ECON 101
LE1 NOTES
10 PRINCIPLES OF
ECONOMICS (MANKIW)
1. People face tradeoffs
2. The cost of something is what you give
up to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to
organize economic activity
7. Governments can sometimes improve
market outcomes
8. A country’s standard of living depends
on its ability to produce goods and
services
9. Prices rise when the government prints
too much money
10. Society faces a short-run tradeoff
between inflation and unemployment
MACRO PRINCIPLES
MP#1: a country’s standard of living
depends on its ability to produce goods and
services
● Big question in economics: Why are some
countries rich while others are poor?
○ EG always wondering why the PH is
still very poor
○ Differences in standards of living across
countries can be quite large
○ Changes in living standards over time
are also quite large
● Development Economics - explaining
such differences, so we know how poorer
countries can improve their plight
● Short answer: productivity
○ The amount of output that can be
produced from each unit of labor input
■ Productivity growth determines
income growth
■ More productive country is, the
higher income growth can be
expected
● What’s the best (but not necessarily
perfect) way to measure development?
○ Short answer: gross domestic
product (GDP) per person
● How do we boost productivity?
○ Short answer: investments
○ Physical, capital, and human per person
AND technological progress
● “Very high inflation erodes real wages”
○ Actual value of your money
continuously decreases due to inflation
● “The bigger and more persistent problem
for real wages is that it is dependent on
worker productivity…
○ Hence, current education deficit is made
worse by lockdowns and closures is a
portent of things to come”
Cases of Hyperinflation
● Zimbabwe (2008-2009)
○ Small pack of coffee cost Z$1B
○ The first in the 21st century
○ Peak inflation in 2008:4 @ 7.3 x 1022
○ Beggars rejected billions
● Venezuela (2017 - present)
○ Peak inflation @ 2018: 130,000%
○ Speed of increase in price of goods
makes money worthless
● Philippines (Martial Law 1984-85)
○ Spiked
MP#2: Prices rise when the government
prints too much money
● Inflation - the increase in the general
level of prices in an economy
○ Hyperinflation - extreme version of
inflation
● Milton Friedman: “Inflation is always and
everywhere in a monetary phenomenon”
Why print money then?
● If tax Revenues or law or borrowing is
impossible, print money
○ Should be last resort
● Zimbabwe used the money to finance its
involvement in the Democratic Republic of
the Congo and the Second Congo War
○ EG higher salaries for government and
army officials
● Venezuela printed money to finance
government spending in the wake of the
severe oil price drop in 2014/2015
○ Worsened by the devaluation
● But this diminishes the value of people's
incomes (inflation tax)
● Inflation can be compared to taxes since
even if your income is high, but if price of
goods are high: it cancels each other out
Other key factors behind inflation
● Also rises when there are supply-chain
problems
○ Russian invasion of Ukraine → oil,
wheat price hikes
○ Agri shortages in the PH
○ EG “shrinkflation”
■ Pandesal size decreases
● Fertilizers also has a supply chain problem
○ Increases price of agricultural
commodities
MP#3: Society faces a short-run tradeoff
between inflation and unemployment
● Related to principle #1: People face
tradeoffs
○ Guns vs. butter - military goods vs.
consumer goods
○ Efficiency vs. equity
■ When there is some conflict between
maximizing pure economic efficiency
and achieving other social goals
■ EG working after graduating,
government decides to impose 50%
tax on your income to lift up the poor,
but the people being taxed will
incentivize you to work less and
produce less output
■ Veering more toward equity of the
government = reduction in
productivity
○ Inflation vs. unemployment scarcity of jobs), at least in the short run
■ Inflation signifies economic activity
in the short run and economy is
providing jobs for people
■ More people are absorbed in
workforce and unemployment goes
down even if price of goods are high
■ And vice versa
■ If policymakers expand aggregate
demand, they can lower
unemployment, but only at the cost
of higher inflation
● If the government prints more money in
the short run:
○ Interest rates goes up/down
○ People buy more/less cars and houses
○ Equilibrium quantity of cars and houses
increases/decreases
○ Firms want to raise/lower their prices
over time
○ But to produce more goods firms have to
hire more/fewer workers
○ More hiring means that
unemployment (scarcity of jobs) goes
up/down
● Impact of monetary policy a.k.a. monetary
transmission mechanism
© Bloomberg via Twitter
● In a bid to defeat inflation at the cost of
possible future economic downturns
Phillips curve
● Economic concept stating that inflation and
unemployment have a stable and inverse
relationship
● Stagflation - simultaneous appearance in
an economy of slow growth, high
unemployment, and rising prices
○ Happening now with what happened in
the 70’s (oil crisis; oil embargo)
● 1980s U.S.A.: unemployment increased but
inflation decreased
○ Led to a recession in the U.S.
