This document provides definitions and diagrams related to macroeconomics concepts including: - Definitions of macroeconomics, national income, GDP, GNP, real GDP - Circular flow diagrams showing flows between households, firms, government - Components of aggregate demand and supply - Causes of shifts in aggregate demand and short-run aggregate supply - Business cycles and use of diagrams to illustrate macroeconomic goals - Unemployment, inflation, and Phillips curve concepts - Monetary and fiscal policy approaches and their strengths/weaknesses

1. MacroEconomics Diagrams and Definitions

2. What is macroeconomics? Macroeconomics is the study of a national economy.

3. Macroeconomic Goals

4. Two Sector Circular Flow of Income Monetary Flow Households RealFlow Good and Services = Output (O) Expenditure on Goods and Services (E) Wages, Rent and Profits (Y) Factors of Production Firms E = O = Y 4

5. Four Sector Circular Flow of Income Leakages (L) Injections (J) Saving (S) Households Investments (I) Income Exports (X) Imports (M) Government Spending (G) Expenditure Taxes (T) Firms O = E = Y 5 Sum J = Sum L

6. Measuring National Income Income Method Output Method Households Good and Services Wages, Rent and Profits Expenditure on Goods and Services Factors of Production Firms Expenditure Method 6

7. How is national income measured?

8. How is national output measured?

9. How is national expenditure measured?

10. What is GDP?

11. GDP GDP = Gross Domestic Product = Total Value of all Spending in an Economy = The Total Value of all final Goods and Services in an Economy regardless of who owns the productive assets. GDP = C + I + G + (X – M)

12. GNP GNP = Gross National Product = Total Income Earned by a nation’s factors of production regardless of where the assets are located

13. Real GDP Real GDP = Nominal GDP adjusted for inflation

14. Calculating Real GDP Real GDP = Nominal GDP of year measured

15. The Uses of National Statistics

16. Limitations of the Data

17. What is economic development? Economic Development is a multidimensional concept that includes poverty reduction, provision of education, health care and law and order, civil liberties and civic participation.

18. Why GDP fails to accurately measure welfare

19. Why GDP may understate improvements in welfare

20. Why GDP may overstate welfare

21. How can development be measured? GDP per capita Human Development Index Aims to stress the human dimension of economic growth

22. How can development be measured?

23. How is the HDI determined?

24. How can development be measured?

25. Developing and Developed

26. How can development be measured? Important Indicators of development Infant mortality rate Maternal mortality ratio Enrolment in each level of education Literacy Internet users per 1000

27. Macroeconomic Models

28. What is aggregate demand (AD)? Aggregate Demand is the aggregate (total) spending on goods and service in a period of time at a given price level.

30. What are the components of AD? C = all household consumption on durables, non-durables and services I = firm’s replacement investment(spending on capital to maintain productivity) or induced investment to increase production G = all government spending X-M = spending by foreigners on exports less domestic spending on imports

31. What causes shifts in AD?

32. What causes Changes in Consumption? AD AD AD AD 32

33. What causes Changes in Consumption? AD AD AD AD 33

34. What causes Changes in Consumption? AD AD AD AD 34

35. What causes Changes in Investment? AD AD 35

36. Demand for investment funds?

37. What causes Changes in Investment? AD AD AD AD 37

38. What causes Changes in Investment? AD AD AD AD 38

39. What causes Changes in Investment? AD AD 39

40. What causes Changes in Government Spending? AD AD AD AD 40

41. What causes Changes in Export and iMport spending? AD AD 41

42. What causes Changes in Export and iMport spending? AD AD AD AD 42

43. What is aggregate supply (AS)? Aggregate(total) Supply isamount of goods and services that all industries will produce at a given price level.

44. What is aggregate supply in the short run (SRAS)?

45. What are the components of AS?

46. What causes shifts in SRAS?

47. What causes shifts in SRAS? AS AS AS AS 47

48. What causes shifts in SRAS? AS AS AS AS 48

49. What causes supply shocks? AS AS 49

50. Macroeconomic Equilibrium

51. Shifts in AD

52. Shifts in SRAS

53. The Business Cycle Fluctuations in the growth of real output, consisting of periods of expansion and contraction called business cycles or trade cycles.

