PRIN OF MACROECON
PRIN OF MACROECON ECO 2013
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Date Created: 09/17/15
The US and Global Economies CHAPTER CH ECKLI 1 Describe what how and for whom goods and services are produced in the United States Use the circular flow to provide a picture of how households firms and government interact N 3 Describe the macroeconomic performance standard or living cost of living and economic fluctuations of the United States and other economies LECTU RE TOPICS I What How and For Whom l Circular Flows l Macroeconomic Performance Cobbe ECO 2013 Fall 2001 Ch 2 Page 1 of 8 I What Do We Produce In macroeconomics we divide the vast array of goods and services produced into 1 Final goods Consumption goods and services Investment goods Government goods and services Exports of goods and services And 2 Intermediate goods ie those goods and services wholly used up producing other goods and serv39c s Consumption goods and services Goods and services that are bough by individuals and used to provide personal enjoymen and contribute to a person s standard ofliving For example food clothing movies haircuts and laundromat services t t Investment goods Goods that are durable will last more than a year and are bought by businesses to increase their productive capacity For exampe computers cranes and trucks Intermediate goods are also bought by businesses for production but are not durable and are used up in the production process eg gasoline electricity our to make bread stationery and supplies cement accounting services etc Government goods and services oods and services that are bought by governments For example education roads missiles and bridges In the US the convention is that government does not produce or invest so all government purchases are nal government does not buy intermediates Exports goods nd services produced in the United States and sold to residents of other countries For example airplanes corn computers and banking services Cobbe ECO 2013 Fall 2001 Ch 2 Page 2 of 8 qure 2 mm p c Faaursm Drodummn was and was mm mm Emevreneursmv mm mm 37 mm mums mm was and m znnn mummyquot m m m m a m swans m 5 km annn w m mmmaum resaumesusedw mam wan in mm m hummus mm was and m as weHasnmhnd m Meg s Land mm mm mm m we sew mm mas and was mmumnvs we u my mum and mauaesmm s w my ma mg mm s Cobbe ECO 2013 Pa 2001 Ch 2 Page 3 of 8 Labor Labor The work time and work effort that people devote to producing goods and services Human capital The knowledge and skill that people obtain from education onthejob training and work experience Capital Capital Tools instruments machines buildings and other constructions that have been produced in the past and that are now used to produce goods and services Capital in economics means physical capital It includes semi nished goods of ce buildings housing and computers as w 39 m Physical capital does not inclu e money stocks and bonds They are nancial resources sometimes called nance capital Entrepreneurship Entrepreneurship The human resource that organizes labor land and capital and takes risk Entrepreneurs are notjust managers they come up with new ideas about what and how to produce make business decisions and bear the risks that arise from these decisions Economists call the new ideas innovation Cobbe ECO 2013 Fall 2001 Ch 2 Page 4 of 8 Fnrwnnm nnWe Prmuce hams aVDmdunmn 79 mm mm m Waga hymn mm mm semuesa abar Mares hymn mm mm use mam mm w 055 nwme enmedbvan emmvmneurhrmnmnv busmessand mmm m mm md Fund sna d snhmmn m mm mm a39vmduwan 735m d snhmmn m mm m pmmm mmquot chumquot mm mm perm v mnmsm mm mm m Cobbe ECO 2013 Pa 2001 Ch 2 Page 5 Of8 qure 2 3 mg m mm mmquot m mm he Us e m m mm m m mm MW e WM m mm quotmm m mm mm mm New m quotmm W h h mm m was a pm a Nnmamds Ind rm Housmmds mm M Wk mm mm demsmn mm m m Mmquot m Dwamxe mmquot mm m Cobbe ECO 2013 Pa 2001 Ch 2 Page 6 of 8 busmess w am Mr mm page ar 5 Marketsmwmch am 039 mmquot m mum and Sam 5mg ma a am m mm was and was in mm and Sam I mm savwmm m mm m rmm mm n my mamaquot