Lecture notes
, LECTURE 1: THE DEMAND SIDE
- When macroeconomists study an economy’s current state of health, they look at 3
variables:
- Output growth
- The unemployment rate
- The inflation rate
- But other metrics are increasingly important objects of policy debates and reforms:
- Business creation, financial stability
- Consumption, wealth and income inequality
- Mortality / fertility rates, educational attainment, access to health
Demand + Supply Side
Supply Side Demand Side
What firms make What agents buy
y S =af ( k , n) y D=c+i+ g+( x−m)
a → technology c → consumption (goods and services)
f(.,.) → a production function i → investment (capital goods)
k → capital g → government spending (goods and
n → labour / hours of work services)
x - m → export - import / trade balance
Price and wage setting
yeq → equilibrium output
𝜋 → inflation
Supply-side policies: Demand-side policies:
Labour market reforms Monetary
Competition policy Fiscal
The Three-Equations (IS-PC-MR) Model
IS: the demand side
- Non-durable consumption of households
- Investment by households (durables and housing) and firms
- Government spending (exogenous)
WS / PS: the supply side
- Imperfectly competitive labour market
- Price setting by firms
- Wage setting by firms/ workers
PC: Phillips curve
- Summarising the supply side with nominal stickiness
MR: monetary rule
- Optimal monetary policy
Identity:
ad=c+ i+ g
, Market clearing:
y=ad
y → goods and services produced
Behavioural models:
- Consumption:
c t =c t ( Λ c )=c 0 ( Λc )+ c y ( Λc ) y t + c r ( Λ c )r t
- Investment:
i t =it ( Λi )=i 0 ( Λi )+i y ( Λi ) y t +i r ( Λ i )r t
The IS curve:
IS: Households
Household spending consists of:
1 1. Non-durable consumption
2
3 2. Durable consumption
3. Housing
The second two are counted as an
investment.
The demand side
Empirical Theoretical
1. Micro-level data + 1) “ad hoc” e.g. c t =c 0 +c y y t
disp
Macro-level
aggregation with c 0 and c y assumed constant
c y → the (marginal) propensity to consume, or the
effect of an extra £ of disposable income on
consumption.
Natural restriction: 0 < c y < 1
, LECTURE 1: THE DEMAND SIDE
- When macroeconomists study an economy’s current state of health, they look at 3
variables:
- Output growth
- The unemployment rate
- The inflation rate
- But other metrics are increasingly important objects of policy debates and reforms:
- Business creation, financial stability
- Consumption, wealth and income inequality
- Mortality / fertility rates, educational attainment, access to health
Demand + Supply Side
Supply Side Demand Side
What firms make What agents buy
y S =af ( k , n) y D=c+i+ g+( x−m)
a → technology c → consumption (goods and services)
f(.,.) → a production function i → investment (capital goods)
k → capital g → government spending (goods and
n → labour / hours of work services)
x - m → export - import / trade balance
Price and wage setting
yeq → equilibrium output
𝜋 → inflation
Supply-side policies: Demand-side policies:
Labour market reforms Monetary
Competition policy Fiscal
The Three-Equations (IS-PC-MR) Model
IS: the demand side
- Non-durable consumption of households
- Investment by households (durables and housing) and firms
- Government spending (exogenous)
WS / PS: the supply side
- Imperfectly competitive labour market
- Price setting by firms
- Wage setting by firms/ workers
PC: Phillips curve
- Summarising the supply side with nominal stickiness
MR: monetary rule
- Optimal monetary policy
Identity:
ad=c+ i+ g
, Market clearing:
y=ad
y → goods and services produced
Behavioural models:
- Consumption:
c t =c t ( Λ c )=c 0 ( Λc )+ c y ( Λc ) y t + c r ( Λ c )r t
- Investment:
i t =it ( Λi )=i 0 ( Λi )+i y ( Λi ) y t +i r ( Λ i )r t
The IS curve:
IS: Households
Household spending consists of:
1 1. Non-durable consumption
2
3 2. Durable consumption
3. Housing
The second two are counted as an
investment.
The demand side
Empirical Theoretical
1. Micro-level data + 1) “ad hoc” e.g. c t =c 0 +c y y t
disp
Macro-level
aggregation with c 0 and c y assumed constant
c y → the (marginal) propensity to consume, or the
effect of an extra £ of disposable income on
consumption.
Natural restriction: 0 < c y < 1
