Makro

CAGR

g = (future price/ current price) to the power of 1/t -1

Compound Annual Growth Rate

Current price/ real GDP * (1+ growth rate) to the power of t

(Current price/ Real GDP times e to the power of g *t)

Disposable income - consumption

Income - taxes

Income - taxes - consumption

Taxes - government spending

Expenditure Approach

Income Approach

Value Added Approach

Add the value of all goods & services produced domestically in one period

Y = C + I + G ( closed economy)

Y = C + I + G + (X-IM) ( open economy)

Add up all factor incomes generated by domestic production

GDP = Compensation of employees + Gross operating income surplus + mixed income + Net subsidies

Gross operating surplus = profits, interest, rent, depreciation

Mixed income = self imployed

Net subsidies = Tax on production & products - subsidies

GDP + Net factor incomes generated from abroad

GNI + Net current transfers from abroad

Sum of value added across all producers to avoid double counting

Output + output of intermediate goods - input for intermediate good (purchases)

Wages + return on capital

Sum of quantities of final goods produced multiplied by current price

Sum of quantities of final goods multiplied by constant prices

Production increases over time

Prices the goods are sold at increases over time

( Nominal GDP/ Real GDP ) * 100

Measures how much quantity demanded changes when income changes

• high volatility of demand

• low/negative growth rates in recession

• high financial risk

Ey < 0 ( Inferior good; when income goes up demand falls )

Ey = 0 ( Income neutral)

0 < Ey < 1 ( Normal necessity)

Ey > 1 ( Luxury Good; demand rises more than proportionally when income increases)

Y = L*w + K* r

Y = units of output

L = Labor

w = wage

K = stock of physical Capital

r = rental rate

• An additional unit of Labor increases output by its marginal product

• w = MP(L)

• Firms will hire until real wage equals marginal product of labor

• Slope of production function with respect to L ( holding K fixed )

• An additional unit of Capital increases output by its marginal product

• r=MP(K)

• Firms will rent until real rental rate equals marginal product of capital

• Slope of the production function with respect to K (holding L fixed)

• how total income from production is split by factor of production—mainly labor vs. capital

Total Labour Income

w * L = MPL * L

Total Capital Income

r * K = MPK * K

If the production functionhas constant returns to scale

Y = MPL * L + MPK * K

Y = national income

• Cobb Douglas production with constant returns to scale

• single nuber summary of inequality

• between 0 and 1

• 0 = equal

• Cannot b decomposed into groups of household

• Inequality measure

• no upper limit

• 0 = perfect equality

• very sensitive to changes at the botton of the income distribution

• can be decomposed into subgroups

S = I

• private savings is needed to cover the deficit

-> Investment falls = crowding out

L = N * U

N = employment rate

U = unemployment rate

L / Population size in working age ( 20-66 )

u = U/L

The rate at which the price level increases

• how often one unit of a currency is changing hands

• V = P * Y / M

• M = Money supply

• Quantity Theory states that Velocity is constant

• Money supply determins value of nominal GDP

• real GDP Y is determined by L & K

• Money supply decides about price level P

• Economic Growth requires a certain amount of money supply growth

• execessive Money growth leads to inflation

Open Economy

Z = C + I + G + X - IM

Closed Econoy

Z = C + I + G

Consumption is income that remains after tax and government transfers are recieved

• C = C(Yd)

• Yd = disposable income

• Yd = Y- T

• Consumption increases with disposbale income but less than one for one

Production Y = Demand Z

• Demand Z in turn depends on income Y which itself is dependend on production

• Substitute C for Consumption Function (linear relation)

  • C = c0 +c1*Yd

• Substitute Yd with Y-T

how much equilibrium changes per 1 unit change in auntonomos demand

• propensity to consume is between 0 and 1

• 1-c1 is a small number

• dividing that number by 1 makes it bigger than 1

• therefore it multplies change

The part of the equation that does not depend on output / income Y

• c0 + I + G +c1*T

• Money M is readily be used to make transaction -> pays no interest

• Bonds B pays interest -> can’t be used to make transactions

Md = $Y L(i) (-)

• following transaction approach

• Demand for Money increases inproprtion to nomincal income

• Depends negatively on interest rate

Nominal Income / Price Level

Money supply = Money demand

M = $Y * L(i)

-> LM RELATION

the Equilibirium happens when interest rate i is at a level where Ms (independent of interest rate) equals Md (dependent on interest rate)

An increase in nominal income -> People want more transactions at any interest rate -> Md shifts right -> interest rate goes up (with fixed Ms)

interest rate decreases

when i= 0

-> they become indifferent between holding money and holding bonds

-> Md become horizontal

-> increasing Ms doesn’t have an effect on interest rate

B= Currency in Circulation + Reserves

2-tiered banking system

M = C + D

M = Money Stock

C = Currency

D = Demand Deposits (Money bank lend)

R = Reserves (Money banks didn’t lend)

B = C + R

rr = R/D

cr = C/D

R = MR + ER

MR = Minimum Reserves

ER = Excess Reserves

M = m * B

Y-Axsis : interest rate i

X-Axsis : Money

• given level of nominal income: lower interest rate -> increases demand for money -> (move along the curve)

• given interest rate: increase in nominal income -> increases the demand for money -> (shift to the right)

It is the ratio m=ΔM/ΔBm showing how much the money stock changes when the monetary base changes by one unit

Y = C (Y-T) + I (Y,i) + G

The Aggregate Demand Function Z increases because Output Y increases

• when Output Y increases -> income Y increases -> therefore disposable income Yd increase -> which increases Consumption

• when Output Y increases -> income Y increases -> Investment increases

It decreases the demand for goods -> decrease in the Equilibrium level of output

The Equilibrium condition in the goods market implies that an increase in interest rate decreases Output Y

