UNIVERSITY OF ECONOMICS HO CHI MINH CITY MACROECONOMICS HUỲNH VĂN THỊNH...

UNIVERSITY OF ECONOMICSHO CHI MINH CITY

MACROECONOMICS

HUỲNH VĂN THỊNH thinh.huynhvan@gmail.com 1

HUỲNH VĂN THỊNH

Home phone:(84.8) 39911812; (84.8) 66786400Cell phone: 0989 0110 19Email: thinh.huynhvan@gmail.com thinhhv@ueh.edu.vnWeb: http://sites.google.com/site/huynhvanthinhsitehttp://sites.google.com/site/economicsfamily

MACROECONOMICS

Macroeconomics is the study of the economy as a whole. Its goal is to explain the economic changes that affect many households, firms, and markets at once.

Macroeconomics answers questions like the following:

Why is average income high in some countries and low in others?

Why do prices rise rapidly in some time periods while they are more stable in others?

Why do production and employment expand in some years and contract in others?

CONTENTS

Chapter 1AGGREGATE DEMAND AGGREGATE SUPPLY AND EQUILIBRIUMChapter 2MEASURING AGGREGATE OUTPUTChapter 3THE MULTIPLIER MODEL

CONTENTS

Chapter 4THE IS – LM FRAMEWORKChapter 5OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTSChapter 6INFLATION AND UNEMPLOYMENT

Chapter 1Aggregate Demand, Aggregate Supply

and Equilibrium

I. Aggregate Demand, AD

AD= C + I + G + X – M1.Consumption, C:The spending by households on goods and services, with the exception of purchases of new housing.•Durable goods (exception of purchases of new housing)•Non-durable goods•Services

• Mathematical Function:C = Co + Cm*Yd

Co= Autonomous consumptionCm=MPC= Marginal propensity to consume Marginal consumptionCm = dC/dYdThe marginal propensity to consume measures

households’ willingness to change consumption spending as result of a change in disposable income Yd

0 < Cm < 1HUỲNH VĂN THỊNH

thinh.huynhvan@gmail.com 9

Example:C= 100 + 0.8*YdCo= 100= Autonomous consumption, constant

Cm=0.8= Marginal propensity to consume

Yd change 1$ => C change 0.8$Yd=Disposable incomeYd = Y- T + Tr = Y – Tn = C + S

• Y=GDP=Output=Gross domestic Product• T=Tax• Tr=Transfer payment• Tn= Net tax = T – Tr• C=Consumption• S=Saving

• Y = 100• T = 10• Tr = 6• Tn = T – Tr = 10 – 6 = 4• Yd = Y – T + Tr = Y – Tn =100-10+6=100-4=96• Yd = 96 = C+S

2. Saving, S:S = Yd – CS = -Co + (1-Cm)*Yd1-Cm=MPS= Marginal propensity to

saveCm + MPS = 1

Example:C=100+0.8*YdS= -100 +(1-0.8)*YdS= -100 +0.2*Yd

3. Net tax, Tn:Tn = T – Tr

3.1. Tax, T:T = To +Tm*Y

To= Autonomous tax, constantTm=Marginal tax

Tm=dT/dY

Example:T=100+0.1*YTo=100= Autonomous tax, constantTm=0.1= Marginal taxY change 1$ => T change 0.1$

Marginal tax # Tax rate

Marginal tax, Tm:Tm=dT/dY

Tax rate, t (%):t (%)= T/Y

Example:T=100+0.1*YTm=0.1

T=100+0.1*Yt (%)=????Y T t=T/Y

0 100 infinity100 110 110%

200 120 60%

But ????

dT/dY=T/Y????

dT/dY = T/Y To=0Or

Tm = t To=0

3.2. Transfer payments, Tr:Transfer consist of government payments which involve no direct service by the recipient, such as unemployment insurance payment…

Tr = TroAutonomous transfer, constant

3.3 Net tax, Tn:Tn = T - TrTn = To + Tm*Y - TrTn = To - Tro + Tm*YTn = Tno + Tm*YTno = Autonomous net tax, constantTno = To - Tro

Example:T=100+0.1*YTr=60Tn=T-Tr=100+0.1*Y-60Tn=(100-60)+0.1*YTn=40+0.1*Y

To = 100 = Autonomous taxTr = 60 = TransferTno = 100 – 60 = 40 = Autonomous net taxTm = 0.1 = Marginal tax

4. INVESTMENT, I:The spending on capital equipment, inventories, and structures, including new housing.

* Capital equipment* Structures (including new housing)* Inventories

Mathematical function:I = Io + Imy*Y - Imi*i

Io = Autonomous investment, constantImy =Marginal Propensity to invest for YImi =Marginal propensity to invest for iY = GDP = Outputi = Interest rates

Imy > 0 ; Imi > 0Y and i is inverse relationshipY and I is the same directionExample:I=350+0.4*Y-200*iIo = 350 = Autonomous investmentImy = 0.4 = Marginal propensity to invest for YY change 1$ => I change 0.4 $

Imi = 200 = Marginal propensity to invest for ii increase 1% => I decrease 200 $i decrease 1% => I increase 200 $

5. Government Spending, G:The spending on goods and services by local, state, and federal governments.Does not include transfer payments because they are not made in exchange for currently produced goods or services.