○ Tighter monetary policy
○ Lowering inflation at a cost of higher
unemployment and vice versa
○ Agua Oxinada Analogy - killing bad
bacteria but also good bacteria
● Tradoff turns out to be crucial in managing
business fluctuations
● Tradeoff between inflation and
unemployment is generally more evident in
the short-run (but in some cases also
manifest in the long-run like in Japan)
● EG you spend Php1,000 for a haircut,
someone also receives that in the form of
income
● Phillips curve is flatter than what it was in
the past decades
● The trade-off is becoming more subtle
● Phillips curve relationship is more
consistently clearer in Japan than in the
U.S.A.
● The relationship in the U.S.A. is more
unclear = firm economic policies are harder
to create
KEY ECONOMIC
STATISTICS
●
●
●
●
GDP
Inflation rate
Unemployment rate
For each:
○ What is it?
○ How is it defined?
○ What are its nuances?
Model: Circular Flow Diagram
● If someone spends (expenditure),
someone must receive it (income, EG
wages, profits, etc.)
● GDP can be measured from the
expenditure side or the income side
● They must be equal
○ Aka, national income accounting
(NIA)
COMPARING GDP OVER TIME
● How does GDP change over time?
○ We need to “remove the effects of
inflation” (or the increase in prices)
from the measure of GDP
○ When GDP increases, either:
■ There are more goods/services
produced
■ Their prices just became higher over
time due to supply and demand)
■ “Nagmamahal lang pala” LOL
GROSS DOMESTIC PRODUCT (GDP)
● Total value of all final goods and services
produced in an economy in a year or
quarter
● “Gawa Dito sa Pilipinas”
○ Regardless if it was a foreigner/local
who produced the good/service as long
as it was made IN the country
● Nominal and GDP deflators are steeper
than real GDP thus, GDP is more due to
the increase of price
Measures total income
● Why income?
● For economy as a whole, income = output
● GDP is total spending and at the same
time total income
Nominal GDP
● What’s the value of goods/services this year
using this year’s prices?
● If there are n goods in the economy,
Real GDP
● What’s the value of goods/services this year
using prices some time ago (in a base
year)?
○ P1 is price of good x in year 1 (a specific
yr) and so on
GDP Deflator
● Shows the general price level in an
economy relative to a base year (deflator =
100)
GROSS NATIONAL INCOME (GNI)
● GNI: “Gawa ng Pilipino”
○ Regardless of where the Filipinos are,
as long as goods/services were made by
them
● GNI is higher than GDP recently due to
the high amounts of OFWs
● = GDP plus net receipts from abroad of
compensation of employees, property
income, and net taxes less subsidies on
production
GDP growth
● Percent change of GDP over time
Inflation
● Can be computed from the GDP deflator:
Exercise
● Nominal GDP:
○ 2010: (1)(100) + (2)(50) = $200
○ 2011: (2)(150) + (3)(100) = $600
○ 2012: (3)(200) + (4)(150) = $900
● Real GDP:
○ 2010: (1)(100) + (2)(50) = $200
○ 2011: (1)(150) + (2)(100) = $350
○ 2012: (1)(200) + (2)(150) = $500
● Real GDP and nominal GDP will
always be equal during the base year
● GDP deflator:
○ 2010: (200/200)(100) = 100
○ 2011: (600/200)(100) = 300
○ 2012: (900/200)(100) = 450
*check vals with other ppls notes lol
Actual values of the GDP in the PH
● Latest values (2021):
○ Php19.4 trillion (nominal)
○ Php18.5 trillion (real)
● *NOTE: the magnitude of difference
between 1 million and 1 billion is not that
intuitive as illustrated:
○ 1 million seconds = 12 days
○ 1 billion seconds = 31 years
○ 1 trillion seconds = 31,688 years
HOUSEKEEPING
STOCK VS FLOW VARIABLES
● Stock - total amount
● Flow - extra amount per unit of time
● EG
○ Income (EG gdp) vs. wealth
■ GDP is a flow variable since it is only
the total production for that year and
by no means represents the total
wealth of country
○ No. of unemployed (stock) vs. no. of
people losing jobs (flow)
○ Investment (flow) vs. capital (stock)
○ Deficit (flow) vs. debt (stock)
■ Deficit is amount you borrow (you
form a deficit when your spending >
money
● If the country’s GDP in 2021 (in 2018
prices) was Php18,538,053,835,090, what
was PH GDP per second last year?
