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Macroeconomics Intermediate Level (College) Summary from Mankw
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(Monetary policy goal)The federal can set nominal money supply and interest rate to reduce output fluctuations. Which goals should be
set? Please graphically discuss all possibilities by IS-LM model.
Case 1: IS curve fluctuates more volatile
The initial economy is in i* and Y* and the IS curve fluctuates between
IS1 and IS2, when the fluctuation of the LM curve is very small
If the central bank peruses the stability of interest rate (to limit the
interest rate at i*): Market purchase or open market operations will be
needed to maintain the interest rate at the cost of moving the IS curve.
Output level will then fluctuate between Y1 and Y2
If the central bank peruses the stability of money supply as their policy
goal, when the IS curve fluctuates, the LM curve will stay unchanged,
leading to fluctuations in output between Y1’ and Y2’, leading to a less
dramatic deviation of output
The government should pursue the stability of money supply
Case 2: LM curve fluctuates more volatile
Assume the LM curve fluctuates between LM1 and LM2. If the central
bank wants to pursue the stability of interest rate, it will conduct open
market operations to offset the fluctuations of the LM curve, and maintain
the initial level of output unchanged
But, if the central bank prefers the stability of money supply, then it can’t
intervene in the market. Output would then fluctuate between Y1 and Y2.
The government should pursue the stability of interest rate
Even so, for all practical purpose, the Fed believes that the LM shocks are more prevalent and the interest rate is
more easy to measure. Hence, the interest rate is mostly targeted
Monetary policy neutrality
If we want to maintain the same price and output level when there is a change in
M(s) we should pursue monetary policy neutrality
When the bank sets a monetary policy to raise money supply from
Ms = 100 to Ms = 200, the LM curve will shift to the right, leading to a
lower price of liquidity and interest rate. Lower interest rate will raise
investment, leading to higher levels of output, so Y’ and I’ are short run
equilibriums
But, at this equilibrium, output is higher than the natural level, hence firms
will raise prices to maximize profits. As a result, the LM curve will return
to original position, with I and Y unchanged
Hence, in the long run, prices are flexible and the only effect of increased money supply is higher price
level and monetary policy won’t affect the economy in real terms
, Unidad 2
Definiciones en Colta
Tasas:
Real GDP: Measures the total income of everyone in the economy adjusted for the level of prices
o Tells a nations total income and expenditure on its output of goods and services
o Best measure for the economic performance, obtained from data as ta collections, education programs, regulations, surveys,
etc.
Inflation rate: Measures how fast prices are rising
o Core Inflation: Measures the increase of price of a consumer basket that excludes food and energy producs, as these prices
edhibit substantial short run volatility
Consumer Price Index: Measures the level of prices (CPI)
o Laspeyres Index: price index with fixed basket of goods (CPI). Even so, tends to overstate the cost of living bc not takes
into account consumers have the opportunity to substitute less expensive goods for more expensive ones with the same
purpose
o Paasche Index: Price index with a changing basket of goods (GDP)
Unemployment rate: Measures the fraction of the labor force that is our of work
Stocks: Measures a quantity at a given point in time (Ej.: persons wealth, number of unemployed, amount of capital in the
economy, gobernment debt, etc.)
Flow: Measures a quantity per unit of time (Ej.: persons income and expenditures, unemployment rate, amount of investment,
deficit rates, etc.)
Cambios en la economía
Recesión: Periods where real GDP falls mildly
o Depressions: Periods where real GDP falls severly
o High unemployment, declining income, economic hardship
Deflation: Periods of falling prices
o ≠ Inflation: Periods of rising prices
Modelos:
Variables endógenas: variables a model tries to explain
Variables exógenas: variables que un modelo toma como dadas. La idea es usarlas para explicar las variables endógenas
Market Clearing: Es la assumption that markets are normally in equilibrium, whereas if a price changes, the demand and
supply will adjust to it in order to maintain in equilibrium
o We assume wages and prices are flexible enough to adjust rapidly, instead of sticky
o These assumptions help us concentrate on the long term effects
Modelo de Oferta y Demanda
𝑸𝒅 = 𝑫(𝑷, 𝒀)
o La cantidad demandada Q(d) depende de la demanda de los
consumidores dado un precio (P) y un income (Y)
𝑸𝑺 = 𝑺(𝑷, 𝑷𝒎 )
o La cantidad ofrecida Q(s) depende de la supply function (S) en
términos del precio de venta (P) y precio de los materiales
P(m).