G=GoAutonomous Government Spending, constant

6. Net Exports, Xn, Nx:Xn = X – M

Xn = Exports minus imports6.1 Exports, X:A country exports domestic goods and services

X = XoAutonomous exports, constant

Gross exports are exogenous, largely determined by the level of income in foreign countries.

6.2. Import, M:A country imports foreign-made goods and services

M = Mo + Mm*YMo= Autonomous import, constantMm=Marginal propensity to import

Mm > 0Y and M is the same direction

6.3. Net Exports, Xn:Xn = X – MXn = Xo – (Mo +Mm*Y)Xn = (Xo – Mo) – Mm*YXn = Xno - Mm*YXno = Xo – MoXno = Autonomous net exports

Example:X = 250M = 100 + 0.2*YXn = X – M = (250-100)-0.2*YXn = 150 - 0.2*YXo = 250 = Autonomous exportsMo = 100 = Autonomous importsMm = 0.2 = Marginal propensity to importsXno = 150 = Autonomous net exports

SUMMARY

AD = C + I + G + X - MAD = C + I+ G + XnC = Co + Cm*YdS = -Co + (1-Cm)*YdYd = Y – T + Tr = Y – Tn = C + S

T = To + Tm*YTr = TroTn = T – Tr = Tno + Tm*Y

I = Io + Imy*Y - Imi*IX = XoM = Mo + Mm*YXn = X – M = Xno - Mm*Y

G = Go

Aggregate Demand Curve:

P, Price Level

Y, Output

P, Price Level

Y, Output

AD1 => AD2 => AD increaseAD2 => AD1 => AD decreaseAD increase (C+I+G+Xn) increaseAD decrease (C+I+G+Xn) decrease

II. Aggregate Supply, AS:

Aggregate Supply depends on the state of technology and the supply cost of available human resources, capital resources and natural resources.

Aggregate Supply Curve:

P, Price Level

Y, Output

P, Price Level

Y, Output

AS1 => AS2 => AS increaseAS2 => AS1 => AS decrease

AS increase * Decrease : +Cost of human Resources+Cost of Capital Resources+Cost of Natural Resources

* Increase: +Technology

AS decrease * Increase : +Cost of human Resources +Cost of Capital Resources +Cost of Natural Resources

* Decrease: +Technology

III. Aggregate Demand and Aggregate Supply

The economy’s actual output and price level are determined by the interaction of aggregate demand and aggregate supply

P, Price Level

Y, Output

ADoASo

P, Price Level

Y, Output

AD1AS1

P, Price Level

Y, Output

AD1AS1

SUMMARY

No change in the ASAD increase => P increase ; Y increaseAD decrease => P decrease; Y decreaseNo change in the ADAS increase => P decrease ; Y increaseAS decrease => P increase; Y decrease

Government Spending

Consumption

Net Exports

Aggregate Demand

Technology

Cost of Natural Resources

Cost of Capital Resources

Cost of Human Resources

Investment

Aggregate Supply

Aggregate Output

General Price Level

CHAPTER 2MEASURING

AGGREGATE OUTPUT

I. Gross Domestic Product, GDP

1. Gross domestic product (GDP) is a measure of the income and expenditures of an economy. GDP is the total market value of all final goods and services produced within a country in a given period of time.

• “GDP is the Market Value . . .”– Output is valued at market prices.

• “. . . Of All. . .”– Includes all items produced in the economy and legally

sold in markets

• “. . . Final . . .”– It records only the value of final goods, not intermediate

goods (the value is counted only once).

• “. . . Goods and Services . . .”– It includes both tangible goods (food, clothing, cars) and

intangible services (haircuts, housecleaning, doctor visits).

• “. . . Produced . . .”– It includes goods and services currently produced, not

transactions involving goods produced in the past.

• “ . . . Within a Country . . .”– It measures the value of production within the geographic

confines of a country.

• “. . . In a Given Period of Time.”– It measures the value of production that takes place within

a specific interval of time, usually a year or a quarter (three months).

THE COMPONENTS OF GDP

• GDP includes all items produced in the economy and sold legally in markets.

• What Is Not Counted in GDP?– GDP excludes most items that are produced and

consumed at home and that never enter the marketplace.

– It excludes items produced and sold illicitly, such as illegal drugs.

