Econ Resit Notes PDF

Macroeconomics Objectives: - - - - MACROECONOMICS *Definition:* Macroeconomics is a branch of economics that focuses on the study of the economy as a whole, rather than on individual markets. It analysis large scale economic phenomena and aggregates such as: - - - - - - *K...

Macroeconomics Objectives: - - - - MACROECONOMICS *Definition:* Macroeconomics is a branch of economics that focuses on the study of the economy as a whole, rather than on individual markets. It analysis large scale economic phenomena and aggregates such as: - - - - - - *Key Goals?* - - - - *[Industrial level ]* - - - - - THE CIRCULAR FLOW OF GOODS & INCOMES CIRCULAR FLOW OF INCOME  Inner flow- Money flows directly between households & firms. ***Money vs Income?*** Money: stock concept Income: Is a flow concept (per period of time) Velocity of circulation: Determines relationship between money & income 'Aggregate demand (AD)' - Total level of spending on goods & services produced within the country over a given time period ***Injections (J):*** - - - - **[AD= C*d* + I + G + X]** **[J = I + G + X]** **[AD = Cd + J]** ***Withdrawals (W) or Leakages:*** - - - **[W = S + T + M]** GDP: The total annual output of goods & services on which aggregate demand is spent on. (Value) More capacity in the economy: [AD rises → firm produces more → GDP rises.] **Relationship between INJECTION & WITHDRAWAL** - - *[Budget surplus]* - government choose not to spend all their tax revenues *[Budget defici]t* - spent more than they receive by borrowing or printing money to make up the difference. ***[NOT EQUAL?]*** Injection \> Withdrawal - - - - *Measuring NATIONAL INCOME?* 3 ways of measuring GDP: 1. 2. 3. - - Determination of Business Activity ================================== - Functions of Money - - - - ATTRIBUTES of money? - - - - WHAT COUNTS as money? 1. - - - 2. *Store of value* - - - 3. - - - - *Examples:* Modern paper currency, digital representations of these currencies. Advantages: - - Disadvantages: - - Eurozone Monetary Aggregates ---------------------------- - - - Roles of the Central Bank?? --------------------------- - - - - - - - - BONDS - 1. - - - 2. - - - - Bonds & the interest rate ------------------------- - *Example:* - - - Relationship between the PRICE OF TREASURY BILLS and the RATE OF INTEREST Treasury bill: Short term debt securities issued by a government to raise funds. *(Maturity: 1 year or less).* - - *Example:* *Face value = \$1,000* *Sold for (discounted) = \$950* *(interest) face value at maturity = \$50* *Interest rate ( Inverse relationship)* Treasury bill was issued \$100, and pays \$10 p.a. - If (i) rises to 12% - If (i) falls to 8% - Controlling the money supply ---------------------------- GOVERNMENT BONDS Bonds from Central bank or government treasur - ***Increase in money supply:*** - - - ***Decrease in money supply:*** - OPEN MARKET OPERATIONS 1 **[If the government wish to reduce Money Supply:]** - 1. - - 2. - 3. - - -  OPEN MARKET OPERATIONS 2 **[If the government wishes to increase MS:]** 1. 2. - 3. - 4. ***Why?*** - - -  A **yield curve** is a graph that shows the relationship between the **interest rates (yields)** of bonds and their **time to maturity**. It is a critical tool for understanding market expectations, investment strategies, and economic trends. Normal - - Inverted - - - ### Summary: Interest rate rises: Aggregate demand decreases → Business confidence decreases → fewer investments. - - - - EQUILIBRIUM: supply of money =demand of money - - Effects of changes in interest rates: - **MONEY SUPPLY INCREASES WHEN** 1. 2. 3. QUIZ ---- 1. - 2. - 3. - 4. - Banks & Credit creation The Fractional Reserve System ----------------------------- Banking system in which banks are required to keep only a fraction of their depositors' funds in reserve and can lend out the rest. -  **Bank Credit Creation** - - - - - **Liquidity Ratio & Money Multiplier** - - - Example: 1. 