MACROECONOMICS TERMINOLOGY

Aggregate demand; Total demand for goods and services in an economy Nominal interest rate; Value of the interest rate Real interest rate; Adjusted value of the Nominal interest after adjusting for the inflation Liquidity; Amount of capital that is available for investment and spending Money supply; The total amount of monitory assets available in an economy. Government bond; Bond issued by national government promising to pay certain amount of money in certain amount of time Open market operations; Any buying of selling of government securities. Volatility; Frequency the price changes in a mrket.(Higher the volatility higher the risk Liquidity; The degree asset that can be converted in to cash quickly without affecting with minimal impact to the price bought. Eg; Bank account High liquidity investment Real estate Low liquidity investment Price level = Price of the goods and services . Crowding out effect = low aggregate demand caused due to higher public spending Purchasing power ; Amount of goods and services that can be bought with a unit of currency

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TREE REASONS FOR THE DOWNWARD SLOPE OF AGGREGATE DEMAND CURVE 1. Wealth effect 2. Interest rate effect 3. Exchange rate effect

WEALTH EFFECT Inflation rise Purchase power decrease Output demanded Decreases INTEREST RATE EFFECT Increase in savings Increase in loanable funds Decrease in real interest rates Increase investment Increase the aggregate demand EXCAHNGE RATE EFFECT Inflation increases interest rates increase Foreign investment increases due to high interest rates Demand for dollar increases Dollar appreciates in Foreign exchange Foreign goods become cheaper Domestic imports increases, Export decreases Low demand for domestic output

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CROWDING OUT EFFECT Increase in government spending Increase in interest rates Reduce private investment

MAIN CAUSES OF INFLATION

1. 2. 3. Demand pull inflation Demand for goods goes up Cost push inflation Supply goes down monopoly, natural disasters, depletion of natural resources Monitory expansion

WAYS OF EXPANDING MONEY SUPPLY

1. 2. 3. Reducing federal reserve requirement Reducing fed funds rate Printing money

WHAT CAUSES BUSINESS CIRCLE

1. 2. Supply and demand Liquidity (availability of capital)

** money supply of a country is controlled by RBA through open market operations

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EFFECTS OF LOW INTEREST RATES

1. 2. 3. Economy grows faster People spend more High inflation

THEORY OF LIQUIDITY PREFERENCE

** As interest rates rise demand for money decreases (People get more money by keeping money in banks) **As interest rates decrease demand for money increases (Can loan money for low interest rate)

MONEY SUPPLY

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EQUILIBRIUM IN THE MONEY MARKET

MULTIPLIER EFFECT Every time there is a new demand on to the circular floor the is likely to be a multiplier effect Eg, If the MPC is 3/4, then the multiplier will be: Multiplier = 1/(1 3/4) = 4 In this case, a $5 billion increase in government spending generates $20 billion of increased demand for goods and services.crouding effect

Formula for the spending multiplier Multiplier = 1/(1-MPC) MPC= marginal Propensity to consume

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TXATION AND AGGREGATE DEMAND

Changing tax rates affect the consumer spending . This cause a shift in aggregate demand

FACTORS EFFECT THE UNEMPLOMENT

1. 2. 3. Minimum wage laws Market power of unions Effectiveness of job seach

MARKET POWER
Ability of a firm to change the market price of a good

SHORT RUN TRADE OFF

Inverse relationship of two factors Eg. Short run trade off between Inflation and Unemployment

(Low unemployment higher spending Higher inflation )

THE PHILLIPS CURVE
Relationship between Inflation and unemployment

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PHILLIPS CURVE IN THE SHORT RUN

PHILLIPS CURVE IN THE LONG RUN

There is no connection between unemployment and inflation in the long run. So in the long run Phillips curve is a vertical line

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Unemployment rate = Natural Rate of unemployment a (Actual inflation Expected inflation)

NATURAL RATE OF UNEMPLOYMENT

NAIRU (the non-accelerating inflation rate of unemployment).

UNEMPLOYMENT RATE

STABILISING THE ECONOMY

There are lags in fiscal and monitory policies Government can use stabilisation policy to stable the economy

AUTOMATIC STABILISER S
Ta x system Unemployment benefit

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