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HUỲNH VĂN THỊNH
Home phone:(84.8) 39911812; (84.8) 66786400Cell phone: 0989 0110 19Email: [email protected] [email protected]: http://sites.google.com/site/huynhvanthinhsitehttp://sites.google.com/site/economicsfamily
HUỲNH VĂN THỊNH [email protected] 2
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.
HUỲNH VĂN THỊNH [email protected] 3
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?
HUỲNH VĂN THỊNH [email protected] 4
CONTENTS
Chapter 1AGGREGATE DEMAND AGGREGATE SUPPLY AND EQUILIBRIUMChapter 2MEASURING AGGREGATE OUTPUTChapter 3THE MULTIPLIER MODEL
HUỲNH VĂN THỊNH [email protected] 5
CONTENTS
Chapter 4THE IS – LM FRAMEWORKChapter 5OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTSChapter 6INFLATION AND UNEMPLOYMENT
HUỲNH VĂN THỊNH [email protected] 6
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
HUỲNH VĂN THỊNH [email protected] 8
• 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
Example:C= 100 + 0.8*YdCo= 100= Autonomous consumption, constant
Cm=0.8= Marginal propensity to consume
Yd change 1$ => C change 0.8$Yd=Disposable incomeYd = Y- T + Tr = Y – Tn = C + S
HUỲNH VĂN THỊNH [email protected] 10
• Y=GDP=Output=Gross domestic Product• T=Tax• Tr=Transfer payment• Tn= Net tax = T – Tr• C=Consumption• S=Saving
HUỲNH VĂN THỊNH [email protected] 11
• Y = 100• T = 10• Tr = 6• Tn = T – Tr = 10 – 6 = 4• Yd = Y – T + Tr = Y – Tn =100-10+6=100-4=96• Yd = 96 = C+S
HUỲNH VĂN THỊNH [email protected] 12
2. Saving, S:S = Yd – CS = -Co + (1-Cm)*Yd1-Cm=MPS= Marginal propensity to
saveCm + MPS = 1
Example:C=100+0.8*YdS= -100 +(1-0.8)*YdS= -100 +0.2*Yd
HUỲNH VĂN THỊNH [email protected] 13
3. Net tax, Tn:Tn = T – Tr
3.1. Tax, T:T = To +Tm*Y
To= Autonomous tax, constantTm=Marginal tax
Tm=dT/dY
HUỲNH VĂN THỊNH [email protected] 14
Example:T=100+0.1*YTo=100= Autonomous tax, constantTm=0.1= Marginal taxY change 1$ => T change 0.1$
Marginal tax # Tax rate
HUỲNH VĂN THỊNH [email protected] 15
Marginal tax, Tm:Tm=dT/dY
Tax rate, t (%):t (%)= T/Y
Example:T=100+0.1*YTm=0.1
HUỲNH VĂN THỊNH [email protected] 16
T=100+0.1*Yt (%)=????Y T t=T/Y
0 100 infinity100 110 110%
200 120 60%
HUỲNH VĂN THỊNH [email protected] 17
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
HUỲNH VĂN THỊNH [email protected] 20
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
HUỲNH VĂN THỊNH [email protected] 21
Example:T=100+0.1*YTr=60Tn=T-Tr=100+0.1*Y-60Tn=(100-60)+0.1*YTn=40+0.1*Y
HUỲNH VĂN THỊNH [email protected] 22
To = 100 = Autonomous taxTr = 60 = TransferTno = 100 – 60 = 40 = Autonomous net taxTm = 0.1 = Marginal tax
HUỲNH VĂN THỊNH [email protected] 23
4. INVESTMENT, I:The spending on capital equipment, inventories, and structures, including new housing.
* Capital equipment* Structures (including new housing)* Inventories
HUỲNH VĂN THỊNH [email protected] 24
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
HUỲNH VĂN THỊNH [email protected] 25
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 $
HUỲNH VĂN THỊNH [email protected] 26
Imi = 200 = Marginal propensity to invest for ii increase 1% => I decrease 200 $i decrease 1% => I increase 200 $
HUỲNH VĂN THỊNH [email protected] 27
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
HUỲNH VĂN THỊNH [email protected] 28
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.
