Aggregate Expenditure and National Income Quiz

Macroeconomics Study Notes

• Syllabus:
  • Lectures are on Mondays and Wednesdays
  • Students should attend at least one conference per week
  • Discussion boards are organized by topic
  • Exams are closed-book and multiple choice
  • Midterm Exam: October 23rd, 30/20%
  • Final Exam: December, 70/80%
  • Textbook: Ragan Macroeconomics 17th ed.
  • Micro vs. Macroeconomics
    • Microeconomics focuses on individual economic units like markets, consumers, firms.
    • Macroeconomics examines the overall economy.
  • Macroeconomics Topics:
    • National income
    • Standard of living
    • Economic growth
    • Employment and unemployment
    • Prices and inflation
    • Exchange rates
    • Imports and exports
    • Monetary and fiscal policies
  • Course Structure:
    • Learn basic economic theory
    • Apply theory to real-world concerns
    • Expand on basic theories

Circular Flow of Income and Expenditure

• A diagram illustrating the flow of money and goods in an economy.
• Shows the relationships between households, firms, and the government.
• Injections (exports, investment, government purchases)
• Withdrawals (imports, savings, taxes)
• An injection into the circular flow increases economic growth
• Injections = withdrawals means no change (equilibrium)

Macroeconomic Variables

• Output generates income: Output creates income for producers.
• Nominal GDP: The total market value of all final goods and services produced in a country in a specific time period.
• Real GDP: Nominal GDP adjusted for inflation, reflecting changes in actual output.

Note: Nominal vs Real GDP

• Nominal values are measured in current prices.
• Adjusting for inflation is critical to determine real growth rate.
• Real values expressed in base-year constant dollars are used to analyze changes in output quantity over time.

Businesses Cycle

• Cyclical fluctuations: Economic activity is not always the same. It has periods of ups and downs.
• Potential output: What output would occur if all resources are used at normal intensity?
• Output gaps: Actual output compared to potential and potential output.
• Recessionary vs. Inflationary gaps: Y < Y* (recessionary) and Y > Y* (inflationary).

National Income

• Measure of economic performance
• Recessions are associated with unemployment and lost output
• Economic growth does not always mean everyone benefits equally

Employment and Unemployment

• Employment: Measures how many people are employed.
• Unemployment: Measures how many people are unemployed.
• Labor Force and Unemployment rate: total people wanting to work that aren't working.
• Note: A lack of change in the unemployment rate does not preclude an increase in the number of unemployed people.

Productivity

• Output per unit of input:
• productivity increase is the largest cause of long-term increases in standards of living.

Inflation and Price Level

• Inflation: Percentage change in the price level.
• Price level (P level): Average level of prices in an economy in a given time period in index form.
• Consumer Price index (CPI): Measures the average prices of a basket of consumer goods and services.

Inflation Importance

• Reduces purchasing power of money.
• Creates expectations which affects behavior and decisions in an economy.
• Nominal vs Real interest rates.

International Economy

• Foreign exchange: foreign currencies.
• Exchange rate: number of CAD to buy/sell unit of foreign currency.
• Depreciation of CAD: decrease in exchange rate relative to another foreign currency.
• Domestic prices of imports rise and vice versa for exports

Measuring GDP

• Balance of payments:
• Trade balance
• Capital account balance
• GDP growth: important for society's living standards.

Measuring GDP and Aggregate Expenditure

• National Output and Value Added
  • Intermediate and final products
  • Value of final goods and services made in country.
  • GDP includes exports but not imports
• Importance: Measures the total value generated annually in an economy
• Problem: Double-counting (measuring intermediate goods and services more than once) must be avoided.
• Value added: Revenue minus cost of intermediate goods. Income for factors of production.

The Simple Short-Run Model

• Desired aggregate expenditure (AE): divided into expenditure categories (autonomous and induced aspects)
• Does not include government or trade
• Investment is autonomous.
• P is constant
• What does "desired” mean? What is the extent of real world constraints of income and market prices?

The Multiplier Effect

• The multiplier is the change in equilibrium from a change in autonomous expenditure.
• The simple multiplier is 1 / (1 - MPC) where MPC is the marginal propensity to consume.
• One person's spending is another person's income.
• The process continues until additional savings equal the initial amount invested (or injection).

Introducing Government and Trade

• Government expenditure (G): part of desired aggregate expenditure (AE) which includes all levels of government expenditure.
• Net taxes (T) are total tax revenues decreased by transfer payments.
• Net Tax Function: T=tY (t is the net tax rate; autonomous and average = marginal)
• Budget in balance = G and T are equal.

Equilibrium and Adjustment

• Equilibrium is where desired aggregate expenditure equals actual output.
• If desired expenditure > actual output, there is pressure to increase output.
• If desired expenditure < actual output, there is pressure to decrease output.

Aggregate Demand and Supply

• AD: Relation between price level and equilibrium real GDP with desired AE=actual GDP.
• AS: Relation between price level and equilibrium real GDP (output).
• Equilibrium = intersection of AD and AS.
• Shifts in AD/AS curve = caused by change in outside forces.

Adjustment in Macroeconomic Equilibrium

• The speed of return to Y* depends on wage flexibility.
• Rigid wages = slow adjustment process
• Flexible wages = quick adjustment process
• Long run equilibrium = Y* = vertical line on AS curve.

Inflation and Validation

• Inflation is temporary unless monetary validation keeps AD increasing.
• Validation = continuous increase in money supply (Ms), which causes the AD curve to shift upwards at the same rate as the AS curve.

Government Budget Constraints and Deficits

• Budget Constraint = Government Expenditure = Tax Revenue + Borrowing.
• Structural Budget component = Actual Y and Y*.
• Cyclical Component = difference between actual deficit and structural deficit.

Debt and Fiscal Policy

• Do deficits crowd out private activity?
• Possible effects on investments and net exports:
• Crowding out: expansionary fiscal policy decreases private spending.
• Government sells more bonds = increases supply of bonds
• Does debt harm future generations?
• Debt redistributes resources and consumption, current generation versus future.

Exchange Rates

• Foreign exchange: exchange of one country's currency for another.
• Exchange rate: the rate at which one currency exchanges for another.
• Appreciation: fall in the exchange rate; Canadian dollar becomes more valuable
• Depreciation: rise in the exchange rate; Canadian dollar becomes less valuable

Money Supply and Interest Rates

• Money supply: total number of money in an economy.
• Interest rate: price of ‘credit’
• Money and bonds are alternative ways of holding wealth.

Banking System

• Most banking systems have: Central bank, commercial banks, deposit money.
• Reserve Ratio.
• Money creation process

This quiz explores the relationship between aggregate expenditure and national income at equilibrium. It covers key concepts such as marginal propensity to consume, the impact of government spending, and fiscal policy measures. Test your understanding of these fundamental economic principles!