macro economics.pdf

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MACROECONOMICS VDT 2012

1

THE EFFECTS OF CHANGING FACTORS

1.

MARKET FOR LOANABLE FUNDS IN CLOSE ECONOMY:

-

Supply of loanable funds: S

- Demand of loanable funds: I

-

Price of a loan: real interest rate.

-

Equilibrium: S = I

A.

Changing real interest rate: (endogenous factor)

- r quantity of supply of loanable funds and quantity of demand of

loanable funds

-

r quantity of supply of loanable funds and quantity of demand of

loanable funds


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B. Changing tax on saving (exogenous factor) (S)

-

Tax on saving encourage saving S shifts right r and

quantity of loanable funds

- Tax on saving discourage saving S shifts left r and

quantity of loanable funds

C.

Changing tax on investment (exogenous factor) (D)

-

Tax on investment discourage investment D shifts left r

and quantity of loanable fund

- Tax on investment or investment tax credit encourage investment

D shifts right r and quantity of loanable fund


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D. Changing government budget (exogenous factor) (S)

- Government budget deficit public saving national saving S

shifts left r and quantity of loanable funds crowding-out

effect I

- Government budget surplus public saving national saving

S shifts right r and quantity of loanable funds

2.

MONEY MARKET (CLASSICAL THEORY - LONG-RUN)

-

Money supply: fixed by central bank

-

Money demand: downward sloping-

Horizontal axis: Quantity of money

- Vertical axis: 1/P

-

Equilibrium: MS = MD

A.

Changing price level (endogenous factor)

-

P not affect MS and quantity of money demand


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- P not affect MS and quantity of money demand

B.

Changing money supply (monetary injection) (exogenous factor)

-

Central bank increases money supply MS shifts right (1/P)

meaning value of money P and quantity of money

- Central bank decreases money supply MS shifts left (1/P)

meaning value of money P and quantity of money

3.

MONEY MARKET (KEYNES THEORY - SHORT-RUN)

- Money supply: fixed by central bank

- Money demand: downward sloping

-

Horizontal axis: Quantity of money

-

Vertical axis: interest rate.

- Equilibrium: MS = MD


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A.

Changing interest rate (endogenous factor)

-

r not affect MS and quantity of money demand

-

r not affect MS and quantity of money demand

B.

Theory of liquidity preference

- r > equilibrium surplus buy interest-bearing assets r until

equilibrium.

-

r < equilibrium shortage sell interest-bearing assets r until

equilibrium.


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C. Changing money supply (monetary injection) (exogenous factor)

-

Central bank increases money supply MS shifts right r and

quantity of money - Central bank decreases money supply MS shifts left r and

quantity of money

D.

Changing price level (exogenous factor) (MD)

-

P MD shifts right r and quantity of money unchanged

- P MD shifts left r and quantity of money unchanged

4. MARKET FOR LOANABLE FUNDS IN OPEN ECONOMY THE RELATION

BETWEEN INTEREST RATE AND NCO FOREIGN-CURRENCY

EXCHANGE MARKET

A.

MARKET FOR LOANABLE FUNDS IN OPEN ECONOMY (GRAPH 1)


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- Supply of loanable funds: S

- Demand of loanable funds: I + NCO

-

Price of a loan: real interest rate.

-

Equilibrium: S = I + NCO

Changing real interest rate: (endogenous factor)

-

r quantity of supply of loanable funds , quantity of demand of

loanable funds and NCO

- r quantity of supply of loanable funds , quantity of demand of

loanable funds and NCO

B.

THE RELATION BETWEEN INTEREST RATE AND NCO (GRAPH 2)

- NCO curve: sloping downward

-

Horizontal axis: NCO

-

Vertical axis: real interest rate


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Changing in interest rate:

-

r domestic assets more attractive NCO

-

r domestic assets less attractive NCO

C. MARKET FOR FOREIGN- CURRENCY EXCHANGE (GRAPH 3)

-

Supply: Supply of Dollars NCO vertical and not depend on real

exchange rate.

-

Demand: Demand of Dollars NX Sloping downward


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- Horizontal axis: Quantity of Dollars

- Vertical axis: real exchange rate

-

Equilibrium: NCO = NX

Changing in real exchange rate:

-

e domestic good more expensive reduce quantity of Dollars

demand to buy those goods.

- e domestic good cheaper rise quantity of Dollars demand to

buy those goods.

D.

