MACROECONOMICS
The Big Picture
Goals of Macroeconomic Policy
Price Stability
Economic Growth
Full Employment
INFLATION
A sustained increase in the
general price level as measured
by the consumer price index (CPI)
or the implicit price deflator (IPD)
Unanticipated inflation hurts
lenders and helps borrowers
Why interest? Lenders have to be
compensated for foregoing current
consumption
The real rate of interest
– The nominal or market rate minus
– The rate of inflation
If the nominal rate is 5% and the
rate of inflation is 6%, the real rate
of interest is %
Unanticipated inflation hurts
lenders and helps borrowers
Why interest? Lenders have to be
compensated for foregoing current
consumption
The real rate of interest
– The nominal or market rate minus
– The rate of inflation
If the nominal rate is 5% and the
rate of inflation is 6%, the real rate
of interest is -1%
Inflation
Perverse Robin Hood
Helps
– Borrowers
– Some businesses
– Home owners
Inflation
Perverse Robin Hood
Hurts
– Lenders
– Home owners
– Fixed income
earners
Lenders are hurt
$20.00
$20.00
Lenders are hurt
Interest rate = 5%
$21.00
Inflation rate = 9%
$21.80
Real Interest rate = -4%
Inflation affects others
Distorts price signals
Those living on fixed incomes
Businesses with fixed contracts
Property owners with fixed leases
Businesses who can raise prices
COLA’s
How does Inflation/Deflation
affect you?
If your purchasing power increases
as a result of inflation/deflation, you
win.
If your purchasing power falls as a
result of inflation/deflation, you lose.
Full Employment
The labor force
16 to 65, able and willing to work, working or
actively seeking work
The unemployment rate – the household
survey
Number of people unemployed
labor force
Change in nonfarm
payroll employment
The establishment survey
A better but not good indicator
What is the difference between the
number of employees you had last
month and the number you have this
month?
Economic Growth
Nominal GDP doesn’t tell you
anything; it must be “deflated.”
Use the IPD to change nominal to
real GDP
REAL GDP = Nominal GDP * 100
IPD
Economic Growth
The rate of economic growth
Real GDP2 - Real GDP1
Real GDP1
THE CIRCULAR FLOW
THE EXPANDED CIRCULAR
FLOW
Total Expenditures
E = C + I + G + (X-M)
C = Personal consumption
I = Business investment
G = Total government spending
(X-M) = Net exports (exports minus
imports)
Main Points
Macroeconomics investigates the
relationships between different sectors of
the economy and the affect of changes in
different variables on those sectors.
Macroeconomics is the study of market
aggregates such as gross domestic
product, the unemployment rate, and the
consumer price index.
Three goals for an economy are full
employment, price stability, and economic
growth
Main Points
Inflation is an increase in the overall
price level
Inflation arbitrarily redistributes
purchasing power and distorts price
signals.
The real rate of interest is the
market rate minus the rate of
inflation.
Main Points
Two measures of the strength of the labor
market are the unemployment rate and
the change in nonfarm payroll
employment.
Economic growth is the rate of change of
Real GDP for a specific time period,
usually a year.
Economic growth should be strong enough
to generate employment but not so strong
as to cause inflation
Main Points
The circular flow illustrates the
interdependence of different sectors
of the economy.
Total expenditures are composed of
consumption, investment,
government, and net exports
E = C + I + G + (X-M)
Main Points
Consumption is the largest spending
category (2/3 of total spending) in GDP
and is affected mainly by income.
Investment is the least stable spending
category and is determined mainly by the
relationship between the cost of borrowing
and the expected return on investment.
Government spending is fairly predictable
due to its contractual nature and built in
stabilizers.