Cobbe ECO 2013 Pa 2001 Ch 2 Page 7 Of8 Hauseha ds w was and was Cobbe ECO 2013 Pa 2001 Ch 2 Page 8 of 8 Rul aws mm mmum m mmquot m m was and was quothue ows awe mg m mm quota red mg m endmres aquot was exp and n Gnvunnsn 5mm Fedem vmmm 31m and w mmm m Humans mm mm mmmm Mm mmums 2 mm mines mm mm Cobbe ECO 2013 Pa 2001 Ch 2 Page 9 Of8 sun Ind Lacl Carnival 2 vaenvuxes 3 m mum s Gmunnul m m Clmulr Flnw mm Government Expen mures qure 2 5a 5m mm vavlmmem expenmmres Cobbe ECO 2013 Pa 2001 Ch 2 Page 10 of 8 mm Government Revenue gt qure 2 ma 5mg mm vavlmmem Mm am mm mm m vavlmmem hasbarmwedm WNW budvex dam m quotmam am sme 65 3 pm vavlmmem Slrvmses Ind Raul mm m an 5mm mm Pubhcwe me mans Cobbe ECO 2013 Pa 2001 Ch 2 Page 11 of 8 511 Ind Lnul ommmn W 3 n Is xquot qure 2 m 5m m and Wei Vavmmem Wham 812 m we WM Government M mm 2 701 M 5m m m m Wm MT lSIzndzld nl Living mm m han was an m mum vame aVDmdunmn mmquot m mm sme mm mm Numera39veav e w mm M mas and Cobbe ECO 2013 Pa 2001 Ch 2 Page 12 of 8 Wmd unhhm Us WWW nuanxxxmecemer znnn Wandvavuman a mmm egg numbers in spwummm mere 5 rm way w W m eunnumbermveawe mth us Dr he W 1 m m awn3V mm m m N am and cmssnvme harder Hmewwe 1 missmcmn m comm M312de WW6 newan WW6 vamacmevad mm mm mm m rwm WW6 mm mm qure 2 x mm mm mm amund M W Mme mm w perm mum W5 3 mm mm 81mm 5 dawn m Cobbe ECO 2013 Pa 2001 Ch 2 Page 13 Of8 Unempmen 2nd vag smmms Unemwawem vmuenees me mm mm Penna m une wamm r e vl ve unemwawem me mme Unned semesmme mm mm been a vervequot and an vl ve n hasuken mm 5 weeksm m an acumabk m Co a In Me annummrmnwmakersm tamme meme semuesmzl an vl ve Vachansumes w m v m Mas emnesemenenee mmquot my mes enanmuiv Sane caumnes Ivan mew expenence mm a an We em and caslm h m Cobbe ECO 2013 Pa 2001 Ch 2 Page 14 of 8 mm rm mm 2 m m m mam M m M m w W m Ecmnmc mum ammmm m M m m surnames mmka m mm m meme busneSS we Cobbe ECO 2013 Pa 2001 Ch 2 Page 15 Of8 l Fiscal and Monetary Policy Debates CHAPTER CHECKLIST Discuss whether fiscal policy or monetary policy is the better stabilization tool Explain the rulesversusdiscretion debate and com are Keynesian and monetarist rules for stabilizing real GDP 3 Assess whether policy should target the price level rather than real GD N l Fiscal Policy Versus Monetary Policy l Rules Versus Discretion lTargeting Inflation Fall 2001 ECO 2013 Cobbe Ch 18 Page 1 of 10 may mm m mm m Mondlry may mp 2mm mm mm me New mvlimemand mrmpg mm ccwanemsav 3mm mam mp 1 lllhetheriwmn mm mm quotmypr mm mm me by Mar We depends myth sensuwvavm Mm pmmypm mp mm mm decrease mm mum pmpsesawrem mam by M m We devendsanme sensm lva mvzmem and mm cawanemsavivvmvm ewendnuru m mm qure p anmenen imesmuimemese PNvasuans mg Wm WM manvSAW Vmcreases m De quotmmquot m um m p n mHmnm mmquot m mm menus ram vemem m manpmm mmmmu Pa 2001 ECO 2013 Cobbe Ch 18 Page 2 of 10 Here he 5m mm mth manevsuvv v awersme mm m m a mm m 5 mm 3 var and mm mam m a mmquot m n 25 17mmquot mwmm 55 mm mumquot We WW5 mmmmmommw may Yhewa ms mmumnswssan ammmm datumquot me predmabmw Wampum A gm m mm mm mm mm mm m a mum em myth were me m Mm WWW mam A w m m a m 3mm mam m mam Mm M be mam m pred mb uhe Mm Ourma av mm mm D mimeer m m mwmdenee mth mnmm mm expene m e mm m mm m mvanam mmw bemvewenmansav mam mm mm Mme Pa 2001 ECO 2013 Cobbe Ch 18 Page 3 of 10 The Effects of Fiscal Policy The three steps in the transmission of scal policy are Step 1An increase in government purchases or a tax cut increases aggregate expenditure and increases aggregate demand with a mul ipier Step 2A change in real GDP changes the demand for money which changes the interest rate A change in he interest rate changes investment and other components of aggregate expenditure in a crowding out effect expenditure then the crowdingout effect is large and scal policy has a weak effect on aggregate demand lfa given change in the demand for money has a small effect on the interest rate and if a given change in the interest rate has a small effect on aggregate expenditure then the crowdingout effect is small and scal policy