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GDP = C + I + G + (X-M)
Real money supply (M/P) is a function of real interest rates and
income.Real rates are inversely related to the quantity of money
demanded.If real rates are higher then people hold less cash.If the
money supply is held constant, then the increase in demand for real
money from an increase in income must be offset by a decrease in the
demand for money from an increase in the real interest rate.In
equilibrium, there is a positive relationship between income and the
real interest rate for a given level of the m
Short-Run Aggregate Supply:- Decrease in input prices- Improved
expectations of future- Decrease in business taxes- Increase in business
subsidies- Currency appreciation that reduces the cost of imported
inputs- Increase in labor productivityLong-Run Aggregate Supply:-
Increase in labor supply- Increase in availability of natural resources-
Increased stock of physical capital- Increased labor quality- Advances
in technology
Nominal GDP is the value of goods and services measured at current
prices.Real GDP indicates what would have been the total expenditures on
the output of goods and services if prices had been unchangedNominal
GDP = sum(Pt x Qt)Real GDP = sum(Pbase x Qt)GDP deflator = (Nominal GDP /
Real GDP) x 100 = real growth + inflation
GDP = National Income + Capital Consumption Allowance + Statistical
DiscrepancyNational Income = Employee Compensation + Corporate and
Government pretax profits + Interest Income + Unincorporated business
net income + Rent + Indirect Business Taxes less SubsidiesCCA = Output
that is used to replace capital stock wearing out (depreciation)
- Increase in household wealth (wealth effect) (C)- Increase in
expectation for economic growth (C, I)- Operation at full capacity (I)-
Decreases in tax rates increase disposable income- Increases in
government spending (G)- Increases in the money supply [lower real
rates] (C, I)- Depreciation of currency (X, M)- Growth of foreign GDP
(X)
Market value of all final goods and services produced in a country.-
Produced during a given period of time- Only goods that are valued in
the market- Final goods and services only- Rental income received by a
property owner or rental value of owner-occupied housing- Government
services at cost
- Environment of both high unemployment and increasing inflation-
Generally associated with a sharp decrease in aggregate supply- Prices
rise and output declines- Government can address inflation or recession
but not both.- Difficult to address because reducing inflation can make
unemployment worse and fighting recession can make inflation worse-
Takes a long time for wages and input prices to fall.
- Cyclical companies - earnings decline (increase) in economic
slowdown (expansion)- Commodity prices - decline (increase) will slow
(accelerate) revenue growth and reduce (increase) profit margin-
Defensive companies - modest declines (increases) in economic slowdown
(expansion)- Investment-grade or government-issued fixed income
securities - prices increase (decrease) as interest rates decline
(increase)- Long-maturity fixed-income securities - prices more
responsive to changes in interest rates- Speculat
PI = National Income + Transfer Payments - Indirect Business Taxes -
Corporate Income Taxes - Undistributed Corporate ProfitsPersonal
Disposable Income = PI - personal taxes
Household and Business- Services of labor, land, and capital flow
through factor market to businesses and income flows back to households-
Household consumption flows through goods market to the business
sector- Household savings flow into financial markets that provides
funding for businesses- Investment flows from firms to goods market and
back to firmsGovernment- Collects taxes from households and businesses-
Purchases goods and services from the business sector- Transfer payments
are subtracted from net
Labor Productivity = Real GDP / Aggregate HoursPotential GDP =
Aggregate hours worked x Labor productivityProduction function => Y =
A x f(L,K)Output per worker => Y/L = A x f(K/L)Growth in Potential
GDP = Growth in technology + WL(Growth in Labor) + WC(Growth in
capital)WL + WC = relative shares of national incomeGrowth in Per Capita
GDP = Growth in technology + WC(Growth in capital-to-labor ratio)
Aggregate Income = value of all the payments earned by the suppliers
or factors used in the production of goods and servicesAggregate Output =
value of all the goods and services produced in a specified period of
timeAggregate expenditure = total amount spent on the goods and services
produced in the economy during the period = Aggregate Output =
Aggregate Income
(S-I) is an increasing function of income(G-T) + (X-M) is a decreasing
function of income (higher taxes and imports)If the real interest rate
decreases- investment increases- savings must increase by the same
amount to keep balances constant- income must increase for this to
happenIS curve is negatively sloped. Higher income corresponds to a
lower real interest rate.
Aggregate Demand:- If P increases then real money supply decreases-
Output decreases as the Price Level increasesAggregate Supply:- In the
very short run, aggregate supply doesn't change (input quantities are
fixed)- In the short run, input prices are fixed so businesses expand
real output when prices increase (wages)- In the long run, aggregate
supply is fixed at full employment or potential real GDP
GDP = C + I + G + (X-M) = C + S + TS = I + (G - T) + (X - M)Private
Savings is absorbed in one of three ways, investment spending, financing
government deficits, and building up financial claims against overseas
economies.A fiscal deficit implies that the private sector must save
more than it invests or the country must run a trade deficit.
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