○ 18,538,053,835,090/31,000,000 =
Php587k of goods/services produced
every second last year
GROSS DOMESTIC PRODUCT (GDP)
● Market value of all final goods and services
produced within a country in a given period
of time
● Market value - we add ramen and milk tea
using their values (prices)
○ If a bowl of ramen costs 2x a cup of milk
tea, ramen bowls contribute 2x more
GDP
● “Of all” - as comprehensive as possible
○ Excludes goods and services sold
illegally (aka underground/black
***CONT
● EG women’s unpaid housework reckonds
20% of PHL GDP
● “Final” - value of intermediate goods
already in the price of final goods; excluded
in GDP unless for inventory
○ Double counting occurs if you include
value of intermediate goods
● “Goods and services”
● “Produced” - does not include transactions
involving items produced in the past
● “Within a country” - within a certain
border/jurisdiction
○ Expats’ output in PH included
○ OFW output abroad excluded
● “In a given period of time” - usually
quarterly/annually
○ Seasonally adjusted GDP - to remove
effects of regular events on total output;
(EG harvest season, Christmas
shopping)
● EG gambling contributes Php551B to PH
economy yearly
○ Contribution of POGOs included in GDP
○ Created economic activity and
employment
COMPONENTS OF GDP
Expenditure Side
● Demand side:
○ Y = C + I + G + NX
○ NX = X - M
○ NOTE: NO good reason why GDP is
denoted as Y
● Supply side:
○ Y=A+I+S
Income Side
● Employee compensation
● Proprietor’s income
● Rental income
● Net interest
● Corporate profits
● Depreciation
● Production taxes, statistical discrepancies,
etc.
GDP VS. DISPOSABLE INCOME
● From GDP to disposable income:
○ Remove depreciation
○ Remove taxes
○ Remove net business saving (profits)
○ Add transfer payments (EG PAG-IBIG,
ayuda)
■ Not initially part of GDP since there
was no exchanged good/service
COMPONENTS OF GDP
Expenditure Side
● Consumption ©
○ Durable and nondurable goods (excludes
new housing)
○ Services
● Investment (I)
○ Used to produce more goods and
services
○ Capital equipment, machinery
inventories (output not yet sold),
buildings, new housing
○ Different from financial investments
(stocks, bonds, etc.) which are NOT
included in GDP
● Government purchases (G)
○ By national/local governments
○ Salaries, public works, etc.
○ Excludes transfer payments (EG SSS
benefits) which do NOT relate directly
to production
● Net exports (NX)
○ Exports (X) - minus imports (M)
○ We deduct imports since some***CONT
○ Imports > exports = trade deficit
■ PHP depreciates (we need more
Dollars to buy imported goods =
Dollar currency becomes stronger)
● Coca-cola scaling down operations due to a
sugar crisis
● PH economy is consumption driven
Supply side (gross value or GVA)
● Agriculture (A) - agriculture, forestry,
fishing
● Industry (I) - mining and quarrying,
manufacturing, construction, utilities
(electricity, gas, water supply)
● Services (S) - transport, storage,
communication, trade, repairs, financial
intermediation, real estate, renting,
business activities (inc. BPOs), public
administration and defense, social security,
others
depleting resources or destroying
biodiversity
K-SHAPED GROWTH
● The rich recover faster than the poor
GDP excludes
● black/underground/informal markets
○ In PH: around 30-50% of GDP
● Non-market goods
● Value of leisure time
● Environmental quality
● Income distribution
● Etc.
