Balla

Labor market = w/p and L
-suply curve: how many people will want to work at various real wage rates slopes upwards: as the wage rate increases, more and more individuals decide they are better off working than not working... rise in the wage rate increases the number of people in the economy who want to work
-demand curve: how many workers firms will want to hire at various real wage rates downward sloping: as the wage rate increases, each firm in the economy will find to maximize profit it should employ fewer workers than before a rise in the wage rate will decrease the quantity of labor demanded in the economy
-demand curve shifts: the capital stock, the availability of resources, taxes on goods sold
-supply curve shifts: size of the population, tastes for labor and market goods vs. leisure, taxes on consumption (taxes on labor we can represent in the labor market model)
If excess supply of labor: competition among workers would drive the wage down if excess demand of labor: competition among firms would drive wage upward equilibrium total employment = market clears, economy achieves full employment
-level of employment is achieved automatically
-unemployment is viewed as frictional.. frictional unemployment causes actual unemployment to be less than the maximum possible
Loanable funds market= r and S=I
-supply curve: level of household saving at various interest rates, slopes upward (quantity of funds supplied to the financial market depends positively on the interest rate)
-demand curve- businesses’ demand for loanable funds: equal to their planned investment spending, funds obtained are borrowed, firms pay interest on these funds
-demand curve shifts: exogenous variables: technical change or new product that gives some existing products a higher IRR, cheaper raw material prices, change in the cost of capital goods
-supply curve shifts: taxes on consumption: people will save more, time preferences: if people care less about future then it will take a higher interest rate to get them to save, age of population: younger people borrow for houses and cars.. middle age people save for retirement.. retired people spend their savings, wealth: when housing prices rose in 90s and 00s people saved less because they felt rich, a stock market boom could do the same thing
-business demand for funds curve: level of investment spending firms plan at various interest rates
-when interest rate falls: investment spending rises, business borrowing rises
-taxes in the classical model create a deadweight loss: reduce employment, savings, investment and thus output
-government borrowing for spending purposes reduces investment (incomplete expectations of tax burden) and/or consumption (tax payers anticipate future taxes and save more to pay off future taxes)
-new investment is determined by the supply and demand for loanable funds that also determines the real interest rate
-problems with the classical model: depressions and recessions: think about the things that move the demand and supply of labor (technology shocks, resource availability, time preference). It is hard to believe that any of these things could have big enough effects to explain the great depression or what we are going through now. Government expands borrowing with no effects on interest rates. The money supply is increased enormously with no impact on inflation. Fiscal expenditures impact output without causing any decline in investment or consumption- in fact both increase. Most economists do not believe the CM applies to recessions or depressions.
-the classical model assumes that wages and prices adjust so the economy is always close to equilibrium
-the short-run or Keynesian model assumes that wages and prices are fixed: this makes it possible for changes in demand to have big effects on output, employment and unemployment. it also allows monetary policy to play a role in determining output, employment and unemployment.
-fixed prices and wages help explain large fluctuations in unemployment because an increase in labor demand = decrease in unemployment, an increase in vacancies
-demand for goods in the short term model depends on income. income moves consumption and that moves demand. in Keynesian equilibrium, output equals demand (GDP = Ad) and income equals output (Y = GDP = Ad).
-aggregate demand is the total demand for final goods and services in the economy at a given time and price level. it is the amount of goods and services in the economy that will be purchased at all possible price levels.
-the Keynesian multiplier is the ratio of a change in national income to the change in government spending that causes it. more generally, the exogenous spending multiplier is the ratio of a change in national income to any autonomous change in spending (private investment spending, consumer spending, government spending, or spending by foreigners on the country's exports) that causes it. When this multiplier exceeds one, the enhanced effect on national income is called the multiplier effect. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased consumption spending, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in national income greater than the initial incremental amount of spending. In other words, an initial change in aggregate demand may cause a change in aggregate output (and hence the aggregate income that it generates) that is a multiple of the initial change.
-Gdp is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy.
-Disposable income is The amount of money that households have available for spending and saving after income taxes have been accounted for. Disposable personal income is often monitored as one of the many key economic indicators used to gauge the overall state of the economy.
-Money is an asset widely accepted as a means of payment. A means of payment is anything acceptable as payment for goods and services. Money supply is the total amount of money held by the public.
-M1 is cash in the hands of the public (currency and coins), checking accounts deposits (accounts held by households and business firms at commercial banks), and travelers checks (specially printed checks that you can buy from banks or other private companies)
-M2 is M1, savings deposits, money market deposits, money market funds, certificates of deposits under $100,000
-The banking system specializes in brokering between savers and borrowers
-Bank reserves are vault cash plus balances held at the Fed
-Required reserve ratio is the minimum fraction of checking account balances that banks must hold as reserves
-The Federal Reserve System is a central bank, it is a nation’s principal monetary authority responsible for controlling the money supply. It has 12 Federal Reserve districts, is not part of any branch of gov. and has a President and Congress. It has seven members (board of governors) appointed by the president for a 14 year term. It also has a chairman, one of the seven governors, 4-year term. There are 12 Federal Reserve Banks, each supervised by 9 directors. Each have a president. The Fed supervises and regulates banks, acts as a “bank for banks”, issues paper currency, clears checks, guides the macroeconomy, and deals with financial crises.
The FOMC is a committee of Federal Reserve officials that establishes U.S. monetary policy, All 7 governors of the Fed, 5 of 12 bank presidents. Discount rate: the interest rate the Fed charges on loans to banks
Demand for money is how much money people would like to hold, given the constraints they face. A household’s quantity of money demanded = amount of wealth that the household chooses to hold as money, rather than other assts. Opportunity cost of holding money.
The Fed shifts the money supply by changing the money supply