EQUILIBRIUM IN OPEN ECONOMIC EQUILIBRIUM IN TWO

MARKET FOR LOANABLE FUNDS AND FOREIGN-CURRENCY

EXCHANGE.

E.

Equilibrium in graph 1: real interest rate determine NCO in graph 2 and

NCO in graph 2 determine supply of Dollars in graph 3


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Government budget deficits

-

Government budget (deficit or G ) Public saving (T G)

national saving Supply of loanable funds shifts left (graph 1) r

crowd-out domestic investment ( I ) NCO (graph 2)

supply of Dollars (graph 3) e NX trade balance (deficit)

( twin deficit)

Trade policy (tariff, quota)

-

Only affect in foreign-currency exchange: IM NX Demand for

Dollar e discourage export (EX until equal to NCO) no

change in NX, r and NCO

Capital flight and political instability- Capital suddenly flow out of domestic economy NCO comes with

demand for loanable funds (graph 1) and NCO shifts right (graph 2)

r and NCO supply of domestic currencyshifts right (graph 3)

e and quantity of domestic currency


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5.

AGGREGATE DEMAND AGGREGATE SUPPLY PHILLIPS CURVE

A.

AGGREGATE DEMAND

-

AD: Y = C + I + G + NX

-

Horizontal axis: Y (reflect unemployment)

-

Vertical axis: P (reflect inflation)

Change in Price level (endogenous factor)

o Wealth effect (C): P real value of money Consumer

wealthier C increase quantity of demand for goods and

services (moving along AD curve).


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o Interest rate effect (I): P r I increase quantity

of demand for goods and services (moving along AD curve).

o

Exchange rate effect (NX): P r NCO Supply ofDollars shifts right e NX increase quantity of demand

for goods and services (moving along AD curve).

Change in exogenous factor:

o

Change in C: C when consumers save more, stock prices fall so

consumers feel poorer, Taxes are increased AD shifts left;

and vice versa, C when consumers save less, stock prices rise

so consumer feel wealthier, Taxes are decreased AD shifts

right.

o

Change in I: I when firms become optimistic about the future

and decide to buy new equipment, investment tax credit, central

bank increase MS lead to reduce r AD shifts right; and vice

versa I when investment tax increase, central bank decrease

MS lead to rise r AD shifts left.

o

Change in G: G AD shifts right and G AD shifts left.

o

Change in NX: NX when NCO or value of dollar fall; and vice

versa, NX when have a recession in foreign countries or value

of Dollar rise.

B.

LONG-RUN AGGREGATE SUPPLY

- LRAS: - potential output full-employment output Output at

natural unemployment level.

-

LRAS is vertical curve

-


- Vertical axis: P (reflect inflation)

Change in Price level (endogenous factor)

- Does not affect LRAS and in long-run: Actual price = Expected price



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o LRAS shifts right when labor (immigration from abroad or

reduction in un from minimum wage ), Capital (human and

physical capital productivity ), Natural resource and

technical Knowledge

o LRAS shifts right when labor (emigration from abroad or

increase in unfrom minimum wage ), Capital (weather)

C.

SHORT-RUN AGGREGATE SUPPLY

- SRAS: Y =+ a (P Pe) = (a.Pe) + a.P

-

SRAS: sloping upward

-


-

Vertical axis: P (reflect inflation)

Change in Price level (endogenous factor):

o

The misperception theory: P actual suppliers only notice

that P of their particular product they believe that Relative

Price of their product quantity of goods and services

o

The sticky-wave theory: P actual real wave w/P

cost of production lowering profits firms hire less labor

Quantity of good and services

o

The sticky-price theory: P actual Firms resist reducing

their prices (menu costs) Their P too high their sales

quantity of goods and services


o

Change in:have same reason like LRAS.

o

Change in Pe:Pe SRAS shifts leftand Pe SRAS

D. PHILLIPS CURVE

- LR Phillips curve: u = un

-

SR Phillips curve: u = una( e) = (un+ a.e) a.

-

Horizontal axis: unemployment


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- Vertical axis: inflation

Change in AD (endogenous factor) ( the short-run tradeoffs)

- AD shifts right P and Y and u

- AD shifts left P and Y and u

Change in SRAS (exogenous factor):

-

Change in un:that is change in

-

Change in e:that is change in Pe

- SRAS shift left Phillips curve shift right

-

SRAS shift right Phillips curve shift left

E.