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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
HUỲNH VĂN THỊNH [email protected] 30
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
HUỲNH VĂN THỊNH [email protected] 31
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
HUỲNH VĂN THỊNH [email protected] 32
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
HUỲNH VĂN THỊNH [email protected] 33
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
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AD1 => AD2 => AD increaseAD2 => AD1 => AD decreaseAD increase (C+I+G+Xn) increaseAD decrease (C+I+G+Xn) decrease
HUỲNH VĂN THỊNH [email protected] 37
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.
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AS1 => AS2 => AS increaseAS2 => AS1 => AS decrease
HUỲNH VĂN THỊNH [email protected] 41
AS increase * Decrease : +Cost of human Resources+Cost of Capital Resources+Cost of Natural Resources
* Increase: +Technology
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AS decrease * Increase : +Cost of human Resources +Cost of Capital Resources +Cost of Natural Resources
* Decrease: +Technology
HUỲNH VĂN THỊNH [email protected] 43
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
HUỲNH VĂN THỊNH [email protected] 44
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
HUỲNH VĂN THỊNH [email protected] 48
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
HUỲNH VĂN THỊNH [email protected] 49
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.
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• “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).
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• “. . . 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).
HUỲNH VĂN THỊNH [email protected] 53
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.
HUỲNH VĂN THỊNH [email protected] 54
2. CALCULATING GDP 2.1 Nominal GDP, GDPn:GDPn year t ($)=Σ(Pt*Qt)GDPn is the value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced.
HUỲNH VĂN THỊNH [email protected] 55
2.2 Real GDP, GDPr:GDPr year t ($)=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.
HUỲNH VĂN THỊNH [email protected] 56
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
HUỲNH VĂN THỊNH [email protected] 57
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.
HUỲNH VĂN THỊNH [email protected] 58
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.
HUỲNH VĂN THỊNH [email protected] 59
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
HUỲNH VĂN THỊNH [email protected] 60
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
HUỲNH VĂN THỊNH [email protected] 61
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
HUỲNH VĂN THỊNH [email protected] 62
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%
HUỲNH VĂN THỊNH [email protected] 63
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(….)]
HUỲNH VĂN THỊNH [email protected] 64
Example:GDPn 2000 = 100 $GDPn 2005 = 200 $gGDPn/year (2000 ->2005) ==(200/100)^(1/(2005-2000))-1=14.87%
HUỲNH VĂN THỊNH [email protected] 65
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%
HUỲNH VĂN THỊNH [email protected] 66
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%
HUỲNH VĂN THỊNH [email protected] 67
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
HUỲNH VĂN THỊNH [email protected] 68
VIII. Forecast the related years
GDP a = GDP b*(1+gGDP/Period)^(Period a – Period b)Example:GDP 2000 = 100 $gGDP/year =10%GDP 2005 =100*(1+10%)^(2005-2000)=161.05GDP 1995 =100*(1+10%)^(1995-2000)=62.09[Excel FV(…) or PV(…)]
HUỲNH VĂN THỊNH [email protected] 69
I. EQUILIBRIUM OF AD AND AS
We have:
AD=C+I+G+X-M
AS=Y
For AS=AD or Y=C+I+G+X-M
HUỲNH VĂN THỊNH [email protected] 71
….Finally, we have:
Y=m*AdoY: Equilibrium Income
m: Ado Multiplier, Expenditure Multiplier
Ado: Autonomous Aggregate Demand
HUỲNH VĂN THỊNH [email protected] 74
m = 1/[1-Cm*(1-Tm)-Imy+Mm]
Ado =[Co + Io + Go + Xo – Mo
-Cm*(To-Tro)]
HUỲNH VĂN THỊNH [email protected] 75
Example:
C=100+0.8*Yd
T=20+0.1*Y
Tr=32
I=50+0.4*Y
G=55
X=40
M=15+0.2*Y
HUỲNH VĂN THỊNH [email protected] 76
Equilibrium Income is:Y=m*Adom=1/[1-0.8*(1-0.1)-0.4+0.2]=12.50Ado=100+50+55+40-15-0.8*(20-32)=269.60Y=12.50*=3370When Equilibrium Income, we have:T=20+0.1*Y=20+0.1*3370=357