has a powerful effect on aggregate demand Extreme Conditions At one extreme monetary policy is allpoweer and scal policy is completely ineffective This extreme occurs if the quantity of mone demanded is independent of the interest rate ie the expenditure but an increase in governmen purchases would change the interest rate and trigger total crowding out Fall 2001 ECO 2013 Cobbe Ch 18 Page 4 of 10 At the other extreme monetary policy is completely ineffective and scal policy is allpowerful This extreme occurs if the quantity of mone demanded is in nitely sensitive to the interest rate ie the money demand curve is a horizontal straight line In this case increased money supply cannot lower the money at that interest rate so only scal policy can change aggregate expenditure and there is no crowding out This is called a liquidity trap and some economists believe it happened in the 1930s in the US and in Japan recently Liquidity trap In a liquidity trap a change in the money supply changes the quantity of money held but has no effect on the interest rate and so it has no effect on aggregate expenditure But a change in government purchases leaves the interest rate unchanged so there is no crowding out and scal policy has a large multiplier effect on aggregate expenditure Reality Neither extreme is likely to occur in real economies although some would argue that the liquidity trap did happen in the 1930s and recently in Japan Fall 2001 ECO 2013 Cobbe Ch 18 Page 5 of 10 lGoal Conflicts Stabilization policy actions have side effects Goal con ict is more serious for scal policy than for monetary policy Fiscal Policy Goal Conflicts Fiscal policy usually has at least three goals To provide public goods and services To redistribute income To stabilize aggregate demand These goals can come into con ict Monetary Policy Goal Con icts Monetary policy usually has three main goals price level stability real GDP stability and stability ofthe nancial s stem There is less con ict among these goals than among those of scal policy First stability ofthe nancial system and aggregate d stability go together Each 39 other So there is no con ict here Fall 2001 ECO 2013 Cobbe Ch 18 Page 6 of 10 Second stability of real GDP and stability of the price level are both served by stabilizing aggregate demand e is a con ict about how much weight to place on price level stability versus real GDP stability But this con ict is also present for scal policy So scal policy does not outperform monetary policy in his area However monetary policy typically can and does have distributional implications which may con ict with the distributional goals of government l Timing and Flexibility The ability to forecast the near future state ofthe economy and act at the appropriate time to counteract any unwanted recession or in ation is a crucial part of a successful stabilization policy ln exible Fiscal Policy Fiscal policy is political The election cycle dominates scal policy making Fiscal policy is relatively in exible and incapable ofa rapid response especially in the US Flexible Monetary Policy Stabilization is the main purpose of monetary policy Monetary policy effects are long and drawn out but actions can be taken quickly Fall 2001 ECO 2013 Cobbe Ch 18 Page 7 of 10 I And the Winner Is There is no clear winner Automatic scal stabilizers do an important part ofthe job of maintaining macroeconomic stability Discretionary scal policy is sometimes a vital part of the policy mix especially ifthe economy is in a deep recession or in a seriously overheated condi ion But for dealing with normal uctuations monetary policy is the preferred stabilization tool ecause it is more exible in its timing and it is the only feasible tool for institutionallconstitutional reasons in the US l Discretionary Policy Discretionary monetary policy is monetary policy that is based on hejudgments ofthe policy ma ers about the current needs ofthe economy Discretionary monetary policy is setting the discount rate and determining open market operations