54. Business Cycle

55. Business Cycle: Expansion

56. Business Cycle: Peak

57. Business Cycle: Contraction

58. Business Cycle: Trough

59. Relationship between real GDP and Employment 59

60. Using Diagrams to Illustrate Macroeconomic Goals

61. Using Diagrams to Illustrate Macroeconomic Goals

62. Changes in SR Equilibrium

63. Changes in AD

64. Changes in SRAS

65. Economic Scenarios

66. Deflationary (recessionary) gap

67. Recession A recession is when the economy experiences two consecutive quarters of falling GDP.

68. Inflationary gap

69. Full employment level of output

70. Causes of Business Cycle

71. Changes in AD

72. Changes in AS

73. What is the neoclassical perspective?

74. The Neoclassical LRAS

75. Neoclassical (Free Market) LRAS LRAS perfectly inelastic at Full Employment Level of Output (Ymax) Potential Output = Quantity and Quality of FOPs not Price

76. Why is the LRAS vertical?

77. Implications of the neoclassical LRAS?

78. Long-run equilibrium

79. Long-run equilibrium and Decline in AD

80. Return to Long-run equilibrium

81. Long-run equilibrium

82. Long-run equilibrium and Increase in AD

83. Return to Long-run equilibrium

84. What is the Keynesian perspective?

85. The Keynesian SR/LRAS?

86. Keynesian SR/LRAS

87. Keynesian SR/LRAS Keynes argued that as there is nothing inherent in the economy to move the SR into the LR, then SRAS = LRAS NB In diagrams taking a Keynesian you may see the AS curve labeled Keynesian AS or simply LRAS as long as the diagram’s title makes clear which perspective is being adopted

88. Inflationary Gap in the Keynesian Perspective

89. Full Employment Equilibrium in the Keynesian Perspective

90. Economic Growth: Improved Quantity & Quality of FOPs

91. Economic Growth: Neoclassical Perspective

92. Economic Growth: Keynesian Perspective

93. Policy Alternatives to Manage the Economy

94. Expansionary Policies (in recession)

95. Contractionary Policies (in inflation)

96. Strengths of Fiscal Policy

97. Weaknesses of Fiscal Policy

98. Strengths of Monetary Policy

99. Weaknesses of Monetary Policy

100. The Neoclassical/Monetarist Challenge Argument that discretionary fiscal polices that try to stabilize the economy are so flawed that they actually cause instability Alternative policies Ensure steady supply of money Ensure price and wage flexibility Focus on supply-side policies to achieve economic growth

101. Supply-side Policies

102. Market-orientated Policies

103. Market-orientated Supply-side Policies: Objectives

105. Reduce Government Sector: Pros and Cons

107. Make labor more responsive to supply and demand : Pros and Cons

109. Government policies to improve industry: Pros and Cons

110. Shifting the SRAS and the LRAS in the AS-AD Model

111. The Multiplier Effect

112. Marginal Propensity

113. Example of the Multiplier in Effect Assumption 60% of additional income spent on Consumption (MPC = 0.6) The Multiplier = 1/1-MPC

114. The Multiplier Effect

115. The Accelerator Theory & the Combined multiplier/accelerator effect Argues that small changes in GDP produces larger changes in investment spending. These fluctuations interact with the Multiplier effect to increase the momentum of business cycle.

116. Crowding-out Effect

117. Crowding-out Effect

118. Crowding-out Effect

119. Unemployment and Inflation

120. Unemployment

123. Economy at Potential

124. Types of Unemployment

125. Keynesian Remedy for Unemployment During a Recession

126. Neoclassical Remedy for Unemployment During a Recession

127. Real Wage Unemployment

128. Eliminating Cyclical (Demand-deficient) Unemployment

129. Inflation and Deflation

130. Inflation & Deflation

131. Demand-pull Inflation

132. Cost-push Inflation

134. Stakeholders and Inflation

136. “Good” Deflation

137. Measuring Inflation The consumer price index (CPI) compares the value of a basket of goods and services in one year with a same basket in the base year.

138. Problems Measuring Inflation

139. The Phillips Curve

140. NRU = NAIRU If governments avoid demand-side expansionary policies Non-accelerating inflation rate of unemployment is achieved (NAIRU)

141. Long-run Phillips Curve

142. Phillips Curve

143. Phillips Curve

144. Neo-classical challenge to the Phillips Curve

145. LR Phillips Curve If expansionary policies adopted, inflation would increase to 4% or more. Real wages have fallen and firms hire additional labor.

146. LR Phillips Curve Unemployment is now below NRU at 4%. (b) Workers have fallen for the “money illusion” and slow to realize that real wages have fallen because inflation is actually over 4%.

147. LR Phillips Curve Unemployment is now below NRU at 4%. (b) Workers have fallen for the “money illusion” and slow to realize that real wages have fallen because inflation is actually over 4%.

148. LR Phillips Curve Once workers realize real wages have fallen they will demand at least a 4% pay rise. Real wages will return to previous levels and firm will fire workers. Unemployment has returned to (c)

149. LR Phillips Curve Any attempt to to increase AD will only result in temporary changes to unemployment but increasingly high rates of inflation

150. LR Phillips Curve Friedman argued that no trade off exists if governments do not use demand side policies.