Presentation Transcript

1. SUMMARY Chapters: 27-31
2. Chapter 27 The goods market and the money market do not operate independently. Thelinks between goodsandmoney markets: The money market determines the interest rate. The demand for money in the money market is affected by income (which is determined in the goods market). The goods market determines income, which depends on planned investment. Planned investment in turn depends on the interest rate (which is determined in the money market). The key link between the two markets is the interest rate…
3. Chapter 27 Planned Investment and the InterestRate There is a negative relationship between plannedinvestment and the interest rate because the interest rate affects the cost of investment projects. When the interest rate rises, planned investment decreases, and when the interest rate falls, planned investment increases.
4. Chapter 27 Equilibrium in Both the Goods andMoney Markets: The IS-LM Model In the goods market, there is a negative relationship between the interest rate and output because there is a negative relationship between the interest rate and planned investment. In the money market, there is a positive relationship between the interest rate and output for a fixed money supply because if output increases, the interest rate must increase to achieve equilibrium in the money market.
5. Chapter 27 The IS-LM Model Combining the goods and money markets determines the equilibrium values of both the interest rate and output. Equilibrium in the goods market (IS).Equilibrium in financial markets (LM). When the IS curve intersects the LM curve, both goods and financial markets are in equilibrium.
6. Chapter 27 Policy Effects in the Goods and Money Markets Expansionary Policy Effects: expansionary fiscal policy - An increase in government spending or a reduction in net taxes aimed atincreasing aggregate output (income) (Y). expansionary monetary policy - An increase in the money supply aimed at increasing aggregate output (income) (Y). Contractionary Policy Effects: contractionary fiscal policy -A decrease in government spending or an increase in net taxes aimed at decreasing aggregate output (income) (Y). contractionary monetary policy -A decrease in the money supply aimed at decreasing aggregate output (income) (Y).
7. Chapter 27 Crowding-outEffect An expansionary fiscal policy based on increases in government spending tends to lead to a crowding-out effect: Because increased government expenditures mean more transactions in the economy and thus an increased demand for money, the interest rate will rise. The decrease in planned investment spending that accompanies the higher interest rate will then partially offset the increase in aggregate expenditures brought about by the increase in G. The size of the crowding-out effect, affecting the size of the government spending multiplier, depends on two things: the assumption that the Central Bankdoes not change the quantity of money supplied and the sensitivity or insensitivity of planned investment to changes in the interest rate. policy mix is the combination of monetary and fiscal policies in use at a given time.
8. Crowding-outEffect (Dışlama etkisi) Devlet artan kamu harcamalarını finanse edebilmek için piyasadan borçlanma gereği duyar. Bu da piyasada faiz oranlarının artmasına neden olur. Artan faiz oranları yatırımın maliyetini artırır. Kamu kâğıtlarına uygulanan faizlerin yüksekliği fonları kamuya yöneltir. Özel sektör yeterli ve uygun koşullarda fon bulamaz.
9. Chapter 27 The Aggregate Demand Curve The aggregate demand (AD) curve graphs the negative relationship between aggregate output (income) and the price level. An increase in the quantity of money supplied, an increase in government purchases, or a decrease in net taxes at a given price level shifts the aggregate demand curve to the right. A decrease in the quantity of money supplied, a decrease in government purchases, or an increase in net taxes shifts the aggregate demand curve to the left.
10. Chapter 27 Refer to the information provided in table below to answer the questions that follow: A Hypothetical Investment Schedule 1. If the interest rate dropped from 10% to 4%, planned investment would __ by $ __billion. A. Increase;90 B. Increase; 60 C. decrease; 90 D. decrease; 60 420-330=90 2. Suppose the expenditure multiplier is 3. A drop in the interest rate from 12% to 6%, ceteris paribus, would increase equilibrium output by $ ____ billion. 180 B. 120C.270 D. 160 Multiplier=∆Y/∆I ; ∆I =390-300=90; ∆Y=90x3=270 3. Suppose the expenditure multiplier is 4and the initial interest rate is 8%. A move to what interest rate will increase equilibrium output by 240 billion? 4 B. 6 C. 10D. 12 ∆I = 240/4=60; 360-60=300
11. Chapter 28 The Aggregate Supply Curve Aggregate supply is the total supply of goods and services in an economy. The aggregate supply (AS) curve shows the relationship between the aggregate quantity of output supplied by all the firms in an economy and the overall price level. The AS curve is not a market supply curve, and it is not the simple sum of all the individual supply curves in the economy.
