Instructor: Basil Al Hashimi
Please be sure to visit each of the following links:
Instructions for Module # 2
- Required Reading as follows: Review Chapters 8-10 in Macroeconomics.
- Written Report Assignment:
Prepare a 2-3 page report addressing one of the
topics below. The paper
should be based upon reading, research, or experience, such as a personal
job
experience or case study. Concepts from the text should be integrated
when
applicable. Identify the macroeconomics concept(s) or principle(s)
involved,
relate the report to specific issues in our economy, and provide conclusions,
recommendations, or lessons learned as a result of your research.
Busines Cycles:
Evaluate the business cycle and why our economy needs to
live with it? Determine business cycle theories, and the reason why are
they different?
Employment and Unemployment
Analyze a business from the perspective of economic costs
of unemployment.
Examine its impact on national income and social environment. Can we live
without unemployment? Why or why not? and Inflation
Identify the type of inflation and the cost of inflation. Discuss the
factors that
affect inflation. What economic effects have resulted from having low
rate of
or high rate of inflation?
Important Points of Chapters 8-10 (handout for
these chapters):
Written by: Basil Al-Hashimi Course: Macroeconomics 111
The following notes have been created in order to assist
you in your understanding of the text as well as to help you prepare for
your examination. Chapters 8-10
- Structural unemployment is caused by people losing jobs when
their skills
become obsolete due to technological innovations.
- Frictional unemployment is the unemployment that arises from normal
labor turnover- from people entering and leaving the labor force. Frictional
unemployment is not usually regarded as a problem, but it is a permanent
phenomenon.
- Cyclical unemployment is defined as unemployment resulting from
fluctuations in economic activity.
- The unemployment rate equals the number equals the number of
unemployed people divided by the number of labor force.
- The unemployment rate consists of the number of unemployed divided
by
the labor force.
- Inflation is defined as a sustained in the price level, or general
increase in
the price level.
- A reduction in the rate of inflation is known as disinflation.
- The Consumer Price Index measures the cost of a fixed market basket
of
consumer goods and services produced in the U.S. economy.
- Demand -pull inflation occurs when the economy is at or above full
employment with excess demand.
- Cost-push inflation occurs when the economy is below full employment
with prices rising even though there are no shortages of goods or workers.
- GDP is a measure of the market value of all final goods and services
produced in an economy in a given year.
- Potential GDP is the total value of goods and services that could
be
produced at full employment.
- Nominal GDP is the total value of goods and services measured at
current prices.
- Real GDP is the total value of goods and services measured at constant
prices.
- A short-run aggregate supply curve will shift ( to the right) when
new
firms enter markets and the economy expands.
- Okun's Law suggests that every reduction of 2% in actual GDP below
potential GDP can be expected to be associated with a 1% increase in
unemployment.
- If inflation is both balanced and anticipated, then there is no
effect on
real output, efficiency, or income distribution.
- Moderate inflation is usually characterized by stable expectations
about
the future rate of inflation.
- The GDP deflator includes the prices of more goods than either the
CPI
or the PPI (Producer Price Index).
- Demand pull inflation can occur only when an economy is operating
close to its full potential.
- The term " potential GDP" refers to the GDP associated with the
natural
level of unemployment .
- Real GDP is computed by dividing nominal GDP by the GDP price
deflator.
- Net National Product (NNP) is equal to the sum total of earned incomes,
including profits.
- GDP differs from NNP by the difference between gross investment
and
net investment.
- GDP- NNP = Depreciation.
- GI - NI = Depreciation.
- The Purchasing Power Parity (PPP) is the theory that postulates
that the
change in the exchange rate between two currencies is proportional to
the
change in the ratio in the two countries's general price levels.
- According to the classical theory, Say's law indicates that the
economy
will always be at full capacity.
- Quantity Theory is based on the assumption of stable money demand
and
flexile wages and prices, this leads to a world in which changes in
the money
supply have a direct link to changes in aggregate demand.
- The real interest rate of interest is determined by saving and investment.
- An increase in aggregate demand in the classical model leads to
higher
prices and constant output.
- The "equation of exchange" states that the value of what is purchased
in
the economy is equal to total spending.
- On the basis of Keynesian model of output determination, GDP is
in
equilibrium whenever planned saving equals planned investment.
- On the basis of Keynesian model of output determination, the multiplier
effect means that an increase in investment will increase output by
more than
itself.
- The idea behind the multiplier principle is that one person's spending
becomes income to another person.
- The accelerator principle differs from other theories of investment
in that
investment is seen as related to how quickly or slowly GDP changes.
- The accelerator principle implies that if real GDP begins to increase
quite rapidly, then the demand investment curve will shift to the right.
- Unemployment, according to Keynes, could be a persistent problem
in a
capitalist economy.
- Paradox of thrift is when the entire nation attempting to save more
causes
income to decrease, thereby, they end up saving less.
- Recessionary gap is the difference between equilibrium GDP and
potential GDP.
- In the Keynesian model, when desired saving exceeds investment,
inventories rise.
- On the basis of the keynesian model of output determination when
GDP
is at its equilibrium level planned investment must equal actual investment.
- To move the economy back towards equilibrium, the multiplier raises
the
total output until the level of planned saving equals the new investment.
- Changes in AD can affect GDP, in the short run at least, if unemployed
resources exist.
- In the simple Keynesian multiplier model, national output moves
up and
down in response to movements in AD.
- The Keynesian multiplier is the reciprocal of the MPS.
- The Multiplier model emphasizes the importance of changes in
autonomous expenditures (especially investment, government spending,
and
net exports) in determining changes in output and employment.
- Paradox of thrift is that an attempt by a society to increase its
saving may
result in a reduction in the amount which it actually saves.
- Automatic stabilizers tend to reduce nations income fluctuations.
- Federal system of taxation acts as a built-in stabilizer because
when GDP
changes tax receipts change automatically in the same direction without
any
change in rates.
- The federal debt may best be viewed as a burden primarily to the
degree
that it reduces the growth and level of the real capital stock.
- The expansion of the government debt could result in:
- a decline in savings
- an increase in interest rates
- a decline in investment
- a reduction in the capital stock
- Discretionary fiscal policy is defined as the deliberate change
in tax laws,
transfer payments, and government spending to change equilibrium income.
- The size of tax multipliers is smaller than that of expenditure
multipliers.
- Tax multiplier = MPC x expenditure multiplier.
- A progressive income tax is an example of an automatic stabilizer.
- Automatic stabilizers affect changes in income, if income rises,
automatic stabilizers decrease spending.
- The size of tax multipliers is smaller than that of expenditure
multipliers.
Basil Al Hashimi
Please be sure to visit each of the following links:
Please contact Basil
al Hashimi for comments or corrections email
Red Mountain Campus phone:
480-654-7715 see a map
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