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Macroeconomics Policies
- 1. Basics of Macroeconomic Policies Sy Sarkarat, Ph. D. United States Fulbright Scholar for Azerbaijan State Economics University , Baku, Azerbaijan. Fall 2008 Copy Rights: This lecture was prepared to CRRC and it is designed for educational purpose not for profit.
- 3. The Business Cycle Trough Peak Peak Peak Trough REAL GDP (units per time period) TIME Growth trend
- 4. Macro Equilibrium PRICE LEVEL (average price) REAL OUTPUT (quantity per year) D 1 S 1 Q E P E Aggregate demand Aggregate supply P 1 E
- 6. An Undesired Equilibrium PRICE LEVEL (average price) Q E P E Aggregate demand Aggregate supply E Equilibrium output Full-employment output Q F P* F
- 8. The Business Cycle in U.S. History Korean War World War II Vietnam War Great Depression Source: U.S. Bureau of the census, The Statistics of the U.S.A. Growth recession Long-term average growth (3%) Recession
- 9. Inflation and Unemployment: 1900-1940 Source: U.S. Bureau of the Census. 24 20 16 12 8 4 0 – 4 – 8 1900 1910 1920 1930 1940 Inflation Unemployment
- 10. Macro Disturbances AS 0 PRICE LEVEL (average price) REAL OUTPUT (quantity per year) ( b ) Demand shifts AD 0 AD 0 AS 0 PRICE LEVEL (average price) REAL OUTPUT (quantity per year) ( a ) Supply shifts F P* Q F AD 1 F P* Q F AS 1 G P 1 Q 1 P 2 Q 2 H
- 15. The Multiplier Process 1. $100 billion in unsold goods appear 3. Income reduced by $100 billion 4. Consumption reduced by $75 billion 5. Sales fall $75 billion 6. Further cutbacks in employment or wages 7. Income reduced by $75 billion more 8. Consumption reduced by $56.25 billion more Factor markets Product markets Business firms Households 9. And so on 2. Cutbacks in employment or wages
- 18. The Multiplier
- 26. Constraints on Monetary Stimulus Inelastic demand Investment demand Rate Of Investment 7 6 0 Interest Rate Inelastic investment demand can also impede monetary policy A liquidity trap can stop interest rates from falling The liquidity trap Interest Rate E 1 E 2 g 1 g 2 Quantity Of Money Demand for money
- 27. Shifts of Aggregate Supply AS 2 E 2 Rightward AS shifts reduce unemployment and inflation AS 1 E 1 Output (real GDP per period) 0 Price Level (average price per unit of output) AD
- 34. Supply-Side Theories AD 0 AS 0 REAL OUTPUT (quantity per year) PRICE LEVEL (average price) Q 3 P 3 Q F E 0 P 0 AS 1 E 3
- 36. Changes in Marginal Tax Rates Since 1915