12. Chapter 28 Short run Aggregate Supply Curve In the short run, the aggregate supply curve (the price/outputresponse curve) has a positive slope. Long run Aggregate Supply Curve If wages fully adjust to prices in the long run, then the long run AS curve will be vertical. The level of aggregate output that can be sustained in the long run without inflation is called potential output or potential GDP.
13. Chapter 28 The Equilibrium Price Level The equilibrium price level in the economy occurs at the point at which the AS and AD curves intersect. The intersection of the AS and AD curves corresponds to equilibrium in the goods and money markets and to a set of price/output decisions on the part of all the firms in the economy.
14. Chapter 28 Monetary and Fiscal Policy Effects If the economy is initially producing on the flat portion of the AS curve, an expansionary policy—which shifts the AD curve to the right—will result in a small increase in the equilibrium price level relative to the increase in equilibrium output. If the economy is initially producing on the steep portion of the AS curve, an expansionary policy results in a small increase in equilibrium output and a large increase in the equilibrium price level. If the AS curve is vertical in the long run, neither monetary nor fiscal policy has any effect on aggregate output in the long run. For this reason, the exact length of the long run is one of the most pressing questions in macroeconomics.
15. Chapter 28 CAUSES OF INFLATION Demand-pull inflation is inflation initiated by an increase in aggregate demand. Cost-push, or supply-side, inflation is inflation initiated by an increase in costs like energy prices. An increase in costs may also lead to stagflation the situation in which the economy is experiencing a contraction and inflation simultaneously. inflation targeting When a monetary authority chooses its interest rate values with the aim of keeping the inflation rate within some specified band over some specified horizon.
16. Chapter 29 The Labor Market: Basıc Concepts Because the economy is dynamic, frictional and structural unemployment are inevitable and in some ways desirable. Times of cyclical unemployment are of concern to macroeconomic policy makers. In general, employment tends to fall when aggregate output falls and rise when aggregate output rises.
17. Chapter 29 THE CLASSICAL VIEW OF THE LABOR MARKET Classical economists believe that the interaction of supply and demand in the labor market brings about equilibrium and that unemployment (beyond the frictional and structural amounts) does not exist. The classical view of the labor market is consistent with the theory of a vertical aggregate supply curve.
18. Chapter 29 EXPLAINING THE EXISTENCE OF UNEMPLOYMENT Some economists argue that the unemployment rate is not an accurate indicator of whether the labor market is working properly. Those who do not subscribe to the classical view of the labor market suggest several reasons why unemployment exists. Sticky wages Efficiency wage theory Imperfect Information Minimum wage laws
19. Chapter 29 THE SHORT-RUN RELATIONSHIP BETWEEN THE UNEMPLOYMENT RATE AND INFLATION There is a negative relationship between the unemployment rate (U) and aggregate output (income) (Y): When Y rises, U falls. When Y falls, U rises. The relationship between the unemployment rate and the price level is negative: As the unemployment rate declines and the economy moves closer to capacity, the price level rises more and more.
20. Chapter 29 The Phillips Curve The Phillips Curve represents the relationship between the inflation rate and the unemployment rate. During the 1950s and 1960s, this relationship was stable and there seemed to be a predictable trade-off between inflation and unemployment. As a result of import price increases (which led to shifts in aggregate supply), the relationship between the inflation rate and the unemployment rate was erratic in the 1970s. Inflation depends on more than just the unemployment rate.