AD AS MODEL

-

Equilibrium in Short-run: AD = SRAS


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- Equilibrium in Long-run: AD = SRAS = LRAS at

Change in AD: (Demand shock)

o

AD shifts left:P and Y u

o AD shifts left:P and Y u

Change in ARAS (Supply shock)

o

SRAS shifts left (adverse shock): P and Y u

o

SRAS shifts left (favorable shock): P and Y u


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6. INVISIBLE AND VISIBLE HAND

-

Invisible hand: the market automatically adjust by shifting SRAS

-

Visible hand: Government and central bank use their policies to shifting

AD

A.

Demand Shock AD shift left

-

Equilibrium in short-run: P < Pe and Y <

- Invisible hand:

o

Process: Y un w Cost of Production SRAS

shift right until u = unand Y =

o

New long-run equilibrium:Y = and Pe

- Visible hand:

o

Process:Government and central bank shift AD right

o

Long-run equilibrium:unchanged

B.

Demand Shock AD shift right

- Equilibrium in short-run: P > Pe and Y >

-

Invisible hand:

o

Process: Y > u < un w Cost of Production SRAS

shift left until u = unand Y =


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o New long-run equilibrium:Y = and Pe

- Visible hand:

o

Process:Government and central bank shift AD left

o


C. Favorable Supply Shock AS shift right

-

Equilibrium in short-run: P < Pe and Y >

-

Invisible hand:

o Process: Y > u < un w Cost of Production SRAS

shift left until u = unand Y =

o


-

Visible hand:

o

Process:Government and central bank shift AD left


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New Long-run equilibrium:Y =and Pe

D.Adverse Supply Shock AS shift left

-

Equilibrium in short-run: P > Pe and Y <

-

Invisible hand:

o Process: Y un w Cost of Production SRAS

shift right until u = unand Y =o


- Visible hand:

o Process:Government and central bank shift AD left

o

New Long-run equilibrium:Y =and Pe


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7. MONETARY POLICY (BY CENTRAL BANK)

A. Open market operation:

o

Open market purchase: Central bank buy government bonds

MS r I AD shifts right.

o Open market sell: Central bank sell government bonds MS

r I AD shifts left.

B.

Reserve requirement:

a. Reserve requirement money multiplier (1/R) MS

r I AD shifts right

b.

Reserve requirement money multiplier (1/R) MS

r I AD shifts left.

C. The discount rate:

a.

Discount rate MS r I AD shifts right

b.

Discount rate MS r I AD shifts left.


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8. MULTIPLIER EFFECT INVESTMENT ACCELERATOR CROWDING-

OUT EFFECT AND THE SHIFT OF AD

A.

Multiplier effect:

-

When C or I or G (not by changing in price level) Y (AD shift

right) meaning that income C Y C and T Yd

meaning C Y C so AD shift right by an amount larger

than initial changing in C, I, G

- When C or I or G (not by changing in price level) Y (AD shift

left) meaning that income C Y C and T Yd

meaning C Y C so AD shift left by an amount larger

than initial changing in C, I, G

B. Investment accelerator:

- Y (AD shift right by C, I, G or T) Firms increase their

investment expenditures on new equipment I

- Y (AD shift left by C, I, Gor T) Firms reduce their investment

expenditures on new equipment I

C.

Crowding-out effect:

-

Y (AD shift right by C, I, G or T) need more money to buy

goods and services MD shift right r I

-

Y (AD shift left by C, I, Gor T) need less money to buy goods

and services MD shift left r I

D. Changing in output and the effects to Investment.

-

Y I (investment accelerator) but I (crowding-out effect)

-

Y I (investment accelerator) but I (crowding-out effect)

E. Automatic stabilizers.

- Tax system: During recession (AD shifts left), T (because Y and

Profits ) Yd C Y AD shifts right.

-

Government spending: During recession (AD shifts left), G

(unemployment benefits and welfare payment ) Y AD shifts

right.


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9.

FISCAL POLICY (BY GOVERMENT)

A. Government purchase:

- G

o

G Y C ( Y - multiplier effect) and I (investment

accelerator)

o G Y MD shifts right r I (crowding-out effect)

o

r NCO supply of Dollars e NX

- G

o G Y C ( Y - multiplier effect) and I (investment

accelerator)

o

G Y MD shifts left r I (crowding-out effect)

o r NCO supply of Dollars e NX


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B. Tax

- T

o

T C Y C ( Y - multiplier effect) and I

(investment accelerator)

o T Y MD shifts right r I (crowding-out effect)

o


-

T

o T C Y C ( Y - multiplier effect) and I

(investment accelerator)

o

T Y MD shifts left r I (crowding-out effect)

o


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