IS GDP A GOOD MEASURE OF
WELFARE?
● “A large income is the best recipe for
happiness i ever heard of” - Jane Austen
● “GDP measures everything…except that
which makes life worthwhile” - Robert
Kennedy
○ Doesn’t capture everything, BUT a large
GDP allows us to measure our ability to
obtain the good things in life (health,
good education, etc.).
● Alternative measures (EG Gross National
Happiness at Bhutan)
○ It has its own set of issues; best seen as
a complementary measure
INFLATION
● Measures how fast prices are rising
relative to a base year (CPI = 100)
● Shrinkflation - how fast goods with
constant prices are shrinking or losing
quality
● Specifically, the percent change of the
consumer price index (CPI), which
captures the average price of a fixed
basket of goods typically consumed by
people
○ Basket of goods is fixed to be able to
monitor inflation for that year
● PSA computes CPI across all provinces and
cities
Growth is NOT always good
● Jobless growth - growth that does not
create new employment opportunities with
it
● Ruthless growth - growth that only
benefits the rich, and leaves the poor in
their property
● Voiceless growth - growth without
improvement in democracy or social
inclusion
● Rootless growth - growth at the expense
of cultural identity, or the loss of minority
identity
● Futureless growth - growth that
undermines future generations by
YEAR ON YEAR AND MONTH ON MONTH
INFLATION
Year on year inflation
𝐶𝑃𝐼𝐽𝑢𝑙𝑦 2022−𝐶𝑃𝐼𝐽𝑢𝑙𝑦 2021
π𝑦𝑜𝑦 = 100 *
𝐶𝑃𝐼𝐽𝑢𝑙𝑦 2021
Month on month inflation
𝐶𝑃𝐼𝐽𝑢𝑙𝑦 2022−𝐶𝑃𝐼𝐽𝑢𝑛𝑒 2021
π𝑚𝑜𝑚 = 100 *
𝐶𝑃𝐼𝐽𝑢𝑛𝑒 2021
INCLUSIONS OF BASKET OF GOODS
● PSA: “The commodities included in the
2018 CPI market basket are the modal
commodities which were considered as the
most common purchased/availed of
commodities by the household [for their
day-to-day consumption]”
○ The composition of the market basket
was determined based on updating the
2012 basket using the results of the
2021 Survey of Key Informants (SKI)
● Basket of goods are updated since
relevance of goods changes
○ Newer products emerge and some goods
are not bought by the people anymore
● Different items in the basket of goods are
weighted differently
● PSA: “The weights for the 2018-based CPI
were derived from the expenditure data of
the 2018 Family Income and Expenditure
Survey (FIES)
● The weight for each commodity/group of
commodities is the proportion of the
expenditure of commodity/group of
commodities to the total national
expenditure
● The sum of the weights of the
commodity groups at the national
level is equal to 100
● Food and nonalcoholic beverages has the
heaviest weight
● 37.75% is the consumption on final goods of
food and nonalcoholic beverages the
average Filipino household
○ So if their income is Php100, 37.75% of
that goes to the certain goods
● Weights are different across different
geographic areas and over time
● Usually denoted by Greek letter pi:
● Inflation = speed of price increases
● Rising inflation = accelerating prices
(faster and faster)
● Deflation = decreasing prices
● General prices are rising due to population
growth and higher demands of goods and
services, but slower and slower (increase
rate is slower)
● Percent change graph of the first ^
● YOY = 6.43
● MOM =
COMPUTING INFLATION
● Removing volatile utilities aid in avoiding
over exaggerating inflation
● Bottom 30% of households is observed since
THE CPI of the poorer people is focused
more on their necessities
○ Bigger percent of your monthly budget
goes to food and basic commodities
● Over the past years, blue trend is always
greater than core inflation rate
○ The difference between the two is just
foods and energy
● From July 2022 to August 2022, core
inflation rate is still increasing even
though headline inflation decreased by a
few and bottom 30% plateaued
○ Means that inflation cannot solely be
blamed on non-volatile prices (food and
energy)
○ As we produce goods and services, diesel
and gasoline are important inputs
○ For services, when gasoline is used for
it, prices of that service is affected as
well
○ Increase of demand in the economy,
prices increase
■ Increase of price in not just due to
decrease in supply
○ Global economy is reopening (= higher
demand)
■ EG we are going out more, so buying
more clothing
○ Basically core inflation is rising due to
higher demand of goods and services
^typo: denom of inflation formula is supposed
to be CPI of t - 1
● (1) 2010: 4(1) + 2(2) = 8
○ 2011: 4(2) + 2(3) = 14
