1. Microeconomics a. 1 market b. Firms/ producers c. Consumers/ households 2. Macroeconomics a. Aggregate of all markets b. Government involvement (policy actions) c.

Central bank (policy), federal reserve d. Variables (3 topics we care about) i. Output (ex. GDP) ii. Inflation iii. Unemployment 3. GDP count all income geographically a. Ex. Toyota (Japanese brand) counts for USA GDP but not USA GNP 4. Real GDP takes prices into account (adjusted for prices) 5. Recession period of falling GDP 6. Inflation change in the average price level 7. Deflation negative changes in price level (not falling) a. Why its bad i. Lender-Borrower relationship as prices go down 1 owes more, debtor is going to be worse off ($100 in real terms is how much it can get you) ii. Massive fall in spending leads to a recession, bc think can wait to buy the product cheaper iii. Labor market real wage increases with deflation can cause unemployment (labor market decisions are distorted) 8. Disinflation fall in inflation, but inflation is still positive 9. There has never been 0 unemployment in the last 100 years (lowest ~2%) a. Can never reach 0% bc people change jobs/ fields 10. Endogenous variables those that the model is trying to explain 11. Exogenous variables those that taken as given a. Exo. V model Endo. V 12. Supply and Demand a. Qd = D(P,Y) b. Qs = S(P,Pm) c. Qd is a function of demand (prices and income) d. Pm is the price of materials e. Equilibrium quantity = Qs = Qd f. Exo. V Y, Pm g. Endo. V P, Q 13. All models built on assumptions

14. Ch. 1 What Macroeconomists Study a. Macroeconomics the study of the economy as a whole b. Inflation rate measures how fast prices are rising c. Unemployment rate measures the fraction of the labor force that is out of work d. Recession period where real GDP falls i. Depression if more severe e. Deflation period of falling prices f. Endogenous variables those which a model tries to explain g. Exogenous variables those which a model takes as given h. Market clearing assume markets are in equilibrium the price of a good/ service moves quickly to bring Qd and Qs into balance i. Continuous MC not entirely realistic bc prices must adjust instantly to changes in demand/ supply ii. Assume all wages and prices are flexible (LR) iii. In real world some wages and prices are sticky (SR) i. Microeconomics the study of how households and firms make decisions and how these decision makers interact in the marketplace, they optimize utility 15. Ch. 2 The Data of Macroeconomics a. Gross Domestic Product (GDP) domestically, the best measure of how well the economy is performing i. Total income of everyone in the economy ii. Total expenditure on the economys output of goods and services iii. Measures income and expenditure bc they are equal (transactions) iv. Can rise to changes in P or in Q b. National Income Accounting accounting system used to measure GDP and many related statistics c. Stocks quantity measured at a given point in time d. Flow quantity measured per unit of time i. Examples. A persons wealth = stock, income and expenditure = flow ii. # of unemployed people = stock, # of people losing their jobs = flow iii. Amount of capital in the economy = stock, the amount of investment = flow iv. Government debt = stock, government budget deficit = flow e. Rules for computing GDP i. Combine the value of goods/ services ii. The sale of used goods not included (its a transfer of an asset, not addition) iii. The treatment of inventories p21 iv. Only include the value of final goods (ex. Hamburger price included but not the meat) this is to avoid double counting