HUỲNH VĂN THỊNH [email protected] 77
Tn=T-Tr=357-32=325Yd=Y-Tn=3370-325=3045C=100+0.8*Yd=100+0.8*3045=2536S=Yd – C=3045-2536=509I=50+0.4*Y=50+0.4*3370=1398Xn=X-M=40-(15+0.2*Y)=25-0.2*Y=25-0.2*3370=Xn= -649 (Deficit)
HUỲNH VĂN THỊNH [email protected] 78
Budget=B=T-Tr-G=Tn-GB=(To-Tro)+Tm*Y-Go=Tno+Tm*Y-GIf:B > 0 => SurplusB < 0 => DeficitB = 0 => EquilibriumB=Tn-G=325-55=270 (Surplus)
HUỲNH VĂN THỊNH [email protected] 79
II. EXPENDITURE MULTIPLIER:
The expenditure multiplier measures the multiplied effect changes in autonomous spending have upon equilibrium incomeY=m*Ado=>ΔY=m*ΔAdoΔAdo= ΔCo+ ΔIo+ ΔGo+ ΔXo - ΔMo -Cm*(ΔTo- ΔTro)
HUỲNH VĂN THỊNH [email protected] 80
ΔC=ΔCo+Cm*ΔYdΔS=-ΔCo+(1-Cm)*ΔYdΔYd=ΔY-ΔT+ΔTr=ΔY-ΔTnΔT=ΔTo+Tm*ΔYΔTr=ΔTroΔTn=ΔTno+Tm*ΔY
HUỲNH VĂN THỊNH [email protected] 81
ΔG=ΔGoΔX= ΔXoΔM=ΔMo+Mm*ΔYΔXn= ΔXno-Mm*ΔYΔI=ΔIo+Imy*ΔYΔB=ΔT- ΔTr - ΔG= ΔTn- ΔG= ΔTno+Tm*ΔY- ΔGo
HUỲNH VĂN THỊNH [email protected] 82
If:m=1, when Ado increase 1$ => Y increase 1 $m=10, when Ado increase 1$ => Y increase 10$m=100, when Ado increase 1$=>Y increase 100$
HUỲNH VĂN THỊNH [email protected] 83
From:
If we want to increase the value of m:Cm lead to 1Imy lead to 1Tm lead to 0Mm lead to 0
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1
[1 *(1 ) Im ]m
Cm Tm y Mm
Example:
HUỲNH VĂN THỊNH [email protected] 85
C=30+0.8*Yd
T=50+0.1*Y
Tr=40
G=200
X=60
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
HUỲNH VĂN THỊNH [email protected] 86
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
HUỲNH VĂN THỊNH [email protected] 87
CHAPTER 4THE IS-LM FRAMEWORK
HUỲNH VĂN THỊNH [email protected] 88
This chapter develops schedules for equilibrium in the goods (IS) and money (LM) market.
HUỲNH VĂN THỊNH [email protected] 89
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
HUỲNH VĂN THỊNH [email protected] 90
…..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
HUỲNH VĂN THỊNH [email protected] 91
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
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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
HUỲNH VĂN THỊNH [email protected] 93
HUỲNH VĂN THỊNH [email protected] 94
Y
i
Horizontal IS
Curve
Vertical IS Curve
Steep
IS Curve
Flat
IS Curve
IS increase IS shift to the right
IS decrease IS shift to the left
HUỲNH VĂN THỊNH [email protected] 95
HUỲNH VĂN THỊNH [email protected] 96
Factors that shift the IS schedule:
Example:
C=10+0.8*Yd
T=20+0.1*Y
Tr=15
G=250
X=50
M=30+0.2*Y
I=120+0.4*Y-10*i
Find IS equation for equilibrium income in the goods market?
HUỲNH VĂN THỊNH [email protected] 97
(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
HUỲNH VĂN THỊNH [email protected] 98
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
HUỲNH VĂN THỊNH [email protected] 99
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]
HUỲNH VĂN THỊNH [email protected] 100
II. Money Market Equilibrium:The LM Curve
1. The Money System:
1.1. Money Supply:
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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.
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The Functions of Money:
Money has three functions in the economy:–Medium of exchange
– Unit of account
– Store of value
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HUỲNH VĂN THỊNH [email protected] 104
• 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.
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• Liquidity is the ease with which an asset can be converted into the economy’s medium of exchange.
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• 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.
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• 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.
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– 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.
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• 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
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• 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.
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• 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.