○ 2012: 4(3) + 2(4) = 20
● (2) CPI2010 = (8/8)100 = 100
○ CPI2011 = (14/8)100 = 175
○ CPI2012 = (20/8)100 = 250
● (3) 2011: [(175 - 100)/100]100 = 750
○ 2012: [(250 - 175)/175]100 = 42.86
● Gray lines are BSP’s target in order to gage
whether inflation is high or low
● In 2018, inflation was above target
● Before the Duterte administration,
inflation was low and negative at some
point
● If inflation is zero, people are not spending
nearly enough
○ Can indicate a slowdown and reduction
in demand which is why target of BSP
is 2-4%
● 2022 inflation is above target (red flag)
● In response to this, interest rates are
increased by the government to dismay
people from spending
● Cereals/cereals product is mostly rice
● Inflation is felt most by the poor (bottom
30%) due to increase of price in food
● For the bottom 30%, almost 60% of their
income goes to food
○ No wonder when fish, meat, rice prices
increase, they are most affected
● Core inflation can be higher than headline
inflation since sometimes there can be a
very big decrease of prices of food and
energy
○ Can also be related to the relative
weights
● During inflation episode of 2018, the
purple and green line are higher than
orange
○ This is due to the fact that more than
half of the poor’s income is spent on food
= inflation is felt stronger by the poor
● TRAIN Law increased oil prices in 2018
due to excise taxes of petroleum products
● For different petroleum products, there
was a different tax increase
● Ad Valorem tax (in %) vs. excise tax (per L,
per Kg, etc.)
*insert missed graph here*
● Mere expectation of inflation can lead to
higher inflation in the future
● If people expect prices to increase, they will
buy more now when prices are not as high
now
○ This increases demand for the good =
price increases (in the present time
when prices have not yet gone up)
■ Creates inflation in the meantime
○ Self-fulfilling prophecy
● Companies price in the future inflation
now
○ Use inflation to get away with
increasing their price
○ Causes inflation in the short run
○ EG when a business thinks that
inflation will be present until the near
future, they will include that future
inflation in their prices
● Biggest contributor of inflation is food/non
alcoholic beverages, and transport (as a
consequence of higher oil prices), and
housing
● **MISSED NOTES
● NFA is always lugi (NFA was further
weakened by TRAIN Law since instead of
the quota system, there are tariffs - anyone
can import rice as long as tariffs are paid)
● Business model of NFA: buy rice from
farmers at high price, then sell it to the
public at a low price (subsidized rice)
○ Lead to significant losses to government
and not productive in the long run
● Back in 2019, rice was a big contributor to
decrease inflation (pulled it down)
○ Rice tarification law helped somewhat
● Rise of inflation is a global matter
● Major factors: war, etc.
● Electricity is a big contributor to inflation
(due to increasing Meralco bills)
● Much harder to deliver goods across
countries and regions when there is a
supply chain disruption
● Even if national income is increasing,
employment and real wages are relatively
flat
● GDP deflator = nominal/real
MONEY AND THE
MONETARY SYSTEM
RECAP
● What do you make of this statement?
● When CPI increases, PPPt decreases
● Inflation peaked during the Martial Law
era
○ Thus rate of decrease of PPT sped up
● Financial investments are not included in
the GDP, but real investments are
● When Peso depreciates, prices of goods and
services rise
● Imports become more expensive for us
○ Need more Peso to buy from other
countries
○ Supply of Peso increases relative to
Dollars
○ Demand for Dollar increases, which
increases the price of Dollars
● As inflation increases, purchasing power
goes down as prices accelerate 9comparable
to the tax)
● Large part of inflation is driven by food
○ Creates more suffering on the poor =
bigger tax on the poor
MONEY
● Higher treasury yields = higher interest
rates on securities issued by the US
government
● Demand for gold decrease as US securities
have higher yields
○ People opt to put their money on
something that yields more gains
● Substitute goods
● Once FED increases its interest rates, Peso
will further depreciate
● Some assets are more liquid than others
○ EG selling the more liquid ones in an
emergency
MONEY SUPPLY
TYPES OF MONEY
● Main objective - keep inflation in target
○ Encourages them to spend more for your
house, job, business, cars, etc.