on the basis ofthe expert opinions ofthe members of the FOMC and their advisors l FixedRule Policies Afixedrule policy speci es an action to pursued independently ofthe state ofthe economy Milton Friedman keep the quantity of money growing at a constant rate year in and year out regardless of the state ofthe economy to make the average in ation rate zero Fixed rules are rarely followed in practice Fall 2001 ECO 2013 Cobbe Ch 18 Page 8 of 10 ramckrnum mean ru e DamnSpeaks m WWWquot mm mm m in mm mm mam m hrrmndirvvahcws mm mum quamva manevanhe mm me m Mpmum mm mm mm We mum WM a mum mquot mammal suns am am WWW and has rm mlauan PM u 2 awn5 Mus m vvrevm mm mm mm Mm mm m am m m an decmaseslaw mHmn name an mm nusm mam mm v es mm mm mm Rul quothmnun Amunaans s whamslwhabehemsmm umauansmme WWWme m snare m ecanamm unummns m w dwcms mm quamnvavmnevvmw a caniam e m ma N mmeu 5mm 5 m m wmmme manev WW mm mniam Pa 2001 ECO 2013 Cobbe Ch 18 Page 9 of 10 qure Mama Mamaquot submxman Pahcvm me dee mquot evvredde demand We A xed Me vahcv eams ma sup andeDnee eve eddddddem m Sm Cm mm dun a Feedback Ru e Key esnn dmsm AKeynesan edmdd d and m behems mmwmnsmmmmmmemmwem eednweddddms Farnnne wvahcv 3 Wed mm wamd lawvale need me unswhen ma sup nusbew Pmemm sun and meme mkeswhen ma sup emeedsweenud sup PM u memes Kawesan and my Akedback Me vahcvmesm reslmes u emwavmemas mm as vassb e w keevmv vvmvm demand d m Pa 2001 ECO 2013 Cobbe Ch 18 Page 10 of 10 The TWO Rules Compared Under a xedrule policy a decrease in aggregate demand puts real GDP below potential GDP where it remains until either a fall in the money wage rate or a subsequent increase in aggregate demand restores Jll employment Under a feedbackrule policy the economy is pulled out ofa de ationary gap or an in ationary gap by a policy action There is no need to wait for an adjustment in the money wage rate for full employment to be restored Real GDP decreases and increases by the same amounts under the two policies but real GDP stays r longer with a xed rule than it does with the feedback rule ifthe feedback rule gets the timing right Are Feedback Rules Better Despite the apparent superiority of a feedback rule many economists remain convinced that a xed rule stabilizes aggregate demand more effectively than do a feedback rule These economists assert that xed rules are better than feedback rules because Potential GDP is not known Policy lags are longer than the forecast horizon Feedbackrule policies are less predictable than xedrule policies Fall 2001 ECO 2013 Cobbe Ch 18 Page 11 of 10 Knowledge of Potential GDP It is necessary to determine whether real GDP is currently above or below potential GDP But potential GDP is not known with certainty As a result there is often uncertainty about the direction in which a feedback policy should be pushing the level of aggregate demand Policy Lags and the Forecast Horizon The effects of policy actions taken today are spread out over the following two years or even more But no one is able to forecast accurately that far head So feedbackrule policies that react to today s economy mig t be inappropriate for the state ofthe economy at that uncertain future date when the policy s effects are felt Predictability of Policies To forecast the inflation rate it is necessary to forecast aggregate demand And to forecast aggregate demand it is necessary to forecast the Fed s policy actions lfthe Fed sticks to a rocksteady xed rule for money supply growth then policy is predictable and it does not contribute to unexpected lluctua ions in aggregate emand Fall 2001 ECO 2013 Cobbe Ch 18 Page 12 of 10 mm mm m Pursues whicka mere 5 m 5pr mm vahcvanmnsm be mm vim mam Me pm A sneues rvm mm m mum mm m ms mmmm mm A ms Eansequem v amabm m maneupr m creme mm mm quummns m vvrevm demandman ma N ecan 51wqu Annyt Swvly sum Yaseuhe wens avsuvv vmawsandme mm submxuhem we ivam sunmn 3mm WWW w rm mlauan m 0 mg m Nvmvm sum mm m ax A m an magma Pa 2001 ECO 2013 Cobbe Ch 18 Page 13 of 10
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