Y - Axis: interest rate i

X - Axis: Output Y

IS Curve shifts left

if Taxes increase -> disposable income dreaceses -> Consuption decreases -> Output Y decreases

Increase in interest rate, taxes

Decrease in government spending

Changes in factors that increase autonomous Demand -> therefore increase the Output

Taxes, Government spending, Consumption

Equilibrium of Ms and Md

increase in income -> increase in Money demand -> given Ms -> increase in interest rate

in the Graph

Y - Axsis: interest rat

X - Axsis: Income Y

LM is upward sloping

increase in money -> lowers interest rates-> LM curve shifts down (right)

Equilibrium in the goods market (IS):

increase in interest rate -> decrease in Output

Equilibrium in the financial market (LM):

increase in Output -> increase in interest rate

• Taxes and Spending is Fiscal

• Money is Monetary

• designed to make monetary decisions predictable

• sets traget nominal interest rates dependent on inflation rate (Taylor formula!)

• An increase in inflation rate by 1% increases interest rates by more than 1%

The Effects of Output on the Prices level

Y - Axsis: Price level P

X - Axsis: Output Y

At an expected Price Level -> when income increases -> Employment increases -> unemployment goes down -> Wages go up -> Prices go up

AS Curve shifts upwards because

expected price level increases -> wages increases -> Price increases

Point A goes through Y = Yn; P = Pe

so

It captures the Effect of the price level on the output

It is derived from the equilibrium conditions in the goods and financial market

Y - Axsis: Price Level

X - Axsis: Output Y

downward slope

Price increases -> Real Money Supply M/P -> interest increases -> demand decreases -> Output Y decreases

AS - Curve:

for given value of expected price level -> higher level of output

-> higher price

AD - Curve:

for given values of M, G and T -> higher price level -> lower the level of output

At Point A Y > Yn -> P > Pe

• to get an equilibirum wage setters increase wage (in expcetation of future prices) -> AS Shifts upward

• this happens until W matches the expected increase in price levels

Output can be above or below the natural level of output

Output eventually return to the natural level of Output -> through shifts of the AS curve

1) increase in nominal money stock -> AD shifts to right

2) MR: AS curve shifts up and Output returns to Yn

• increase in prices is proprtional to the increase in nominal money stock

1) increase in nominal money -> shifts LM curve down

2) decreasing the interest rate -> increasing output

3) price increase prevents even lower shift of LM curve

4) Over time price increases further shifting LM curve back up

5) until Y = Yn

In the SR: Monetary expansion leads to increase in output -> a decrease in interest rate -> increase in the price level

In the MR: the increase in norminal money proportional increase in the price level -> Increase in nominal money has 0 Effect on output/ interest rate -> C; I; G; T are same as before policy measure

• It shifts the AD curve

• Stimulates economic activity in the short run

• neutral/ negative in the medium/long run

• Welfare

• Monetary easing (↑M, ↓policy rate) → AD right; tightening → left.

• Fiscal: ↑G (spending) → AD right; ↓G → left.

• Fiscal: ↓T / ↑transfers → AD right; ↑T / ↓transfers → left.

• Shifts AS Curve (natural rate of employment)

• Stimulates economic growth in the medium/ lonf run

• Neutral/ Negative in the short run

• Unemployment Benefits

• Lowering Corporate Taxes

• Lower labor/capital taxes & deregulation → AS/LRAS right.

• Infrastructure, education, R&D → AS/LRAS right.

• Labor-supply reforms (childcare, retirement age, immigration) → AS/LRAS right.

• Cost shocks (energy/wages up) → SRAS left; cost relief → right.

• Can be derived from the AS relation (rewritten as a fucntion between inflation, expected inflation and unemployment rate)

• increase in expected inflation -> increase in inflation

• given expected inflation -> increase in markup, wage determination y -> increae in inflation

• given expected inflation -> increase in unemployment rate u -> decrease in inflation

when 0 is zero the relation is below

when 0 is 1 change in inflation rate depends on unemployment rate

• Unemployment Rate at which the rate of inflation remains constant

  • Other type of unemployment: Seasonal

Macroeconomic output function

Y = F ( K,L )

under constant returns to the scale

• increase in output per worker y can come from increase in capital per worker (k)

• k = capital-labor ratio

• or they can come from improvements in the state of technology -> shift the production function -> more output per worker

• Focus = Capital accumulation

  • population size, participation rate, unemployment rate -> constant

Investment makes the capital stock bigger

Depreciation makes the capital stock smaller

• Output & Investment per worker increases with capital per worker

• less and less as capital per worker increases

The steady state level of k that maximizes consumption

The economy has a tendency towards the state capital stock NOT towards the golden rule capital stock

To achieve the golden rule requires adjustments to savings rate:

• S(private) -> depends on T&G

• Decreasing income tax; increasing consumption tax -> increasing private savings

• Technological Change shifts production function up

-> higher output per worker for an given capital stock per worker

-> higher income increases investment -> capital stock per worker grows -> output per workr grows

• Technological change does affect the long-run growth rate

  • speed of the process depends on rate of technological change

  • technological progress inplies and increasing capital intensity -> capital productivity is predicted to increase at lower rates than labor productivity

Explaining income growth of an economy over time

Output change can also be the result of technological change

• total factor productiviy growth is a substitue for technological change ga

• TFP growth => Solow residual

Explaining income differences between 2 economies at a givn period

employed + job seeking

1-MPC

Marginal Propensity to Consume

It is the slope of Yd

Number of unemplyed people/ Labor force

1/1-c1

ER are assets for commercial banks

ER are liability for central banks