2. CALCULATING GDP 2.1 Nominal GDP, GDPn:GDPn year t ($)=Σ(Pt*Qt)GDPn is the value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced.

2.2 Real GDP, GDPr:GDPr year t ($)=Σ(Po*Qt)GDPr is the total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year.

2.3 Expenditure Approach:

GDP = C + I + G + X – M2.4 Income Approach:

GDP = w + i + r + П + De + Tiw = wage; i = interest ; r= rentП = Profits; De = Depreciation;Ti = Indirect tax

II. GDP deflator, GDPd:

GDPd year t (100) = GDPn year t/GDPr year tGDPd year t (100) = Σ(Pt*Qt)/Σ(Po*Qt)The GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.

III. Consumer Price Index, CPI:

CPI year t (100)=Σ(Pt*Qo)/Σ(Po*Qo)Calculated by surveying market price for a market basket intended to represent the consumption.

IV. Producer Price Index, PPI:

PPI year t (100)=Σ(Pt*Qo)/Σ(Po*Qo)A measure of the cost of a typical basket of goods and services purchased by producers

V. Inflation, Inf:

Inf year t (%)==[Price Index year t/Price Index year (t-1)]-1“Price Index” maybe GDP deflator or CPI or PPIInf > 0 => InflationInf < 0 => DeflationInf year t(%)=[(1+gGDPn year t)/(1+gGDPr year t)]-1

VI. GDP growth, g, gGDP:

1. Annual growth:gGDPn year t(%)=[GDPn year t/GDPn year (t-1)]-1gGDPr year t(%)=[GDPr year t/GDPr year (t-1)]-1[Excel =rate(….)]gGDPn year t(%)=[(1+gGDPr year t)*(1+Inf year t)]-1gGDPr year t(%)=[(1+gGDPn year t)/(1+Inf year t)]-1Inf year t(%)= [(1+gGDPn year t)/(1+gGDPr year t)]-1

Example:GDPn year 2000 = 100 $GDPn year 2001 = 120 $gGDPn year 2001 = (120/100)-1 =20%GDPr year 2000 = 100 $GDPr year 2001 = 110 $gGDPr year 2001 = (110/100)-1 =10%Inf year 2001=(1+20%)/(1+10%)-1=9.09%

2. The average growth over the period:gGDP/Period=(GDP t/GDPo)^(1/X)-1GDPt = GDP period tGDPo = GDP period oX=Nper= The number of Periods = (t - o)gGDPn/Period=(GDPn t/GDPn o)^(1/X)-1gGDPr/Period=(GDPr t/GDPr o)^(1/X)-1[Excel =rate(….)]

Example:GDPn 2000 = 100 $GDPn 2005 = 200 $gGDPn/year (2000 ->2005) ==(200/100)^(1/(2005-2000))-1=14.87%

gGDPn/month (2000 -> 2005) ==(200/100)^(1/((2005-2000)*12))-1=1.16%gGDPn/6 months (2000 -> 2005) ==(200/100)^(1/((2005-2000)*2))-1=7.18%

GDPr 2000 = 100 $GDPr 2005 = 180 $gGDPr/year (2000 ->2005) ==(180/100)^(1/(2005-2000))-1=12.47%gGDPr/month (2000 -> 2005) ==(180/100)^(1/((2005-2000)*12))-1=0.98%gGDPn/6 months (2000 -> 2005) ==(200/100)^(1/((2005-2000)*2))-1=6.05%

VII. GDP per capita (Per capita Income, PCI)PCI year t = GDPr year t/POP year tPOP = PopulationGDP year 2000 = 1000 $POP year 2000 = 100 (People)PCI year 2000 = 1000/100 =10 $gPCI year t (%)= [(1+gGDPr year t)/(1+gPOP year t)]-1gPCI year t(%)=[PCI year t/PCI year(t-1)]-1

VIII. Forecast the related years

GDP a = GDP b*(1+gGDP/Period)^(Period a – Period b)Example:GDP 2000 = 100 $gGDP/year =10%GDP 2005 =100*(1+10%)^(2005-2000)=161.05GDP 1995 =100*(1+10%)^(1995-2000)=62.09[Excel FV(…) or PV(…)]

CHAPTER 3

THE MULTIPLIER MODEL

I. EQUILIBRIUM OF AD AND AS

We have:

AD=C+I+G+X-M

For AS=AD or Y=C+I+G+X-M

C=C+Cm*Yd

Yd=Y-T+Tr=Y-Tn=C+S

T=To+Tm*Y

Tr=Tro

M=Mo+Mm*Y

I=Io+Imy*Y

(Keyness: Assuming that Imi=0)

….Finally, we have:

Y=m*AdoY: Equilibrium Income

m: Ado Multiplier, Expenditure Multiplier

Ado: Autonomous Aggregate Demand

m = 1/[1-Cm*(1-Tm)-Imy+Mm]

