Macro I

MadNotes
Lecture 2

Unemployment rate
a L I
stf N
NRU O sN_ f jobfinders
set s fromjob
separated
NRE L Ha N fin fixedinthelongrun N labourforce
set
MPL if slopedy daily
Profit t PY WL
PFCKDWL
Output HK i MPL DL

itonlyMPLgiven andYis
notgiven

LABOUR MARKET GOODS MARKET

Y Ls fixedinLR
P LRAS

µ
age
p
P mince L y from
money
market

I L Y Y

Labourisfixedsooutputfixed
in theLR iy fcr.is
t
market
Labour
it
outputonlychanges shockin
Lecture 3

Consumption function C CH T
disposable income

MPC is the slope of C CCY T

Investment function
ICI
real interest rate

Income GDP Expenditure Yd C t I t G AD

I T t Ier t G

National savings s I C4 T G
I I c I T t T G
private public

Scr 5
r
s

µ investment S saving
Lecture 4 Money supply

Ms Ct D
whatwethink
we have Ms B
B Ct R
amountactually
issued

I
monetarybase

multiplier m ertlrr
cr
I
Ms MB

DMsdepends on
currency
or currencyheld byconsumersthatis notsaved
Dudeposits
reserves
reserves heldbybanks
rr 1
D
required
deposits
deposits

Central Bank controlling Ms

D rrt Msp
2 BT Msp
t
openmarket buybondsgive currency
Lenderoflast resort
low discountrate incentivefor privatebanks toborrow
Lecture 5 Money demand

Fischerequation
it rt tree
determined
in financial market re is
andsee is given
i canonly
r is fixed in LR so
bechangedby a change in i

CB
F given as it is fixed by
supplycurve in moneymarket

Liquidity f
Quantity theory ofmoney
MV P M PY f
naeoutput
t nom
in givenyear
moneysupply velocity
frombanks ofmoney

49 M AD in
800kmarket

Ydys ed
gives pricelevel

SR
Mschanging would
require i to change
but pricesydon'tchange
V
as r canchangein
SR
LR
Ms4 moremoneychases
same no ofgoods
i prices4

YI stays the same

Pchangesbut idoesnot
Lecture 6
How nationalincome is determined short run
by spendings

ned
assume constantffixed output
Ept C ti
i
l
p
t G NX ii
not dependent a Aggregate
GDP

I
what firms are lookingto produce
build up inventories
it demand expected
c inventories
it demand expected eat into
actualexpplanned takes away Mom
prod selling
exp I
actualexp planned
planned investment

proasselling

that Pategumisntaanimalstate
idea

demand driven

af
c onstant
assume

ftp.wu.im
selling
f i inventories accumulate
slope
i production I
B equilibriumreachel
a
dieto
_output
expenditures
Mpeg
save
yo of
you some
your
 Government purchasesmultiplier
Tax multiplier
HAG PEshift upwards byAG IT AT t Y T by AToo Aconsumptionby
MPCXAT AYandAPE higher
greater pay GOV i

DEFICIT
PEshifts upby ATXMPC
when G o de o whenDG 0 AT TAXCUT

1
BY f AT MPC_
multiplier tatty
I mpc
i mac multiplier II Mpc
always
AT 1 Mpc
I 1tt in taxes
fora 1 A in A

MPCft gov purchase

multiplier
taxmultiplier

1 y MPI
1 MPC 1 MPC
DG O BT DG
Add govpurchase taxmultiplier mode
i GOVspending
1 Mpe Tax
Interest rate investment Is wire

planned investment I Icr

Tr II as interest rate is costof borrowing for investment

AYadier co
rt It Yt
if 4 DISD
m attic
Changes in r movement along the IS
andviceversa Wwe

dy

y Drain for a
given
tram
policy

Fiscal policy IS curve Shifts

rate
given interest
3 given planned
Pruestment

IG Ifor AT
Shifu outwards
as AY is tve
IG I o AT
Shifa inwards
as AY is ve
f Dur Dc
BY DE t c Dy DT
l c Dy DE CAT Dl Cdt DG

ft E E
Lecture 7

thetheay bqu.dk
Interest rate adjusts to balance the supply demand

money
Mlp supply of real money
balances

theory assumes this is fixed so Mlp MTF

exogenous
money supply central Bank
price fixedinnCIS LM short run

Doesn't depend
ooo on interest rate interestratedetermin
Gromit
Demand for real money balances Ml D Lcd
rn
interest supply Demand curve downward
rate
fixed sloping because Mr P
cost of holding money
Demand Lcr
opportunity cost
Tilneybalances demand t 1
similarto
PLY
 Reduction IIncrease in
money supply

r n r n

it r A
it iz

Mlp Mlp Mlp Mfp

Shock Mst RT so people satisfied to hold less
money
Shock MST r te ooo viceversa

IncomeomoneydemandandtheLMcurvef

Income N expenditures 4 demand for money 9

D
MIP L r Y
Income 9 MD curve shifts right rot to equilibrate the
money market
vice versa LM curve

n
r n LM
raz
B I

r II re il
r Y i
I I
MTF Y Yz income
Each point on LM curve represents equilibrium Pn
money
market
 Monetarypoliayshift
LM curve drawn for given money supply of real
balances
If income held constant so MD held constant g
Mst rT LM curve shifts upwardsg
LMz
n n
LMy

f
r µ r Ii
yah
E I
i
Myp Mfp I

Theshortrunequplib.nu

Y C Y T t I Cri t G IS Determinenational
Mlp L r Y LM income
Y and r are the
only endogenous variables
money market goods market
intersection

