Macro 17

2. Lecture 17
Macroeconomics

3. Opening
Prayer

4. Exam 2 Review
Chapters 10-16

5. Two Macro Headaches
Unemployment
In
fl
ation

6. Chapter 10
Stock Market and
Personal Finance

7. What is a
Market?
Where buyers
and sellers can
discover value

8. money put at risk over time
money is time
savers and borrowers
(1+r)n
insurance
limited liability corporations
double entry accounting
Financial Capital

9. Income Statement
Revenue
- Expenses
= Net Income
What happened between two dates?

10. Balance Sheet
What I own
What is the status on a speci
fi
c date?
What I owe
What I am worth
=
Assets
Liabilities
Net Worth
Must balance

11. Accounting Pro
fi
t
Explicit Costs
Explicit + Implicit Costs
Economic Pro
fi
t

12. Finance
Time
Risk

13. Finance
Time - t or n
Risk - r or i

14. Foundation Finance
Formula
(1 + r )
n
r = risk rate
n = time periods

15. number of periods
Value r = 5%
r = 10%
r = 15%
Value = (1 + r)n r = rate
n = number of periods

16. number of periods
Value
r = 15%
Value = (1 + r)n r = rate
n = number of periods
Future
Value
Present
Value

17. Present Future
x Factor ?
÷ Factor ?
Factor Formula = (1 + r )
n

18. Chapter 11
Unemployment

19. Culture
Human Beings
Ideas
Physical Human Intellectual Financial
Inventions
Entrepreneurs Free Markets
Innovations
The Capitals of Innovation

20. trust
health
skills
knowledge
personality
relationships
Human Capital

21. Unemployment
Inactive Human
Capital

22. Three Types of
Unemployment
Frictional
Seasonal
Structural

23. Frictional
Unemployment
Time to find a new
job

24. Seasonal
Unemployment
Demand changes
with the season

25. Structural
Unemployment
Too many workers
Change in Demand

26. Unemployment Rate
Labor Force
Participation Rate
Rate are Ratios

27. Population 330
Adults 254
Labor Force 160
Employed 152
Under 16 76
Not in Labor Force 94
8 Unemployed
Employed 152 8
Unemployed
Not in Labor Force 94 Under 16 76
Labor Force
Participation Rate
=
Labor Force
÷
Adults
Unemployment Rate =
Unemployed
÷
Labor Force
Rates

28. Men
Women

29. $0
$5
$10
$15
$20
0 10 20 30 40 50 60
Supply
Demand
Wage
Workers
Equilibrium
Wage
30 workers
30 jobs
no
unemployment
Minimum Wage
40 workers
20 jobs
20 unemployed
workers
Minimum Wage
20 workers
get a raise
10 workers
lose job
10 new
unemployed
workers
Minimum
Wage

30. 3,000 people live in Pooleynesia. There are
250 people under 16. 450 people are not
in the labor force. 230 people are
unemployed.
1. What is the Labor Force Participation
Rate?
2. What is the Unemployment Rate?

31. Calculating Unemployment Rates
Employed
+ Unemployed
= Labor Force
# %
100%
The unemployment rate is 10% and there
are 4,500 people employed. What is the
number unemployed?
10%
90%
4,500
5,000
500
4,500 ÷ .90 = 5,000

32. Calculating Unemployment Rates
Employed
+ Unemployed
= Labor Force
# %
100%
The unemployment rate is 5% and there are
2,500 people unemployed. What is the
number employed?
5%
95%
47,500
50,000
2,500
2,500 ÷ .05 = 50,000

33. Calculating Unemployment Rates
Employed
+ Unemployed
= Labor Force
# %
100%
The unemployment rate is 3% and there are 19,400
people employed. There are 30,000 adults. What is
labor force participation rate?
3%
97%
19,400
20,000
600
19,400 ÷ .97 = 20,000
20,000 ÷ 30,000 = .67 or 67%

34. Chapter 12
In
fl
ation and the
Quantity Theory of
Money

35. Prices
Current
Constant

36. In
fl
ation
Cause:
Printing money faster than
making goods and services
Effect:
Rising prices

37. Nominal
vs.
Real

38. P2 - P1
P1
In
fl
ation Rate

39. Price Level
Average of
prices

40. In
fl
ation
GDP
De
fl
ator

41. Quantity Theory of Money
M = Money Supply
v = velocity
P = Price Level
YR = Real GDP

42. v = velocity
The average number of times
a dollar is used to purchase
fi
nal goods and services
within a year

43. Mv = PYR
Assume v andYR are
constant
M = P

44. M = P
In
fl
ation is
everywhere and
always a monetary
phenomenon
Milton Friedman

46. Chapter 13
Aggregate Demand
Aggregate Supply
Model
AD-AS Model

47. Model
A way to understand how
things work
Models change
Reality doesn't

48. Chart
A way to illustrate logic and
data

49. Aggregate Demand
Why do people want to buy
things?

50. In
fl
ation
Rate
P
π
AD
Real GDP Growth Rate Y
Shift Left - Decreasing Demand
Slower Money Supply Growth
(higher interest rates)
Fear
Reduced Wealth
Higher Personal Taxes
Lower Government Spending
Decreased Export Growth
Increased Import Growth
Shift Right - Increasing Demand
Faster Money Supply Growth (lower interest rates)
Con
fi
dence
Increased Wealth
Lower Personal Taxes
Higher Government Spending
Increased Export Growth
Decreased Import Growth