Ado =[Co + Io + Go + Xo – Mo

-Cm*(To-Tro)]

Example:

C=100+0.8*Yd

T=20+0.1*Y

I=50+0.4*Y

M=15+0.2*Y

Equilibrium Income is:Y=m*Adom=1/[1-0.8*(1-0.1)-0.4+0.2]=12.50Ado=100+50+55+40-15-0.8*(20-32)=269.60Y=12.50*=3370When Equilibrium Income, we have:T=20+0.1*Y=20+0.1*3370=357

Tn=T-Tr=357-32=325Yd=Y-Tn=3370-325=3045C=100+0.8*Yd=100+0.8*3045=2536S=Yd – C=3045-2536=509I=50+0.4*Y=50+0.4*3370=1398Xn=X-M=40-(15+0.2*Y)=25-0.2*Y=25-0.2*3370=Xn= -649 (Deficit)

Budget=B=T-Tr-G=Tn-GB=(To-Tro)+Tm*Y-Go=Tno+Tm*Y-GIf:B > 0 => SurplusB < 0 => DeficitB = 0 => EquilibriumB=Tn-G=325-55=270 (Surplus)

II. EXPENDITURE MULTIPLIER:

The expenditure multiplier measures the multiplied effect changes in autonomous spending have upon equilibrium incomeY=m*Ado=>ΔY=m*ΔAdoΔAdo= ΔCo+ ΔIo+ ΔGo+ ΔXo - ΔMo -Cm*(ΔTo- ΔTro)

ΔC=ΔCo+Cm*ΔYdΔS=-ΔCo+(1-Cm)*ΔYdΔYd=ΔY-ΔT+ΔTr=ΔY-ΔTnΔT=ΔTo+Tm*ΔYΔTr=ΔTroΔTn=ΔTno+Tm*ΔY

ΔG=ΔGoΔX= ΔXoΔM=ΔMo+Mm*ΔYΔXn= ΔXno-Mm*ΔYΔI=ΔIo+Imy*ΔYΔB=ΔT- ΔTr - ΔG= ΔTn- ΔG= ΔTno+Tm*ΔY- ΔGo

If:m=1, when Ado increase 1$ => Y increase 1 $m=10, when Ado increase 1$ => Y increase 10$m=100, when Ado increase 1$=>Y increase 100$

If we want to increase the value of m:Cm lead to 1Imy lead to 1Tm lead to 0Mm lead to 0

[1 *(1 ) Im ]m

Cm Tm y Mm

Example:

C=30+0.8*Yd

T=50+0.1*Y

M=20+0.2*Y

I=35+0.4*Y

m= 12.50

Ado=Y= 3,712.50

Tn= 381.25Yd 3,331.25C= 2,695.00S= 636.25

Xn= -702.50B= 181.25

If ΔGo change = 100.00ΔTno=ΔAdo=

ΔY= 1,250.00ΔTn= 125.00ΔYd= 1,125.00

ΔC= 900.00ΔS= 225.00

ΔXn= -250.00ΔB= 25.00

CHAPTER 4THE IS-LM FRAMEWORK

This chapter develops schedules for equilibrium in the goods (IS) and money (LM) market.

I. Product Market Equilibrium:The IS Curve

Equilibrium Income AD=ASAD=C+I+G+XnAS=YC=Co+Cm*YdI=Io+Imy*Y-Imi*iG=GoXn=Xno-Mm*YYd=Y-TnTn=Tno+Tm*Y

…..Finally we have IS equation:

(IS) Y=(m*Ado)-(m*Imi)*i

m=1/[1-Cm*(1-Tm)-Imy+Mm]

Ado=Co+Io+Go+Xno-Cm*(To-Tro)

Xno=Xo-Mo

The slope of IS:

-m*Imi (negative)

Imi=0 => Vertical IS curve

the interest elasticity of investment demand is zero

Imi=Small=> Steep IS curve

the interest elasticity of investment demand is low

Imi=high => Flat IS curve

the interest elasticity of investment demand is high

Imi=Infinity => Horizontal IS curve

the interest elasticity of investment demand is infinity

Horizontal IS

Vertical IS Curve

IS Curve

IS increase IS shift to the right

IS decrease IS shift to the left

Factors that shift the IS schedule:

Example:

C=10+0.8*Yd

T=20+0.1*Y

M=30+0.2*Y

I=120+0.4*Y-10*i

Find IS equation for equilibrium income in the goods market?

(IS) Y=(mt*Tm+m*Ado)-(m*Imi)*i

m=1/[1-0.8*(1-0.1)-0.4+0.2]=12.50

mt= -0.8*12.50=-10

Tno=20-15=5

Ado=10+120+250+50-30-0.8*5=396

Imi=10

(IS) Y=(12.50*396)-(12.50*10)*i

(IS) Y = 4950 - 125*i

Government Spending increases 10$, ceteris paribus,Find IS2 equation for equilibrium income in the goods market?