2. 3. Step 1: - Step 2: Calculate Increase in Money supply The central bank injects \$1,000 into Bank A: - - The borrower deposits the \$900 into Bank B: - -  **Capital Adequacy Ratio (CARs)** - - - - - ***[Purpose of CAR?]*** - - - - - - QUIZ ---- 1. - *Meaning?* For every dollar deposited, the banking system can create up to **20 dollars** in the total money supply through the fractional reserve system (FRS). 2.  - 3. - - 4. - - - - - - - - - SHORT RUN GDP fluctuates → **BUSINESS CYCLES**/ economic cycles. - - - Aggregate Demand Curve ---------------------- - 'Aggregate demand'- total level of spending on the g&s produced within a country -------------------------------------------------------------------------------- AD= C + I +G + X - M - The AD curve shows the quantity of all g&s demanded in the economy at any given price level. -------------------------------------------------------------------------------------------- - - - -  **AD Curve Slope Downward?** Y = C + I + G + NX - - 1. *P rises → C falls* - - 2. *P rises →Investment falls* - - - - *Result: More expensive for companies to borrow money for investments* 3. *P rises → NX falls* - - - - **Shift in AD curve** - - - - - - *[Facts:]* - QUIZ: The Aggregate Demand Curve A. - - B. - - - - C. - - D. - - Aggregate Supply - - *[Components of AS:]* - - - - *Exact location of curve determined by the...* - - - - *New classical position* - - - - - - - - - **Supply-side policies & the macroeconomy** - - - ***Economic growth & supply side policies*** - - - ***Others:*** 1. - - - 2. - - ***Effect of supply-side policy on national output*** Long term impact: - - - - **New Classical Supply-side Policies** 1. - - - - - 2. - - - - 3. - 4. - - - - - - - - - - - - KEYNESIAN approach to supply side policy - - - 1. 2. 3. 4. - - **Link between demand side & supply side policies** - - Summary ------- - - - - - Fiscal vs Monetary policy Fiscal policy: Government expenditure & Taxation Monetary policy: Interest rate & Money Supply. Fiscal Policy ------------- **1. Manipulating government expenditure & taxation:** - - - - - **2. Different policies in various budget situations** - - - - - **3. Reallocating resources between industries/ areas** **[Industries:]** Promote or prioritize certain industries over others. *Example:* - - - **[Between regions:]** Address regional disparities in economic development. - -  **Problems with Fiscal Policy** - - - - - - - - - - - - - - - - Monetary Policy =============== - - - - - - **Problems** - - - - - - **To solve: Quantitative Easing (QE)** Used when [interest rates are near zero &] CB can\'t lower rates further to stimulate growth - - Keynesianism **Pre- Keynes:** Classical/ Neo classical schools believed in minimal government intervention. [The market is self-correcting and will \"clear\" itself if left alone:] - - - Great Depression: - - - ***Equilibrium always good?*** I.e. equilibrium could be high with high unemployment. - - - Deflationary/ Recessionary Gap Average Propensity to Consume (APC) - - - Average Propensity to save (APS) - - **APC + APS = 1 (or 100%), because all income is either spent or saved.** Marginal propensity to consume (MPC) - - - Marginal propensity to save (MPS) - - The Marginal Tax Propensity (MPT) - - The Marginal Propensity to Import (MPM) - - The Marginal Propensity to Withdraw (S+T+M) (MPW) - - **IT IS ALWAYS A FACTOR DIVIDED BY INCOME!!** **The Multiplier (K):** Shows how much the national income (Y) will increase as a result of this initial injection (investment/govt expenditure) - - - ### ***Example:*** - - - [EXERCISE: Marginal Propensity to Withdraw] MPW= MPS + MPT + MPI **MPS** = Marginal Propensity to Save = 10% (0.10) **MPT** = Marginal Propensity to Tax = 20% (0.20) **MPI** = Marginal Propensity to Import = 10% (0.10) → 0.10 + 0.20 + 0.10 = 0.40 Multiplier formula: K = 1/ MPW K= 1/0.40 K= 2.4 - - -