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• The reserve ratio (R/D) is the fraction of deposits that banks hold as reserves.
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• 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.
HUỲNH VĂN THỊNH [email protected] 114
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%.
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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.
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The Money Multiplier
• How much money is eventually created by the new deposit in this economy?
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The Money Multiplier
• The money multiplier (K) is the amount of money the banking system generates with each dollar of reserves.
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The Money Multiplier
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)
HUỲNH VĂN THỊNH [email protected] 120
• 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.
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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
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The CB’s Tools of Monetary Control
• 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.
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The CB’s Tools of Monetary Control
• 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.
HUỲNH VĂN THỊNH [email protected] 124
The CB’s Tools of Monetary Control
• 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.
HUỲNH VĂN THỊNH [email protected] 125
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
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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.
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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.
HUỲNH VĂN THỊNH [email protected] 128
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.
HUỲNH VĂN THỊNH [email protected] 129
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
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SUMMARY
K=Sm/H=(Cu+D)/(Cu+R)=
=(Cu/D+D/D)/(Cu/D+R/D)=
HUỲNH VĂN THỊNH [email protected] 131
1CuDK
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$
K=10, when H increase 1$=> Sm increase 10$
K=100, when H increase 1$=> Sm increase 100$
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
HUỲNH VĂN THỊNH [email protected] 133
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
….
HUỲNH VĂN THỊNH [email protected] 135
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$
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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=>….
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=>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
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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
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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
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HUỲNH VĂN THỊNH [email protected] 142
Y
i
Horizontal LM
Curve
Vertical LM Curve
Steep
LM Curve
Flat
LM Curve
LM increase LM shift to the right
LM decrease LM shift to the left
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Factors that shift the LM schedule:
HUỲNH VĂN THỊNH [email protected] 144
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
HUỲNH VĂN THỊNH [email protected] 145
(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
HUỲNH VĂN THỊNH [email protected] 146
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
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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.
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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
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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 ($)
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© 2007 Thomson South-Western
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• 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.
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• 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.
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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.
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• Exports are goods and services that are produced domestically and sold abroad.
• Imports are goods and services that are produced abroad and sold domestically.
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• 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.
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• 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.
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• 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.
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– 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.
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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.
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• 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.
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• 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.
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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.
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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
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• National saving (S) equals Y – C – G so:S = I + Xn
• Or
Saving Domestic Investment
Net Capital Outflow
= +
S I NCO= +
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© 2007 Thomson South-Western
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.
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• The nominal exchange rate is the rate at which a person can trade the currency of one country for the currency of another.
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• 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.
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• 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.
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• 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.
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• 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)
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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.
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• 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.
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• The real exchange rate depends on the nominal exchange rate and the prices of goods in the two countries measured in local currencies.
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• 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×
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• 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.
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• 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.
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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.
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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.
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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.
HUỲNH VĂN THỊNH [email protected] 184
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.
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CHAPTER 6
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• 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.
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• 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.
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• The Phillips curve shows the short-run trade-off between inflation and unemployment.
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Figure 1 The Phillips Curve
UnemploymentRate (percent)
0
InflationRate
(percentper year)
Phillips curve
4
B6
7
A2
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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.
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How the Phillips Curve is Related to Aggregate Demand and Aggregate
Supply
Quantityof Output
0
Short-runaggregate
supply
(a) The Model of Aggregate Demand and Aggregate Supply
UnemploymentRate (percent)
0
InflationRate
(percentper year)
PriceLevel
(b) The Phillips Curve
Phillips curveLow aggregatedemand
Highaggregate demand
(output is8,000)
B
4
6
(output is7,500)
A
7
2
8,000(unemployment
is 4%)
106 B
(unemploymentis 7%)
7,500
102 A
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An Adverse Shock to Aggregate Supply
Quantityof Output
0
PriceLevel
Aggregatedemand
(a) The Model of Aggregate Demand and Aggregate Supply
UnemploymentRate
0
InflationRate
(b) The Phillips Curve
3. . . . andraises the price level . . .
AS2 Aggregatesupply, AS
A
1. An adverseshift in aggregate supply . . .
4. . . . giving policymakers a less favorable tradeoffbetween unemploymentand inflation.
BP2
Y2
PA
Y
Phillips curve, P C
2. . . . lowers output . . .
PC2
B
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