○ Spurs economic activity
● Volatile prices firms may delay investment
and other decisions or increase their risk
management activities. The costs
associated with such activities tend to
increase the costs of supplying
● They have a target inflation AND target
interest rate
● Means of reaching their objective
● Promotes spending amongst people to grow
the economy especially in the short run
● Low interest rates = people are encouraged
to take out loans
● M1 and M2 is most monitored by BSP
● Reserves are there for in case someone
needs to withdraw money
*missed slide
● Geometric series can be reduced to (1/(1 z))X
● M = mB = (( ***CONT
● If B increases, M increases by the same %
○ Directly proportional
○ Linked by money multiplier
● …increases…decreases ***
● …decreases…increases
Fig WP
● When PHP is strong = cheaper imports
(EG 1970)
*missed slide*
● Basically he PH government ran out of
Dollars
● Central bank also did not have government
independence
● Economic growth decreased by 10% in 2020
● Interest rate set by BSP dropped
● Reverse repurchase rate - by reducing
this, BSP wants the banks to lend money
to the people, rather than lending to BSP
to expand monetary supply
● Federal funds rate also decreased
● Not zero to have enough wiggle room for
emergencies
○ EG in case they need to spur economic
activity in the future
○ As low as possible but NOT zero
● Expansionary monetary policy
●
*missed slide
● As fed rate increases, inflation is also
raised by BSP
○ Trying to decrease inflation rate by
decreasing people’s spending
○ But PHP has been depreciating
○ Since as interest rates are increasing in
the US, investors tend to put their
money in the US (where interest rates
are higher)
■ Fig WP
● In 101, we are studying a closed economy
● If there’s a change in one tank, what are
the repercussions?
ECONOMY IN THE LONG
RUN: CLASSICAL THEORY
● Profit is determined by houch labor and
capital are used
● We are multiplying ALL inputs = all
factors of production at the same time
● Output is fixed since ;abor and capital are
fixed
● Diminishing marginal product - as you
bring in more input, output decreases, but
contribution of each unit becomes smaller
and smaller
● Atomistic - too small to influence prices in
the market
● Perfectly competitive meaning price takers
○ As opposed to a monopoly
● Increasing
● Constant returns to scale
● Decreasing returns to scales
● (1-3) Increasing since input is doubled, but
output tripled
● (4-6) constant since input doubled, output
doubled
● (7-8) decreasing
●
●
●
●
More
Less
Same
Only stop making a decision when MPL =
W
○ Opportunity cost - value of what you
gave up that you could have done
instead
● In the real world, firms own capital (NOT
households) that is why accounting profit
formula is like that
● Even if there is economic profit, if you
remove all OC of ….CONT
● Y = total income, MPLxL = all wages,
MPKxK = total capital, MPL = real wage,
MPK = real rental price of capital
● Econ profit in long term is zero by perfect
competition
● Euler’s theorem - if constant returns to
scale, then total output is equal to
(MPKxK)+(MPLxL)
^KEY STATEMENT
● If inputs multiplied by z, output is
multiplied by z
● Decreases (since in the denominator),
decreases
○ Considering alpha < 1 -> alpha minus 1
is negative
● Decreases, increases
● Increase (since it is just multiplied)
● Econ zero vs. accounting profit
○ In econ profit, opportunity cost is
accounted for
● Private service is most productive in terms
of increase in real wages
○ Followed by transportation and
communication
○ Manufacturing decreased with real
estate
*missed slide graph
● No NX yet since dealing with closed
economy
● MPC = portion of extra income that you are
spending rather than saving
● Manufacturing is most productive ‘
● Budget deficit
● Budget surplus
● Balanced budget
IS-LM MODEL
● Push through since comparing returns
with cost of borrowing
● Real interest rate can be negative
● Change in capital over change in output
productivity
● Higher ICOR = more inefficient
● Inefficient ICOR during martial law
● *missing text below
● MV ≡ PY
○ If money supply increases, affects
nominal variables but not real ones
● Total output is assumed to be fixed
● So change in money supply means a
change in price
%changeM = %changeP
60% = 60%
Change in P: 2%
● Like simple demand curve but considering
all actors in society
● Perfectly elastic and inelastic due to stick
prices in the short run
𝑒
● i=r+π
r = -2%
● Only change in aggregate demand can
change a horizontal aggregate supply curve
● Huge decline of capital productivity from
70s to early 80s
● “This is consistent with a high capital
intensity of the projects undertaken by the
regime during the period, as borrowed
funds became readily available to favored
state and crony firms… The decline
reflects the deteriorating efficiency of
many of these projects through time.”
