Summary macroeconomics
Chapter 2 – A tour of the book
Okun’s law: relation that shows a negative correlation between the
unemployment rate and a country's economic output, specifically GDP. It states
that for every 1% increase in the unemployment rate, there is roughly a 2%
decrease in GDP below its potential output.
Inverse relationship: A lower unemployment rate is associated with higher
economic output, and vice versa.
Phillips curve: an economic model illustrating the inverse relationship between
inflation and unemployment.
Higher unemployment is associated with lower inflation, because then
people have less income and consume less low output low inflation
Lower unemployment is associated with higher inflation
3 time frames:
Short run: output is primarily driven by movements in demand. Changes in
demand (changes in consumer confidence) can lead to a decrease in
output (recession) or an increase in output (expansion).
Medium run: the economy tends to return to the level of output
determined by supply factors (capital stock, technology, size of labour
force). These factors move so slowly that we can take them as given.
Long run: no inputs are given, dependent on capability of country or
company to innovate. The size of capital stock depends on how much
people have saved.
The true determinants of output are factors like a country’s education
system, its saving rate and the quality of its government.
Chapter 3 – The goods market
GDP is the sum of consumption, investment, government spending, inventory
investment and export minus imports.
Consumption (C): purchase of goods and services by consumers.
Investment (I): the sum of non-residential investment (purchases of new
plants/machines by firms) and of residential investment (purchase of new
home)
Government spending (G): the purchase of goods and services by federal,
state and local governments
Exports (X): purchases by foreigners. Imports (IM) purchases of foreign
goods.
Inventory investment is the difference between production and purchases.
C (Y – T): income minus taxes is what is left for spending.
Y=Z
o Y = C (Y – T) + Ī + G
In the short run, demand determines production. Production is equal to income.
Income affects demand.
The consumption function shows how consumption depends on disposable
income. The propensity to consumer describes how much consumption increases
for given increase in disposable income.
In equilibrium, output equals autonomous spending times the multiplier.
Autonomous spending is the part of demand that does not depend on income.
The multiplier is equal to 1/(1-c1), is the propensity to consume.
, Increases in consumer confidence, investment demand, government spending, or
decreases in taxes all increase equilibrium output in the short run.
An alternative way of stating the goods-market equilibrium condition is that
investment must be equal to saving – the sum of private and public saving. For
this reason, the equilibrium is called the IS relation (I for investment, S for
saving).
Chapter 4 – Financial markets: 1
The demand for money depends positively on the level of transaction in the
economy and negatively on the interest rate.
The interest rate is determined by the equilibrium condition that the supply of
money be equal to the demand for money.
For a given supply of money, an increase in income leads to an increase in the
demand for money and an increase in the interest rate. An increase in the supply
of money for a given income leads to a decrease in the interest rate.
The way the central bank changes the supply of money is through open market
operations.
Expansionary open market operations, in which the central bank
increases the money supply by buying bonds, lead to an increase in the
price of bonds and a decrease in the interest rate.
Contractionary open market operations, in which the central bank
decreases the money supply by selling bonds, lead to a decrease in the
price of bonds and an increase in the interest rate.
When money includes both currency and deposit accounts we can think of the
interest rate as being determined by the condition that the supply of central bank
money is equal to the demand for central bank money.
The supply of central bank money is under the control of the central bank. In the
special case where people hold only deposit accounts, the demand for central
bank money is equal to the demand for reserves by banks, which is itself equal to
the demand for money times the reserve ratio chosen by banks.
The market for bank reserves is called the federal funds market. The interest
rate determined in that market is the federal funds rate.
The interest rate chose by the central bank cannot go below 0. When the interest
rate is equal to 0, people and banks become indifferent to holding money or
bonds. And increase in the money supply leads to an increase in money demand,
an increase in reserves by banks, and no change in the interest rate liquidity
trap, monetary policy no longer affects the interest rate.
Chapter 5 – Goods and financial markets: the IS-LM
model
5.1 IS relation
Investment is not constant for 2 reasons:
1. The level of sales. Increase in sales and needing to increase production
needing to invest in new machines. Firms with lower sales have less need
to invest.
2. The interest rate. For investing, firms can borrow, the higher the interest
rate the less attractive it is to borrow and buy the machine.