51. Aggregate Supply
a function of all of your
capitals

52. What is capital?
anything you can use to
create value

53. Supply
No matter the price
you can only produce
so much

54. Real GDP Growth Rate
In
fl
ation
Rate
π
LRAS
Shift Left - Losing Capitals
Bad weather
Higher oil price
Tech slump
Higher business taxes or regulations
War, Earthquake, Pandemic
Shift Right - Gaining Capitals
Good weather
Lower Oil Price
Tech boom
Lower business taxes or regulation
Smooth production

55. Real GDP Growth Rate
In
fl
ation
Rate
π
LRAS
AD

56. Real GDP Growth Rate
In
fl
ation
Rate
π
AD
LRAS
SRAS

57. Father of Macroeconomics
John Maynard Keynes
(1883 - 1946)
The GeneralTheory of
Employment,
Interest and Money
The ideas of economists and political
philosophers are more powerful than
commonly understood; indeed the
world is ruled by little else.

58. Aggregate
Supply
Shift Left - Decreasing Demand
Slower Money Supply Growth
Fear
Reduced Wealth
Higher Personal Taxes
Lower Government Spending
Decreased Export Growth
Increased Import Growth
Shift Right - Increasing Demand
Faster Money Supply Growth
Con
fi
dence
Increased Wealth
Lower Personal Taxes
Higher Government Spending
Increased Export Growth
Decreased Import Growth
Left
Shift Left - Losing Capitals
Bad weather
Higher oil price
Tech slump
Higher business taxes or regulations
War, Earthquake, Pandemic
Shift Right - Gaining Capitals
Good weather
Lower Oil Price
Tech boom
Lower business taxes or regulation
Smooth production
Aggregate
Demand
Right

59. π Y
Quiz ADAS Modeling In
fl
ation Output
Curve Direction Level Level
1. Good Weather
2. Slower Money Growth Rate
3. Lower Business Taxes
4. Decrease in Exports
5. New innovation
6. Lower electricity prices
7. Higher Personal Taxes
8. Earthquake
AD
Real GDP Growth Rate
In
fl
ation
Rate
π
LRAS
SRAS

60. Chapter 14
Transmission and
Ampli
fi
cation

61. Transmission and Ampli
fi
cations
Intertemporal Substitution
Uncertainty and Irreversible Investments
Labor Adjustment Costs
Time Bunching
Collateral Damage

62. Uncertainty and Irreversible
Investments
Bad news creates uncertainty
uncertainty makes you wait
Sunk Costs
Cannot reverse

63. Chapter 15
Central Banks

64. Who is the
chairman of the
central bank in
your country?

65. AD
Real GDP Growth Rate
In
fl
ation
Rate
π
LRAS
SRAS
Recession
In
fl
ation

66. Money Supply Tools
Excess
Reserves
Rate
Open
Market
Operations
Discount
Rate
Reserve
Ratio

67. Central Bank
Recession
Unemployment
In
fl
ation

68. Reserve Ratio
Fractional Reserve
Banking
Money Multiplier

70. Reserve Ratio
Fraction of deposits
that must be held in
reserve

71. Reserve Ratio
RR = 1÷ MM
Money Multiplier
MM = 1÷ RR

72. Discount Rate
Rate the FED
charges member
banks

73. Discount Rate
In
fl
uences other
rates

74. 0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Time to Maturity
Interest
Rate FED Changes
Discount
Rate
Other Rates
Follow

75. Open Market
Operations
Buying and Selling
Financial
Instruments

76. Banks
now have more
cash to loan
Central Bank
Public Banks
Increase Money Supply?
Buy bonds for cash

77. Banks
now have less
cash to loan
Central Bank
Public Banks
Decrease Money Supply?
Sell bonds for cash

78. What do banks do with
extra money?
Excess Reserves
The FED will pay them
interest

79. Excess Reserves Interest
If the rate is high enough
you will leave it in the
bank.
Sets a
fl
oor

81. Chapter 16
Monetary Policy

82. AD
Real GDP Growth Rate
In
fl
ation
Rate
π
LRAS
SRAS
Recession
In
fl
ation

83. Problem
Money
Supply
Interest
Rate
AD
Shift
Reserve
Ratio
Discount
Rate
Open Market
Operations
Excess
Reserve
Rate
In
fl
ation
Unemployment
Stag
fl
ation
Left Increase Increase
Sell
Bonds Increase
Right Decrease Decrease Decrease
Buy
Bonds
Increase
Decrease Increase
Decrease

84. Disin
fl
ation
Slower growth in in
fl
ation rate
8% to 3%
De
fl
ation
Negative in
fl
ation
8% to -3%

85. Illiquid
No cash
Net worth to pay debt, but can’t
sell quick and without loss
Insolvent
No cash
No net worth to pay debt

86. Illiquid
Assets are frozen

87. Quantitive Easing
Buying lots of other
fi
nancial
instruments.
Lots of illiquid assets

88. Lender of Last
Resort
Bailouts