CHAPTER 1 INTRODUCTION TO MACROECONOMIC PB202 MACROECONOMICS CHAPTER 1 INTRODUCTION TO MACROECONOMIC Prepared by: Azlina bt Azmi Session of December 2010

Chapter objectives Learn macroeconomic in general To evaluate government policies and tools To know the Aggregate Demand and Aggregate Supply

Arrow Process Chapter Sneak Peak Why use graphics from PowerPointing.com? - Definition -AD curve - AS curve Factors that shift AD curve Factors shift AS curve - What is macroeconomics? Macroeconomics versus microeconomics - Macroeconomic goal EFFECT ON UNEQUAL EQUILIBRIUM OF AD & AS AGGREGATE DEMAND & AGGREGATE SUPPLY GOVERNMENT POLICIES AND TOOLS MACROECONOMICS IN GENERAL SUMMARY Fiscal policy Monetary Policy - How does it affects price level and real GDP? Prepared by: Azlina bt Azmi Session of December 2010 This illustration is a part of ”Building Plan”. See the whole presentation at slideshop.com/value-chain

What is macroeconomics? The branch of economics that studies decision making for the economy as a whole (inflation, unemployment, economic growth, money supply, national incomes, business cycle)

Macroeconomics vs Microeconomics Studies individual income Studies national income Analyzes demand for and supply of labor Analyzes total employment in the economy Deals with households’ and firms’ decisions Deals with aggregate decisions Analyzes demand and supply of goods Analyzes aggregate demand and aggregate supply

Macroeconomic Goal Price stability Economic growth Full employment Distribution of income

Inflation

Inflation An increase in the overall average price level of goods and services in the economy How do we know when it is inflation? By computing price level using CPI index Key measurement: Consumer Price Index (CPI) Types of inflation: Cost Pull Inflation Demand Pull Inflation Imported Inflation

Unemployment The growth of economy and unemployment are always “catching our eyes” Why? Affect our future GDP rises (economic in boom), full of jobs GDP falls, firms facing a bankruptcy and more workers lost their job

Business cycles Alternating periods of economic growth and contraction, which can be measured by changes in real GDP (Tucker. I.B, 2008) As a mirror of changes in unemployment and other key measures of macro economy 4 phases: Peak Recession Trough Recovery

Government Policies In order to stimulate economic growth, price level and aggregate demand (AD) To combat recession and inflation Two types: Fiscal Policy (tax and government spending) Monetary Policy (money supply)

Fiscal Policy The use of government spending and taxes to influence the nation’s spending, employment and price level Falls in to two types: Expansionary Fiscal Policy Contractionary Fiscal Policy

Expansionary Fiscal Policy In order to combat recession To increase aggregate demand Reduce tax, increase government spending or equally

Contractionary Fiscal Policy To combat inflation To increase aggregate demand Increase tax, reduce government spending

Monetary Policy The government tool to control level of money supply in the economy Changes in money supply can led changes in interest rate How Federal Reserve’s power to change money supply can also alter the interest rate Two types: Expansionary Monetary Policy Contractionary Monetary Policy

Expansionary Monetary Policy To combat recession Increasing money supply leads interest rate to fall How? Funds will be injected into the banking system to reduce interest rates Spending and borrowing would increase Resulting increase in consumption and investment to stimulate economic growth

Contractionary Monetary Policy To combat inflation Decreasing money supply leads an increase in interest rate How? Withdrawing funds from the banking system and raising interest rates The higher interest rates will encourage people to save more and spend less More expensive for people to borrow money

GDP growth and public expenditure share to GDP (%)

Aggregate Demand