21. Chapter 29 THE LONG-RUN AGGREGATE SUPPLY CURVE, POTENTIAL OUTPUT, AND THE NATURAL RATE OF UNEMPLOYMENT Those who believe that the AS curve is vertical in the long run also believe that the Phillips Curve is vertical in the long run at the natural rate of unemployment. The natural rate is generally the sum of the frictional and structural rates. The NAIRU (Nonaccelerating Inflation Rate of Unemployment) theory says that the price level will accelerate when the unemployment rate is below the NAIRU and decelerate when the unemployment rate is above the NAIRU.
22. Chapter 29 Refer to the information provided in figure below to answer the question that follow. 1. The equilibrium wage rate is $________ and the equilibrium number of people employed is ________ million people. 13; 100 B. 7; 160 C. 4; 130 D. 13; 220 2. At wage rate $13, there is a ________ of labor equal to ________ million people. Surplus; 100 B. Shortage; 100 C. Shortage; 120D.Surplus; 120 3. At wage rate $4, there is a ________ of labor equal to ________ million people. Shortage; 120B. Shortage; 60 C. Surplus; 120 D. Surplus; 60
23. Chapter 30 THE STOCK MARKET, THE HOUSING MARKET, AND FINANCIAL CRISES A firm can finance an investment project by : borrowing from banks, by issuing bonds, or by issuingstock. People who own shares of stock own a fraction of the firm. A bubble exists when the price of a stock exceeds the discounted value of its expected future dividends
24. Chapter 30 TIME LAGS REGARDING MONETARY AND FISCAL POLICY Stabilization policy describes both fiscal and monetary policy, the goals of which are to smooth out fluctuations in output and employment and to keep prices as stable as possible. Stabilization goals are not necessarily easy to achieve because of the existence of certain time lags. A recognitionlag (tanıma)is the time it takes for policy makers to recognize the existence of a boom or a slump. An implementationlag (uygulama)is the time it takes to put the desired policy into effect once economists and policy makers recognize that the economy is in a boom or a slump. A responselag (yanıt)is the time it takes for the economy to adjust to the new conditions after a new policy is implemented—in other words, a lag that occurs because of the operation of the economy itself. In general, monetary policy can be implemented more rapidly than fiscal policy but fiscal policy generally has a shorter response lag than monetary policy.
25. Chapter 31 HOUSEHOLDS: CONSUMPTION AND LABOR SUPPLY DECISIONS The life-cycle theory of consumption says that households make lifetime consumption decisions based on their expectations of lifetime income. Generally, households consume an amount less than their incomes during their prime working years and an amount greater than their incomes during their early working years and after they have retired.
26. Chapter 31 FIRMS: INVESTMENT AND EMPLOYMENT DECISIONS Expectations affect investment and employment decisions. Keynes used the term animal spirits of entrepreneurs to refer to investors’ feelings. At any level of the interest rate, expectations are likely to be more optimistic and planned investment is likely to be higher when output is growing rapidly than when it is growing slowly or falling. The result is an accelerator effect that can cause the economy to expand more rapidly during an expansion and contract more quickly during a recession.
27. Chapter 31 PRODUCTIVITY AND THE BUSINESS CYCLE Productivity, or labor productivity, is output per worker hour— the amount of output produced by an average worker in 1 hour. Productivity fluctuates over the business cycle, tending to rise during expansions and fall during contractions. That workers are less productive during contractions does not mean that they have less potential to produce output; it means that excess labor exists and that workers are not working at their capacity.
28. Chapter 31 THE SHORT-RUN RELATIONSHIP BETWEEN OUTPUT AND UNEMPLOYMENT There is a negative relationship between output and unemployment: When output (Y) rises, the unemployment rate (U) falls, and when output falls, the unemployment rate rises. Okun’s Law stated that in the short run the unemployment rate decreases about 1 percentage point for every 3 percent increase in GDP. Okun’s Law is not a “law”—the economy is too complex for there to be a stable relationship between two macroeconomic variables. In general, the relationship between output and unemployment depends on the state of the economy at the time of the output change.
29. Chapter 31 Restaurant employs 5workers. Each worker works 10hours per day. The 5workers are able to serve 50customers per day. The labor productivity is therefore ________ customer(s) per person/hour: 2 1,5 1 0,5 Labor productivity = output/ (time worked x number of workers)