IS2=IS+ΔIS or Y2=Y+ ΔY

ΔY=m*ΔAdo

ΔTno=ΔTo- ΔTro

ΔAdo=ΔCo+ ΔIo+ ΔGo+ ΔXno-Cm* ΔTno

ΔXno= ΔXo- ΔMo

ΔAdo = ΔGo=10; ΔTno=0

Δ Y=m* Δ Ado

ΔY= 12.50*10=125

(IS2) Y2=Y+ Δ Y=(4950+125) -125*i

(IS2) Y2 = 5075 – 125*i

[(IS) Y = 4950 - 125*i]

II. Money Market Equilibrium:The LM Curve

1. The Money System:

1.1. Money Supply:

The meaning of money:

Money is the set of assets in an economy that people regularly use to buy goods and services from other people.

The Functions of Money:

Money has three functions in the economy:–Medium of exchange

– Unit of account

– Store of value

• Medium of Exchange– A medium of exchange is an item that buyers give

to sellers when they want to purchase goods and services.

– A medium of exchange is anything that is readily acceptable as payment.

• Unit of Account– A unit of account is the yardstick people use to

post prices and record debts.

• Store of Value– A store of value is an item that people can use to

transfer purchasing power from the present to the future.

• Liquidity is the ease with which an asset can be converted into the economy’s medium of exchange.

• Commodity money takes the form of a commodity with intrinsic value.– Examples: Gold, silver, cigarettes.

• Fiat money is used as money because of government decree.– It does not have intrinsic value.

– Examples: Coins, currency, check deposits.

• Currency (Cu) is the paper bills and coins in the hands of the public.

• Demand deposits (D) are balances in bank accounts that depositors can access on demand by writing a check.

– The money supply (Sm, M) refers to the quantity of money available in the economy.

–Monetary policy is the setting of the money supply by policymakers in the central bank.

• Open-Market Operations– The money supply is the quantity of money

available in the economy.

– The primary way in which the CB (Central Bank) changes the money supply is through open-market operations.• The CB purchases and sells Government bonds

• Open-Market Operations– To increase the money supply, the CB buys

government bonds from the public.

– To decrease the money supply, the CB sells government bonds to the public.

• Banks can influence the quantity of demand deposits in the economy and the money supply.

• Reserves (R) are deposits that banks have received but have not loaned out.

• In a fractional-reserve banking system, banks hold a fraction of the money deposited as reserves and lend out the rest.

• The reserve ratio (R/D) is the fraction of deposits that banks hold as reserves.

• When a bank makes a loan from its reserves, the money supply increases.

• The money supply is affected by the amount deposited in banks and the amount that banks loan.– Deposits into a bank are recorded as both assets

and liabilities.– The fraction of total deposits that a bank has to

keep as reserves is called the reserve ratio.– Loans become an asset to the bank.

Banking Money Creation with Fractional-Reserve

• This T-Account shows a bank that…– accepts deposits,– keeps a portion

as reserves, – and lends out

the rest.

• It assumes a reserve ratio

(R/D) of 10%.

Assets Liabilities

First National Bank

Reserves$10.00

Loans$90.00

Deposits$100.00

Total Assets$100.00

Total Liabilities$100.00

Money Creation with Fractional-Reserve Banking

• When one bank loans money, that money is generally deposited into another bank.

• This creates more deposits and more reserves to be lent out.

• When a bank makes a loan from its reserves, the money supply increases.

The Money Multiplier

• How much money is eventually created by the new deposit in this economy?

• The money multiplier (K) is the amount of money the banking system generates with each dollar of reserves.

Increase in the Money Supply = $190.00!

Original deposit = $100.00

• 1st Natl. Lending = 90.00 (=.9 x $100.00)

• 2nd Natl. Lending = 81.00 (=.9 x $ 90.00)

• 3rd Natl. Lending = 72.90 (=.9 x $ 81.00)

• … and on until there are just pennies left to lend!

• Total money created by this $100.00 deposit is $1000.00. (= 1/.1 x $100.00)

• The money multiplier is the reciprocal of the reserve ratio (R/D):

Sm=M = 1/(R/D)

• Example:–With a reserve requirement, R/D = 20% or .2:

– The money multiplier is 1/.2 = 5.

The CB’s Tools of Monetary Control

• The Central Bank (CB) has three tools in its monetary toolbox:– Open-market operations

– Changing the reserve requirement

– Changing the discount rate

• Open-Market Operations– The CB conducts open-market operations when it

buys government bonds from or sells government bonds to the public:• When the CB sells government bonds, the money

supply decreases.