Chapter 2 – A tour of the book
Okun’s law: relation that shows a negative correlation between the
unemployment rate and a country's economic output, specifically GDP. It states
that for every 1% increase in the unemployment rate, there is roughly a 2%
decrease in GDP below its potential output.
Inverse relationship: A lower unemployment rate is associated with higher
economic output, and vice versa.
Phillips curve: an economic model illustrating the inverse relationship between
inflation and unemployment.
Higher unemployment is associated with lower inflation, because then
people have less income and consume less low output low inflation
Lower unemployment is associated with higher inflation
3 time frames:
Short run: output is primarily driven by movements in demand. Changes in
demand (changes in consumer confidence) can lead to a decrease in
output (recession) or an increase in output (expansion).
Medium run: the economy tends to return to the level of output
determined by supply factors (capital stock, technology, size of labour
force). These factors move so slowly that we can take them as given.
Long run: no inputs are given, dependent on capability of country or
company to innovate. The size of capital stock depends on how much
people have saved.
The true determinants of output are factors like a country’s education
system, its saving rate and the quality of its government.
Chapter 3 – The goods market
GDP is the sum of consumption, investment, government spending, inventory
investment and export minus imports.
Consumption (C): purchase of goods and services by consumers.
Investment (I): the sum of non-residential investment (purchases of new
plants/machines by firms) and of residential investment (purchase of new
home)
Government spending (G): the purchase of goods and services by federal,
state and local governments
Exports (X): purchases by foreigners. Imports (IM) purchases of foreign
goods.
Inventory investment is the difference between production and purchases.
C (Y – T): income minus taxes is what is left for spending.
Y=Z
o Y = C (Y – T) + Ī + G
In the short run, demand determines production. Production is equal to income.
Income affects demand.
The consumption function shows how consumption depends on disposable
income. The propensity to consumer describes how much consumption increases
for given increase in disposable income.
In equilibrium, output equals autonomous spending times the multiplier.
Autonomous spending is the part of demand that does not depend on income.
The multiplier is equal to 1/(1-c1), is the propensity to consume.
, Increases in consumer confidence, investment demand, government spending, or
decreases in taxes all increase equilibrium output in the short run.
An alternative way of stating the goods-market equilibrium condition is that
investment must be equal to saving – the sum of private and public saving. For
this reason, the equilibrium is called the IS relation (I for investment, S for
saving).
Chapter 4 – Financial markets: 1
The demand for money depends positively on the level of transaction in the
economy and negatively on the interest rate.
The interest rate is determined by the equilibrium condition that the supply of
money be equal to the demand for money.
For a given supply of money, an increase in income leads to an increase in the
demand for money and an increase in the interest rate. An increase in the supply
of money for a given income leads to a decrease in the interest rate.
The way the central bank changes the supply of money is through open market
operations.
Expansionary open market operations, in which the central bank
increases the money supply by buying bonds, lead to an increase in the
price of bonds and a decrease in the interest rate.
Contractionary open market operations, in which the central bank
decreases the money supply by selling bonds, lead to a decrease in the
price of bonds and an increase in the interest rate.
When money includes both currency and deposit accounts we can think of the
interest rate as being determined by the condition that the supply of central bank
money is equal to the demand for central bank money.
The supply of central bank money is under the control of the central bank. In the
special case where people hold only deposit accounts, the demand for central
bank money is equal to the demand for reserves by banks, which is itself equal to
the demand for money times the reserve ratio chosen by banks.
The market for bank reserves is called the federal funds market. The interest
rate determined in that market is the federal funds rate.
The interest rate chose by the central bank cannot go below 0. When the interest
rate is equal to 0, people and banks become indifferent to holding money or
bonds. And increase in the money supply leads to an increase in money demand,
an increase in reserves by banks, and no change in the interest rate liquidity
trap, monetary policy no longer affects the interest rate.
Chapter 5 – Goods and financial markets: the IS-LM
model
5.1 IS relation
Investment is not constant for 2 reasons:
1. The level of sales. Increase in sales and needing to increase production
needing to invest in new machines. Firms with lower sales have less need
to invest.
2. The interest rate. For investing, firms can borrow, the higher the interest
rate the less attractive it is to borrow and buy the machine.
