defined money supply

23. Open-Market Operations
The money supply is the quantity of money available in the economy.
The primary way in which the Fed changes the money supply is through open-market operations.
The Fed purchases and sells U.S. government bonds.

24. Money Creation through the bank
When one bank loans money, that money is generally deposited into another bank.
This creates more deposits and more reserves to be lent out.
When a bank makes a loan from its reserves, the money supply increases.

25. Money Multiplier
The money multiplier is the reciprocal of the reserve ratio:
M = 1/R
With a reserve requirement, R = 20% or 1/5,
The multiplier is 5.

26. Tools of Money Control
The Fed has three tools in its monetary toolbox:
Open-market operations
Changing the reserve requirement
Changing the discount rate
**The discount rate is the interest rate the Fed charges banks for loans.

27. Motives of Money Demand
Transaction motive (Price, income)
Precautionary motive (Price, income)
Speculative motive (interest rate)

28. Money Market Equilibrium
The interest rate and quantity demanded of money are negatively related. Therefore, the money demand curve is downward sloping.
The quantity supplied of money is controlled by Fed. Therefore, the money supply curve is vertical.
As money demand increases, the interest rate is higher.
As money supply increases, the interest rate is lower.

29. Figure M3 M2 M1
r2=r3 r1
MS3
MS1
MS2
Money Quantity
Interest Rate

30. Liquidity Trap
When the money demand is perfectly elastic at a low interest rate, the increase in money supply would not have any impact on the interest rate.

31. International Trade and Exchange Rate
Net Export is affected by exchange rate.

32. Nominal Exchange Rate
The nominal exchange rate is the rate at which a person can trade the currency of one country for the currency of another.
The nominal exchange rate is expressed in two ways:
In units of foreign currency per one U.S. dollar.
And in units of U.S. dollars per one unit of the foreign currency.

33. Figure 30 E** E* D Q** Q* 29 S S1 US Dollar
Nominal Exchange Rate (NT$/US$)

34. Real Exchange Rate
The real exchange rate is the rate at which a person can trade the goods and services of one country for the goods and services of another.
The real exchange rate compares the prices of domestic goods and foreign goods in the domestic economy.
If a case of German beer is twice as expensive as American beer, the real exchange rate is 1/2 case of German beer per case of American beer.

35. Formula

36. The Market for Foreign-Currency Exchange
Real
Exchange
Rate
Supply of dollars
(from net capital outflow)
Demand for dollars
(for net exports)
Equilibrium
quantity
real exchange
rate
Quantity of Dollars Exchanged
into Foreign Currency
Copyright©2003 Southwestern/Thomson Learning

37. Short-Run Economic Fluctuation
Economic activity fluctuates from year to year.
A recession is a period of declining real incomes, and rising unemployment.
A depression is a severe recession.
Fluctuations in the economy are often called the business cycle.

38. The Aggregate-Demand Curve...
Price
Level
Aggregate
demand P Y
1. A decrease
in the price
level . . . Y2 P2
Quantity of
increases the quantity of
goods and services demanded.
Output
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39. Shifts Shifts arising from Consumption Investment Government Purchases
Net Exports

40. Demand Curve Shifts Price Level D2 P1 Y2 Aggregate demand, D1 Y1
Remove bullet in graph – graph needs no additional title???
Aggregate
demand, D1 Y1
Quantity of
Output

41. The Long-Run Aggregate-Supply Curve
Price
Level
Long-run
aggregate
supply P
1. A change
in the price
level . . . P2
does not affect
the quantity of goods
and services supplied
in the long run.
Natural rate
Quantity of
of output
Output
Copyright © South-Western

42. Long-Run Aggregate Supply Curve
The Long-Run Aggregate-Supply Curve
The long-run aggregate-supply curve is vertical at the natural rate of output.
This level of production is also referred to as potential output or full-employment output.
Any change in the economy that alters the natural rate of output shifts the long-run aggregate-supply curve.
The shifts may be categorized according to the various factors in the classical model that affect output.