• When the CB buys government bonds, the money supply increases.

• Reserve Requirements– The CB also influences the money supply with

reserve requirements.

– Reserve requirements are regulations on the minimum amount of reserves that banks must hold against deposits.

• Changing the Reserve Requirement– The reserve requirement is the amount (%) of a

bank’s total reserves that may not be loaned out.

– Increasing the reserve requirement decreases the money supply.

– Decreasing the reserve requirement increases the money supply.

The CB’ Tools of Monetary Control

• Changing the Discount Rate– The discount rate is the interest rate the CB

charges banks for loans.• Increasing the discount rate decreases the money

supply.

• Decreasing the discount rate increases the money supply

SUMMARY

• The term money refers to assets that people regularly use to buy goods and services.

• Money serves three functions in an economy: as a medium of exchange, a unit of account, and a store of value.

• Commodity money is money that has intrinsic value.

• Fiat money is money without intrinsic value.

SUMMARY

• The central bank, regulates the Nation monetary system.

• It controls the money supply through open-market operations or by changing reserve requirements or the discount rate.

SUMMARY

• When banks loan out their deposits, they increase the quantity of money in the economy.

• Because the CB cannot control the amount bankers choose to lend or the amount households choose to deposit in banks, the CB’s control of the money supply is imperfect.

H=Cu+R

Sm=Cu+D=K*HH=B=High Power Money

Cu=Currency

R=Reserver

Sm=M=Money Supply, Supply of Money

K=Money Multiplier

SUMMARY

K=Sm/H=(Cu+D)/(Cu+R)=

=(Cu/D+D/D)/(Cu/D+R/D)=

R CuD D

SUMMARY

Cu/D= Currency ratio

R/D= Reserve ratio

Sm=K*H

ΔSm=K*ΔHIf:

K=1, when H increase 1$=> Sm increase 1$

HUỲNH VĂN THỊNH

SUMMARY

From K, if we want to increase the value of K:

R/D=> Decrease

=>R=> Decrease

=>D=>Increase

Cu/D=>Decrease

=>Cu=> Decrease

=>D=> Increase

SUMMARY

Example:

H=100; Cu/D=10% ; R/D=5%

K=(1+Cu/D)/(R/D+Cu/D)=

=(1+10%)/(5%+10%)=7.33

Sm=K*H=7.33*100=7.33

Cu=10%D

R=5%DHUỲNH VĂN THỊNH

SUMMARY

H=Cu+D=10%D+5%D=100

D=100/15%=666.67

Cu=10%D=66.67

R=5%D=33.33

If ΔH =20 => Δ Sm=K* ΔH=7.33*20=146.60

SUMMARY

1.2 Money Demand, Dm, Md, L, Lp:

Money is demanded because of its transactions use and its quality as a store of value. Money is also a component of investors’ portfolios.

Dm=Dmo+Dmy*Y-Dmi*iDm = Demand for money

Dmo = Autonomous Money Demand

Dmy = Marginal Money Demand for Y

Dmi = Marginal Money Demand for iHUỲNH VĂN THỊNH

Y=Income, output; i= Interest rate

Dmy > 0 ; Dmi > 0

Dm and i is inverse relationship

Dm and Y is the same direction

Example:

Dm=100+0.4*Y-200*I

Dmo=100; Dmy=0.4 ; Dmi=200

When Y increase 1$=> Dm increase 0.4$

When i increase 1%=> Dm decrease 200$

2. The LM curve:

Equilibrium exits in the money market when the demand for money equals the supply of money.

We assume that the money supply is controled by the central bank (Sm=K*H), we also continue to assume that the price level is constant.

Demand for money Dm=Dmo+Dmy*Y-Dmi*i

Sm=Dm=>….

=>The LM Equation:

(LM)i=(Dmo-Sm)/Dmi + (Dmy/Dmi)*YDmo=Autonomous Money Demand

Sm=Money Supply

Dmi=Marginal Money Demand for i

DmY=Marginal Money Demand for Y

Y=Income, Output

i=Interest rate

The Slope of LM: Dmy/Dmi (Positive)

Dmi=0 => Vertical LM curve

the interest elasticity of Money demand is zero

Dmi=Small=> Steep LM curve

the interest elasticity of Money demand is low

Dmi=high => Flat LM curve

the interest elasticity of Money demand is high

Imi=Infinity => Horizontal LM curve

the interest elasticity of Money demand is infinity

Horizontal LM

Vertical LM Curve

LM Curve

LM increase LM shift to the right

LM decrease LM shift to the left

Factors that shift the LM schedule:

Example:

H=100; Cu/D=20%; R/D=5%; Dm=200+0.4*Y-10*i

Find LM equation for the Money Market Equilibrium ?