interest n LM
rate planned actual

If
r
demand so p'Ty

i real money balances

y Incomeoutput
Fiscalpolicyandeguilibnoomy

Government purchases 3
HAG TY by AG l MPc IS shifts right
t AG TY and Tr
CHAE planned expenditure rises stimulates production
of goods and services total income rises demand

for money rises at every Pmerest rate

PMD RT
supply of money constant
ooo

IS
Is LM 4G TPEby DaxImpe
stimulates prod MY
M Tat au r rt
I r I
1 is shiftsright
q g y men
t DTCO
Y Yz
Taxes
Same effect as above boe TY
by ATo MPCX1 MPc
HAT consumption 4 planned expenditure 4 income4
at interest rate ooo IS curve shifts right
any given
IT TY Tr
Higher interest rate depresses investment increase
Ph Y is smaller in IS LM model than Pn KeysPan
Dyis
cross
7
extend r
rafts
Inherin
g is
 n
LM
14 1demand c
A

i
IS IS y
i
Ya k
c
2 Hold Pinterest rate constant 5 Recession
t AT IS curve shifts left ooo Fed IMS
keeps r the same so LM curve shifts left
TY Ps larger than in 1 Interact
n
ima
c LM the
tr LMshiftsleft
r B

IS
y
k c Yz
M Y is notdecreasing
3 Hold income constant no recession

t AT IS curve shifts
left Fed TMS
LM curve shifts right rt
High tax L consumption s t r Phuestment In
Y constant as they balance out
LM
r LMz

ti
Y
Lecture 8
Is
LMtoAggregateDemande
Why is the demand cure downward sloping
For any given money supply PT MIP too RT
Ms1alls
ooo
shifts 2M curve upward Yf
r r

p in
µ

re fr
1
ia
Mhz Mp Mp T Y

LMz
n p
t
n a P2
re
In ht
Yz Iz Yz
i Yz Y
what makes the AD shift
Shift in LM or IS curve for a given price level
Monetary policy examples Tms
Msinterestrates
LMI
M
3
p
re of 1

tr 1.3

Is 1
i l

Yy Yz I Yz

Fiscal policy example AAG or c AT

LM

gra p i l
Is
Ise i i
Ye Yz YI Yz
 Shortronaggregatesupply

Prices
sticky
difficult to adjust prices to meet demand so YS
Ps adjusted

SRAS

LRvsSRequplib.nl

LRAS Y FCko L Doesn't depend on price

Y
Vertical line changes in AD affect prices but not output
SRAS changes in AD do affect output but not prices
LRAS
FED CBreduces FED CBreduces
moneysupply moneysupply
SEAS
I
p
y
i l
n
a a
I Yz Yy
c
Lecture 9
Deflationaryexpectations
Expected changes in price AE
ooo r I Tie fischer equation
Y C Y T t I Ci TEI t G IS
MIP LP E Y LM

Fall in prices C SAF r i c tee

E if
real interest rate nominal interest rate at any given i
ooo r'T It so IS Shifu left ooo Yt so it
t I Pet Yt MDIV it by less than expected
inflation ooo r'T

LM

c
Tz

r is
I t
i
a
E at this point

t B
r
z y
i
i
I
fee Ist
l
i l
i t ISz
i l
I
Yz YI
LRandSRequilibriulRAS

equilibrium
longrun
p µ

AD

I
Examples CB IMS AD shifts left
SR sticky prices output adjusts
employment4 Recession

LR due to low demand wages prices t

downward AD curve
economy moves along
output employment back to normal but prices lower

LRAS

ftp
s
p X

ADI

I
Stabilization
Demand shocks shifts to AD curve

Supply shocks AS cone

Stabilization policy actions aimed at reducing severity
of
short run economic fluctuations

keep employment and output as close to their

natural levels
AD shock 3
Example intro of credit cards IvMD a TV less moneycirculates
more

If Ms kept constant TV CT ADshifts right YT

More sold at lower prices more workers employed to
increase output short Run

High demand PT and wages'T YI reaching original

production long Run
CB could 4ms Lo offset 411 sostabilising AD
no impact on employment and Y

LRAS

Arr B SRAS

y
AS shock or priceshocks as they have direct impact
on prices
Alters cost of producing goods so prices firms charge
change
Adverse shocks pushup costs and prices
Favourable shocks reduce Coste and prices

Adversesupply shocks
SRAS shifts up ooo PT and Yt and employmentd

stagflation g combines 4Y TOE with RE

Option 18 Keep AD constant
Eventually Pt to restore full initial employment
but faced with recession in the process
Option 2 I Accomodate supply shockby expandingAD
Quicker to bring economy back to initial y
butprices permanently higher

LRAS LRAS
B SRASz SRASz
I

saselpnpznpf.ir

i ADz
AD ADI

c y y

Option to Option 2
 FORMULAE
f ofgoodsold
value
memorise
Valueadded Rev Intermediategoods

GDPdeflator nominal
realGDP

a
Scott
O I
set
L Ha N
f jobfinders
fin
set
s separated fromjob

MPL Wp
Nationalsavings publicsavings privsavings

NS TG YT C
NS YC G
ANS DY AC DG
rr I er I Ct R
B amount Ms Ct D
D D a ctually what think
we
issued wehave
MPL
WP
N Lt U U UN
In LR ft 5L
Ms MB
multiplier
ererr MJ
Fischer equation
in re re

Md Pyd Ui yd Lcr re

MV Py
Ms of nominaloutput
timescirculated