43. Long-Run Growth and Inflation
and growth in the
money supply shifts
aggregate demand . . .
Long-run
aggregate
supply,
LRAS
1980 Y
1990
LRAS Y
2000
LRAS
Price
Aggregate
Demand, AD
2000
Level
1. In the long run,
technological
progress shifts
long-run aggregate
supply . . . AD
1990 P
2000
and
ongoing inflation. P
1990 P
1980 AD
1980 Y
1980
leading to growth
in output . . .
Quantity of
Output
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44. Short-Run Aggregate Supply Curve
Short-run fluctuations in output and price level should be viewed as deviations from the continuing long-run trends.
In the short run, an increase in the overall level of prices in the economy tends to raise the quantity of goods and services supplied.
A decrease in the level of prices tends to reduce the quantity of goods and services supplied.

45. The Short-Run Aggregate-Supply Curve
Price
Level
Short-run
aggregate
supply Y P
1. A decrease
in the price
level . . . Y2 P2
reduces the quantity
of goods and services
supplied in the short run.
Quantity of
Output
Copyright © South-Western

46. The Long-Run Equilibrium
Price
Level
Long-run
aggregate
supply
Short-run
aggregate
supply
Aggregate
demand A
Equilibrium
price
Natural rate
of output
Quantity of
Output
Copyright © South-Western

47. Two Causes of Economic Fluctuation
Shifts in Aggregate Demand
In the short run, shifts in aggregate demand cause fluctuations in the economy’s output of goods and services.
In the long run, shifts in aggregate demand affect the overall price level but do not affect output.
An Adverse Shift in Aggregate Supply
A decrease in one of the determinants of aggregate supply shifts the curve to the left:
Output falls below the natural rate of employment.
Unemployment rises.
The price level rises

48. A Contraction in Aggregate Demand
causes output to fall in the short run . . .
Price
Level
Short-run aggregate
supply, AS
Long-run
aggregate
supply
Aggregate
demand, AD
AS2
AD2
but over
time, the short-run
aggregate-supply
curve shifts . . . A P Y B P2 Y2
1. A decrease in
aggregate demand . . . C P3
and output returns
to its natural rate.
Quantity of
Output
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49. An Adverse Shift in Aggregate Supply
1. An adverse shift in the short-
run aggregate-supply curve . . .
Price
Level
Long-run
Short-run
aggregate
supply, AS
AS2
aggregate
supply
Aggregate demand B Y2 P2 Y A P
and
the price
level to rise.
Quantity of
causes output to fall . . .
Output
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50. Policy Responses to Recession
Policymakers may respond to a recession in one of the following ways:
Do nothing and wait for prices and wages to adjust.
Take action to increase aggregate demand by using monetary and fiscal policy.

51. Fed’s Monetary Injection
The Fed can shift the aggregate demand curve when it changes monetary policy.
An increase in the money supply shifts the money supply curve to the right.
Without a change in the money demand curve, the interest rate falls.
Falling interest rates increase the quantity of goods and services demanded.

52. A Monetary Injection (a) The Money Market
(b) The Aggregate-Demand Curve
Interest
Price
Rate
Money
supply, MS
MS2
Level
AD2
Money demand
at price level P
1. When the Fed
increases the
money supply . . . r Y P
the
equilibrium
interest rate
falls . . . r2
Aggregate
demand, A D
Quantity Y
Quantity
which increases the quantity of goods
and services demanded at a given price level.
of Money
of Output
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53. Fiscal Policy
When policymakers change the taxes, the effect on aggregate demand is indirect—through the spending decisions of firms or households.
When the government alters its own purchases of goods or services, it shifts the aggregate-demand curve directly.

54. Two Macroeconomic Effects
There are two macroeconomic effects from the change in government purchases:
The multiplier effect
The crowding-out effect