(LM)i=(Dmo-Sm)/Dmi + (Dmy/Dmi)*Y

Dmo=200

Sm=K*H=[(1+20%)/(5%+20%)]*100=4.80*100=480

Dmy=0.4

Dmi=10

(LM) i=(200-480)/10 + (0.4/10)*Y(LM) i= -28 + 0.04*YCentral Bank increases H=10, ceteris paribusFind LM2 equation for the Money Market Equilibrium ?

From (LM)i=(Dmo-Sm)/Dmi + (Dmy/Dmi)*Y

=>(ΔLM)Δi=(ΔDmo - ΔSm)/Dmi + (Dmy/Dmi)*ΔY

ΔSm=K*ΔH

(LM2)=LM+ ΔLM or i2 = i +Δi

ΔSm=K*ΔH=4.80*10=48

Dmi=10

(ΔLM)Δi=(ΔDmo - ΔSm)/Dmi+ (Dmy/Dmi)*ΔY

(ΔLM)Δi=(0 - 48)/10 + (0.4/10)*0=

Δi=- 48/10= - 4.80

(LM) i= -28 + 0.04*Y(LM2) i2=(-28-4.8) + 0.04*Y

(LM2) i2= -32.8 + 0.04*Y

III. The IS and LM combined

The point of intersection of the IS and LM curves gives the combination of the interest rate and income (io, Yo) which produces equilibrium for both the money and product markets.

IS1LM1

No change in the ISLM increase => i decrease ; Y increaseLM decrease => i increase; Y decreaseNo change in the LMIS increase => i increase ; Y increaseIS decrease => i decrease; Y decrease

Example:(IS) Y = 4950 - 125*i

(LM) i= -28 + 0.04*YFind the income level and rate of interest at which there is simultaneous equilibrium in the money and goods marketsi=28.33 (%/year)Y=1408.33 ($)

• Open and Closed Economies– A closed economy is one that does not interact

with other economies in the world.• There are no exports, no imports, and no capital flows.

– An open economy is one that interacts freely with other economies around the world.

• An open economy interacts with other countries in two ways.– It buys and sells goods and services in world

product markets.– It buys and sells capital assets in world financial

markets.

THE INTERNATIONAL FLOW OF GOODS AND CAPITAL

• The Flow of Goods: Exports, Imports, and Net Exports– The United States is a very large and open

economy—it imports and exports huge quantities of goods and services.

– Over the past four decades, international trade and finance have become increasingly important.

• Exports are goods and services that are produced domestically and sold abroad.

• Imports are goods and services that are produced abroad and sold domestically.

• Net exports (NX) are the value of a nation’s exports minus the value of its imports.

• Net exports are also called the trade balance.

• A trade deficit is a situation in which net exports (NX) are negative. – Imports > Exports

• A trade surplus is a situation in which net exports (NX) are positive. – Exports > Imports

• Balanced trade refers to when net exports are zero—exports and imports are exactly equal.

• Factors That Affect Net Exports– The tastes of consumers for domestic and foreign

goods.– The prices of goods at home and abroad.– The exchange rates at which people can use

domestic currency to buy foreign currencies.

– The incomes of consumers at home and abroad.– The costs of transporting goods from country to

country.– The policies of the government toward

international trade.

The Flow of Financial Resources: Net Capital Outflow

• Net capital outflow refers to the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.

• A U.S. resident buys stock in the Toyota corporation and a Mexican buys stock in the Ford Motor corporation.

• When a U.S. resident buys stock in Telmex, the Mexican phone company, the purchase raises U.S. net capital outflow.

• When a Japanese residents buys a bond issued by the U.S. government, the purchase reduces the U.S. net capital outflow.

• Variables that Influence Net Capital Outflow– The real interest rates being paid on foreign

assets.– The real interest rates being paid on domestic

assets.– The perceived economic and political risks of

holding assets abroad.– The government policies that affect foreign

ownership of domestic assets.

The Equality of Net Exports and Net Capital Outflow

• For an economy as a whole, Xn and NCO must balance each other so that:

NCO = Xn• This holds true because every transaction that

affects one side must also affect the other side by the same amount.

Saving, Investment, and Their Relationship to the International Flows• Net exports is a component of GDP:

Y = C + I + G + Xn• National saving is the income of the nation

that is left after paying for current consumption and government purchases:

Y – C – G = I + Xn

• National saving (S) equals Y – C – G so:S = I + Xn

• Or

Saving Domestic Investment

Net Capital Outflow

S I NCO= +

International Flows of Goods and Capital: Summary

THE PRICES FOR INTERNATIONAL TRANSACTIONS: REAL AND NOMINAL EXCHANGE RATES

• International transactions are influenced by international prices.

• The two most important international prices are the nominal exchange rate and the real exchange rate.