1. Value added = value of the firms output less the value of the intermediate goods that the firm purchases v. Imputed value estimate of the value of goods/ services not sold in a marketplace 1. Ex. Value of housing rent is part of GDP both as expenditure by the renter and as income for the landlord then homeowners housing services need to be calculated so imputed rent estimated of rent homeowners pay themselves 2. No imputation for goods/ services sold in the underground economy 3. Imputations are approximations so GDP is an imperfect measure (alright if ~ constant LR) 4. Housing is the biggest expenditure thats why its imputed 5. Imputed values for government services (ex. Police) f. Nominal GDP value of goods/ services measured at current prices (can increase either bc prices rise or quantities rise) i. Measured in $ g. Real GDP value of goods/ services without being influenced by changes in prices, takes inflation into account, constant prices, more accurate i. Measured in terms of goods/ services h. GDP Deflator (implicit price deflator) ratio of nominal GDP to real GDP i. GDPD = ii. GDPD = iii. GDPN = P*Q iv. GDPN = GDPR*GDPD v. GDPR = Pb*Q vi. GDPR = (take inflation of the GDPN to get real GDP thats why its called the deflator vii. Keep base year prices i. Chain-weighted measures of real GDP policy to deal with changes in the base year, takes averages of different price levels, must change the base year every so often bc otherwise not fully applicable, most reliable j. The components of expenditure i. Consumption (C) expenditure by household 1. Consists of the goods/ services bought by households/ individuals, steady ~70% of GDP 2. Nondurable goods goods that last a short time (ex. Food) 3. Durable goods goods that last a long time (ex. Cars)

k.

l.

m. n.

4. Services work done for consumers by individuals/ firms (ex. Haircuts) ii. Investment (I) investment by firms, investment in economics is investment in capital stock not a purchase of a financial asset 1. Consists of goods bought for future use, purchase of capital stock 2. Business fixed investment purchase of new plant and equipment by firms 3. Residential fixed investment purchase of new housing by households/ landlords 4. Inventory investment the increase in firms inventories of goods (if inventories falling then II is negative) 5. Most volatile ~15% iii. Government Purchases (G) 1. Goods/ services bought by federal, state, and local governments 2. Includes military equipment, highways, and services by government workers 3. 20% iv. Net Exports (NX) 1. Accounts for trade with other countries 2. Exports imports 3. Current account deficit tends to be negative in USA (borrow from abroad) 4. This class closed economy, NX=0 vs. open economy NX0 v. Y C + I + G + NX national income accounts identity, income identity (3 line equation sign bc its an identity), Y= expenditure, output, income Gross National Product (GNP) alternate measure of income i. GNP = GDP + factor payments from abroad factor payments to abroad ii. Total income earned by nationals (residents of a nation) Net National Product (NNP) GNP depreciation (of capital) i. National income accounts ii. Depreciation consumption of fixed capital, equals ~10% of GNP iii. Net national product national income (6 categories p30) iv. Statistical discrepancy dep. and NNP differ bc different data sources may not be consistent Seasonal Adjustment bc GDP follows a seasonal cycle, to take out seasonal fluctuations Consumer Price Index (CPI) most commonly used measure of the levels of prices i. CPI =

o. CPI vs GDP Deflator

p. q. r. s. t. u. v. w.

i. GDPD measures prices of all goods/services produced, CPI measures prices of all goods/ services bought by consumers ii. GDPD includes only goods produced domestically (no imported goods) iii. CPI assigns fixed weights to the prices of different goods, GDPD assigns changing weights 1. Laspeyres index - a price index with a fixed basket of goods (CPI, tends to overstate changes in prices) 2. Paasche index changing basket (GDPD, tends to understate changes in prices) Labor force sum of the employed and unemployed Unemployment rate - % of the LF that is unemployed i. Bureau of labor statistics measures unemployment LF participation rate = (LF/ adult population) *100 Output (income, expenditure) measured by GDP Inflation CPI, GDP deflator Unemployment demographics, regions (several unemployment rates) GDP is the best indicator of how the economy is performing Circular Flow of Income

x.

y. z. aa.

i. Ex. 1 good, bread GDP is the market value of all final goods and services produced within an economy in a given period of time i. Calculate by using current market prices Used goods not included in GDP, intermediate goods not counted i. Inventories depends on what happens to unsold bread Associate inventory with investment Inflation i. Headline inflation overall inflation, measured by CPI (%CPI) ii. Core inflation underlying inflation or trend inflation in an economy 1. %CPIXFE CPI excluding food and energy