Mercado en Equilibrio = 𝑸𝒅 = 𝑸𝒔
o Las variables endógenas siendo P y Q
o La demanda aumenta moviendo su curva para la derecha y la oferta para la izquierda
,Gross Domestic Product
Is the market value of all final godos and services produced within an economy in a given period of time
Characteristics:
o Used Goods It only accounts for currently produced godos (NOT revendidos, ni venta de
activos, used goods, etc.)
o Inventory When a firm puts their production into inventory (to sell later), it is counted as an
expenditure by the firms owners (housholders)
Production for final inventory increases GDP to the same rate as production for sale
When inventory is taken out to sell, it then counts as expenditure (doesn’t matter if it is then
sold or not)
o Intermediate Goods The value of intermediate goods used for production is added to the value
of the final good.
It is added as part of the market Price, so that the GDP only counts for final goods
Value Added of a Firm = Value of the firm’s output – Value of intermediate goods that the
firm purchases
o Imputation Value Assigning a Price to a good that is not on the market
Ej.: Housing rentals, Government services
o Underground economy El mercado negro is left out of GDP. This is the activity people hide
from the Government to evade taxation, bc it is ilegal, etc.
o ¿How is it valued? The sum of all product’s quantities (Q) multiplied by their market price or
imputed value (P), as market prices reflect what people are willing to pay for each product
The Circular Flow:
1. The households sell labor to the firms
2. Firms use labor to produce bread, which they in turn sell to the
households
3. Households buy bread from the firms, circulating dollars
4. Firms use revenue to pay wages of workers and profits belongs to
the owners of firms (who are also households)
5. As GDP measures the flow of dollars, it can now be seen in 2 ways:
a. GDP = Total income of production = Sum of wages and profits
b. GDP = Total expenditure on purchases
Nominal GDP The value of all goods is measured at current prices
o 𝐺𝐷𝑃 = ∑ 𝑃𝑛 ∗ 𝑄𝑛
o This measure can increase bc of rises in Price or quantity each time they happen, so It is used to
measure the change in prices or current dollar value of the output of the economy
Real GDP The value of goods is measured using a constant set of prices. Hence, quantities can
change, but prices don’t
o Calculated using a base set of prices: 𝐺𝐷𝑃 = ∑ 𝑃𝐵 ∗ 𝑄𝑛 donde (B) es un año que se mantiene
constante, utilizado como base, y (n) es el año para el cual te piden que calcules el GDP.
o It is used to measure the change in quantities you can buy with the same amount of money
GDP Deflator: (Implicit Price deflator for GDP) is the ration of nominal to real GDP
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
o 𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
, o It reflects what is happening to the overall level of prices in an economy by measuring the Price
of output relative to its Price in the base year
o Si lo reacomodamos para que se iguale al Real: The deflator is used to deflate (take out inflation
from) nominal GDP and yield to real.
Components of GDP Expenditure: Known as the national income accounts identity
o GDP = Consumption (C) + Investment (I) + Gov. Purchases (G) + Net Exports (NX)
o Consumption Consists of goods and servicies bought by households, divided into non durable
goods, durable and services
o Investments fixed and inventory investments
o Government Purchases Goods and services bought by federal, state and local governments
It does not inlcude transfers payments to individuals as social security and welfare. Does not
count when the idea behind is the reallocation of existing income
o Net Exports All trade with other countries: Value of goods and services sold to other countries
minus the value of goods that foreigners sell to us
Gross National Product
Measures the total income earned by nationals (residents of the nation)
GNP = GDP + Factor payments from Abroad – Factor Payments to abroad
Net National Product (NNP) = GNP – Depreciation
o The depreciation of capital is the amount of the economy’s stock of plants, equipment and
residential structures thtat wears out during the year
National Income: Measures how much everyone in the economy has earned
o Differs slightly from NNP bc a statistical correlation called Statistical Discrepancy
o It is devided into 6 categories with percentage of national income payed in each:
Compensation of employees (63%) The wages and fringe benefits earned by workers
Proprietors income (8%) Income of non corporate businesses as farms, pop stores and
law partnerships
Rental income (3%) Income that landlords recieve (included rent that homeowners “pay”
to themselves) – expenses
Corporate Profits (14%) Income of corporations after payments to workers and creditors
Net Investment (4%) Interest domestic businesses pay – interest domestic businesses
recieve + interest earned from foreigners
Personal Income: The amount of income households and non corporate businesses recieve
o And the equation is the following. PI =
(-) Indirect Bsuiness Taxes As these never enter anyones income
(-) Corporate Profits The sum of corporate taxes, dividends and retained earnings
(+) Back Dividends The amount of corporate profits that are redistributed
(+) Government Transfers to individuals What the Government pays out
(-) Social Insurance Contributions made to the Government by individuals
(+) Interest Households earn Personal interest income – net interest
o Disposable Personal Income = Personal Income – Personal Tax and NonTax payments
This is the amount housolds and noncoporate businesses have available to spend after
satisfying their tax obligagtions to the government
Consumer Price Index
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