• The nominal exchange rate is the rate at which a person can trade the currency of one country for the currency of another.

• The nominal exchange rate is expressed in two ways:– In units of foreign currency per one U.S. dollar.– And in units of U.S. dollars per one unit of the

foreign currency.

• Assume the exchange rate between the Japanese yen and U.S. dollar is 80 yen to one dollar.– One U.S. dollar trades for 80 yen.– One yen trades for 1/80 (= 0.0125) of a dollar.

• Appreciation refers to an increase in the value of a currency as measured by the amount of foreign currency it can buy.

• Depreciation refers to a decrease in the value of a currency as measured by the amount of foreign currency it can buy.

• If a dollar buys more foreign currency, there is an appreciation of the dollar (Exchange rate increase)

• If it buys less there is a depreciation of the dollar (Exchange rate decrease)

Real Exchange Rates

• The real exchange rate is the rate at which a person can trade the goods and services of one country for the goods and services of another.

• The real exchange rate compares the prices of domestic goods and foreign goods in the domestic economy.– If a case of German beer is twice as expensive as

American beer, the real exchange rate is 1/2 case of German beer per case of American beer.

• The real exchange rate depends on the nominal exchange rate and the prices of goods in the two countries measured in local currencies.

• The real exchange rate is a key determinant of how much a country exports and imports.

Real exchange rate =Nominal exchange rate Domestic price

Foreign price×

• A depreciation (fall) in the U.S. real exchange rate means that U.S. goods have become cheaper relative to foreign goods.

• This encourages consumers both at home and abroad to buy more U.S. goods and fewer goods from other countries.

• As a result, U.S. exports rise, and U.S. imports fall, and both of these changes raise U.S. net exports.

• Conversely, an appreciation in the U.S. real exchange rate means that U.S. goods have become more expensive compared to foreign goods, so U.S. net exports fall.

SUMMARY

• Net exports are the value of domestic goods and services sold abroad minus the value of foreign goods and services sold domestically.

• Net capital outflow is the acquisition of foreign assets by domestic residents minus the acquisition of domestic assets by foreigners.

SUMMARY

• An economy’s net capital outflow always equals its net exports.

• An economy’s saving can be used to either finance investment at home or to buy assets abroad.

SUMMARY

• The nominal exchange rate is the relative price of the currency of two countries.

• The real exchange rate is the relative price of the goods and services of two countries.

SUMMARY

• When the nominal exchange rate changes so that each dollar buys more foreign currency, the dollar is said to appreciate or strengthen.

• When the nominal exchange rate changes so that each dollar buys less foreign currency, the dollar is said to depreciate or weaken.

CHAPTER 6

• Unemployment and Inflation – The natural rate of unemployment depends on

various features of the labor market.• Examples include minimum-wage laws, the market

power of unions, the role of efficiency wages, and the effectiveness of job search.• The inflation rate depends primarily on growth in the

quantity of money, controlled by the Central Bank.

• Unemployment and Inflation– Society faces a short-run tradeoff between

unemployment and inflation.– If policymakers expand aggregate demand, they

can lower unemployment, but only at the cost of higher inflation.

– If they contract aggregate demand, they can lower inflation, but at the cost of temporarily higher unemployment.

• The Phillips curve shows the short-run trade-off between inflation and unemployment.

Figure 1 The Phillips Curve

UnemploymentRate (percent)

InflationRate

(percentper year)

Phillips curve

The Phillips curve shows the short-run combinations of unemployment and inflation that arise as shifts in the aggregate demand curve move the economy along the short-run aggregate supply curve.

The greater the aggregate demand for goods and services, the greater is the economy’s output, and the higher is the overall price level.

A higher level of output results in a lower level of unemployment.

How the Phillips Curve is Related to Aggregate Demand and Aggregate

Supply

Quantityof Output

Short-runaggregate

supply

(a) The Model of Aggregate Demand and Aggregate Supply

UnemploymentRate (percent)

InflationRate

(percentper year)

PriceLevel

(b) The Phillips Curve

Phillips curveLow aggregatedemand

Highaggregate demand

(output is8,000)

(output is7,500)

8,000(unemployment

is 4%)

(unemploymentis 7%)

An Adverse Shock to Aggregate Supply

Quantityof Output

PriceLevel

Aggregatedemand

(a) The Model of Aggregate Demand and Aggregate Supply

UnemploymentRate

InflationRate

(b) The Phillips Curve

3. . . . andraises the price level . . .

AS2 Aggregatesupply, AS

1. An adverseshift in aggregate supply . . .

4. . . . giving policymakers a less favorable tradeoffbetween unemploymentand inflation.

Phillips curve, P C

2. . . . lowers output . . .

UNIVERSITY OF ECONOMICS HO CHI MINH CITY MACROECONOMICS HUỲNH VĂN THỊNH...

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