BSP2701 Notes
W1: GDP MEASUREMENT AND AD/AS MODEL
Macroeconomics studies the behavior of aggregate economies and the impact of policies
on their performance:
- How the economy behaves over long periods of time? (Economic growth)
- What determines economic fluctuations? (Business Cycles)
- What causes unemployment?
- What drives price changes (Inflation)
- What is the role for economic policy and the government? (Monetary and fiscal
policies)
- How does the domestic economy interact with the rest of the world? (International
linkages)
Circular flow of resources & products
Tut:
C: consumption
G: government spending
I: investment (capital investment by businesses not financial investments
NX = export – import
3 methods produce the same result because of the circular economy diagram
Produce this year  in this year GDP (e.g. a pen produced, if s.o. buys it, it’s counted in C,
otherwise counted in I as inventory)
Assumption: a country’s economy is at the potential output level (not the maximum
capacity, just the situation where resources are fully utilized)  AD/AS model
C I G NX changes  AD shifts
Cost of production changes  SRAS shifts
AD shifts to the right  economy is overheating  producing more than potential output
level  unsustainable  cost of production increases (e.g. want people to work more, must
pay more)  SRAS shifts to the left  self-correct the SRAS curve back to the potential
output level
GDP should be high but must be sustainable  need monetary and fiscal policy
Nominal GDP = P2019 x Q2019 (P is the aggregate price)
Real GDP = P2015 x Q2019 (2015 is base year)
 Nominal/real = Price index  used to calculate inflation
SG uses production method as default because all the industries are backed up by
government agencies  provides accurate data
W2: FIGHTING RECESSION
PAE
I(P) is planned investment
Consumption function
Y: income, T: tax
Y – T: disposable income
mpc(Y-T) is induced expenditure
Short-run equilibrium graph
Y*: economy’s production capacity
Y < Y*  recessionary gap
Can’t adjust supply to close recessionary gap, must shift PAE
How to shift?  Consider which factor in the PAE formula
Income multipliers
Mpc: Marginal propensity to consume
Income multiplier = if G increase 1 unit, Y increases k units
Tut:
G in CIGNX is gov purchases of goods/services, not gov expenditure
PAE shifts up  demand more than produced  deficit/unplanned investment
Why is the income-expenditure multiplier has that formula?
- Negative because tax reduces disposable income
- mpc  remove the tax savings part
Tut W4:
Why MD is inversely related to interest rate?
- Money demanded = money for transactions
- Money we have will be divided into transactions or investments/savings (nonmonetary assets – bonds)
 High interest rate  save  less MD for transactions
- Interest rate = opportunity cost of borrowing money
Why increasing MS makes interest rate fall?
- At the initial interest rate, MS > MD
- MS increases  more non-monetary assets (D for bonds increases)  Present value
of Bonds increases
- Inverse relation between bond demand and bond yield  rate of return for
investments goes down
- C, I, NX affected
- Transmission mechanism