2. More worrisome bc shows more actual inflation rather than temporary 3. Median CPI inflation another measurement of core 4. Core could be decreasing while overall increasing so not an issue bb. The fed uses PCE (personal consumption expenditure) to measure inflation cc. Unemployment measured by i. The household survey ii. Establishment survey (through firms) iii. Not identical but correlated iv. Unemployment rate is out of the labor force not population bc some people not included v. Multiple unemployment rates depending on different demographic groups vi. Issues surveys have themselves, have some error 16. National Income - LR a. Long run prices are flexible, supply and demand can change instantly b. Very long run growth theory c. Short run prices are sticky

d. Central bank (the fed) are missing, (1) is where it would be and huge impact on financial market (completely separate from the government) e. K, L full employment of resources, so Y=F(K,L) output depends f. Factor supply line vertical bc fixed g. Firms cant change price level h. R= nominal rental price of K (someone/households own K and rent out) i. MPL= = (first continuous time, change discrete time) = F(K,L), means

different with respect to L = j. Extra revenue vs extra cost i. P*MPL vs W ii. Labor for demand where P*MPL=W k. Real wage rate MPL= (expressed in goods not $)

l. Real rental price MPK = Profit revenue left over after workers and capital are paid What is output in the LR? Y=F(K,L) What determines demand for the factors of production? MPL, MPK What determines how income is divided between K, L? from Cobb-Douglas Y goes to K and (1-)Y goes to L q. Which variable ensures the economy equilibrium EQM in the LR? r r. Constant returns to scale (Eulers theorem) tells us economic profit =0 in LR m. n. o. p. s. MPL take derivative with respect to L , average productivity of labor (know what it means in economic terms) t. Costs = WL + RK u. Cant have negative nominal interest rate but can have negative real interest rate v. National savings I=Y-C-G, S=I in a closed economy, saving = investment i. Sprivate+Sgovernment=I where Sp=Y-T-C, Sg=T-G ii. In the LR Y-C(Y-T)-G=I(r), S=I(r) w. Fiscal policy policies conducted by government to influence spending in the economy; G, T i. Expansionary fiscal policy boost spending, G, T 1. G a. Y=C+I+G, Y=C(Y-T)+I(r)+G b. When G, output cant move bc its fixed so I(r) c. How? S=I(r), Y-C-G=I(r), Y=C(Y-T)-G)=I(r) when G, crowding out, S so r then I changes in savings, the effects of fiscal policy d. Bad thing, not always good to increase government spending 2. T a. Y=C(Y-T)+I(r)+G b. T so Y-T so C c. Ex. T decreases by $1million, C increases by $1million isnt true bc C increases by MPC*$1million, so if MPC=.7, C increases by $700,000 ii. Contractionary fiscal policy - G, T 1. Using examples above should know the effects iii. Consumption depends positively on disposable income and negatively on r 1. T-C(Y-T,r)-G=I(r) an upward sloping supply curve 17. Money and Inflation a. Classical theory LR theory where prices are flexible b. Money i. Functions

c. d.

e. f. g. h. i.

Commodity money backed up by an asset that has intrinsic value (ex. Gold) 2. Fiat money no intrinsic value (ex. Paper money) Double coincidence of wants barter system (trade), unlikely to trade Open market operations how the central bank changes money supply through the buying and selling of government bonds (gov debt), government pays back also with interest rate, financial investment for individuals Central bank buys government bonds MS increases, interest rate decreases Central bank sells government bonds MS decreases, interest rate increases Currency measure of how much money, also checking deposits i. Savings a form of money but different bc limited access PY= nominal GDP, Y= real GDP MV=PY EQM in money market? i. Supply of money = ii. Demand of money =( ) = kY (k stands for some fraction)

1. 2. 3. ii. Types 1.

Medium of exchange Store value Unit of account

j. Define the growth rate rules i. If X=YZ, then %X = %Y + %Z ii. If X= , then %X = %Y - %Z iii. %M + %V = %P + %Y but V constant so %V=0, Y also constant in LR therefore %Y=0 therefore %M=%P (%P is inflation), so the growth of the MS is equal to the rate of inflation in LR