[De Dios et al. 2018]
● Incremental capital output ratio - a
measure of capital inefficiency (ICOR)
∂𝐾
1
= 𝑀𝑃𝐾
● 𝐼𝐶𝑂𝑅 =
∂𝑌
𝐼𝐶𝑂𝑅 =
𝑑𝐾
𝑑𝑌
𝐼𝐶𝑂𝑅 =
𝐼
𝑌
𝑑𝑌
𝑌
𝐼𝐶𝑂𝑅 =
=
𝑑𝐾
𝑌
𝑑𝑌
𝑌
𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜
𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ
● A high ICOR means greater inefficiency
● Recall that to fight inflation, interest rates
are raised to discourage spending
○ But this leads to developing
countries/economies having high debt in
Dollars
IS-LM MODEL
APPLICATION:PRODUCTIVITY DURING
MARTIAL LAW
EXERCISES
(1) TRUE OR FALSE
1. F - too many people wanna hold cash
(demand and supply of real money
supply)
2. F - government harder to borrow money
and investors will invest less and Peso
weakens
a. Investors will choose to invest
elsewhere since real interest
rate in PH is less attractive
3. T
a. Expansionary policy increases
money supply (shifts to the
right)
b. Shifts LM curve to the right
when there is expansionary
monetary policy
c. Reduces real interest rate for
the same amount of output
4. F - by a smaller magnitude
a. So when there is expansionary
monetary policy,
b. Government spending increases
at the expense of ***
5. T
a. Real interest rate in this model
will increase
b. BSP does not want output to
increases, so will implement
contractionary monetary policy
c. This will offset increase in IS
curve
6. F - only fiscal policy
a. Monetary policy is ineffective
here since investment is already
interest-inelastic (vertical)
b. Fiscal is more effective since it
can shift vertical IS curve to the
right (more output)
c. LM curve is upward sloping
7. F - deposit below, lending above
a. Lending corridor
8. F - above 0%
a. Need room to cut interest rates
when needed
b. For real interest rate to be able
to get still be negative, real
inflation must be >0
c. Fisher equation
9. F - both to the left
10. T
a. In the long-run prices can
change (classical)
b. Opposed to keynesian theory
that prices are sticky
(2) APPLICATION
1. LM curve will shift to the left (reducing
output), and IS curve has initially
increased but if followed by
contractionary monetary policy, interest
rate will increase further
2. Should have expansionary monetary
policy to have higher money supply ***
3. IS curve will shift to the left since
consumption will decrease
a. Output would decrease
b. BSP should pursue
expansionary monetary supply
to increase money supply
(3) COMPUTATIONS
● Using original IS curve, LM will change
● LM curves shifts to the right
● IS: Y = C + I + G
● Only M bar changes, everything else stays
the same
● LM: M/P = L(r, Y)
●
● ‘f\
● Now, Y and R are undefined
*missed SS of answer
But equate both equations to each other
3,000 - 200r = 1,000 + 200r
Subtopic3
●
● New IS is given by
Notes notes notes
● F
● Bullet points (L: 0.15, H: 0.15)
○ L: 0.35, H: 0.15
■ L: 0.55, H: 0.15
● Equilibrium will:
SUBTOPIC1
● Hex #8edfff
https://www.wizeprep.com/online-courses/4298/c
hapter/6/core/4/1