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

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

3. Arrow Process Chapter Sneak Peak
Why use graphics from PowerPointing.com?
- Definition
-AD curve
- 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?
Factors that shift AD curve
Factors shift AS curve
This illustration is a part of ”Building Plan”. See the whole presentation at slideshop.com/value-chain

4. 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)

5. 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

6. Macroeconomic Goal Price stability Economic growth Full employment
Distribution of income

7. Price stability
A situation in which prices in an economy don’t change much over time
Would mean that an economy would not experience inflation or deflation
However, it is not common in economy to have price stability

8. Economic growth
A positive change in the level of production of goods and services by a country over a certain period of time
Nominal growth is defined as economic growth including inflation
Real growth is nominal growth minus inflation
Economic growth is usually brought about by technological innovation and positive external forces

9. Distribution of income

10. Inflation

11. 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 Push Inflation
Demand Pull Inflation
Imported Inflation

12. Cost – Push Inflation
A phenomenon in which the price levels rise (inflation) due to increases in the cost of wages and raw materials
Develops because the higher costs of production factors decreases in aggregate supply (the amount of total production) in the economy
Fewer goods being produced and demand for these goods remains consistent, the prices of finished goods increase (inflation)

13. Demand Pull Inflation
Economists will often say that demand – pull inflation is a result of too many dollars chasing too few goods
Is a result of strong consumer demand.
When individuals are trying to purchase the same good, the price will inevitably increase

14. 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

15. 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

16. 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)

17. 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

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

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

20. 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

21. 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

22. 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

23. GDP growth and public expenditure share to GDP (%)

24. Aggregate Demand
The total amount of goods and services demanded in the economy at a given time period.
Describe relationship between price levels and aggregate output
Negative relationship
Also known as “total spending”
Formula: AD = C+I+G+(X-M)

25. Aggregate Supply
A total supply of goods and services produced in the economy at given overall price level at given time period
Positive relationship between price and output
Also known as “total output”

26. AD – AS curve

27. Shifts in AD Consumer expect a recessions Foreign income rises
Foreign price levels fall
Government spending increases

28. Shifts in AD Consumer expect a recessions
They will not spend as much money today as to “save for a rainy day’
Thus, if spending has decreased, then AD must decrease
Shown shift to the left

29. Consumer expect a recessions

30. Shifts in AD Foreign income rises
We would expect that foreigners would spend more money – both in their home country and in ours
A rise in foreign spending and exports – increase AD
AD curve shift to the right

31. Foreign income rises

32. Shifts in AD Foreign price levels fall
If foreign price fall, then foreign goods become cheaper
We expect that consumers in our country are now more likely to buy foreign goods and less likely to buy domestic made goods
Thus, fall in AD
AD curve shift to the left

33. Foreign price levels fall

34. Government spending increases

35. Shifts in AS Size and quality of labor Technological innovations
Increase in wages
Increase in production costs
Changes in producer taxes and subsidies

36. Technological improvements

37. Shift in AS Workers expect inflation and negotiate higher wages now
If the cost of hiring workers has gone up, then companies will not want to hire as many workers
AS would shrink, and AS curve shift to the left
Reduction in real GDP as well as increase in the price level
The expectation of future inflation has caused price level to increase today

38. Workers expect inflation and negotiate higher wages now

39. Lower costs of input