Macro Economics

23-06-2014

Economic freedom report, fraser index

Three things interesting:
Making a currency and ignoring the quality of the cigarette
Monopoly: People who spoke Sikh would have direct access to
trading with Sikh, who did not eat beef but wanted jam and
butter
Supply and demand: Prices on food would go up, when new
hungry prisoners arrived. Good and bad war news had an effect
on the price development, as did rumours of new supplies.
(Expectations)
I = Irealtime and risk premium and inflation premium
Sport market = current market
Future market = future supply and demand
Demand
Quantity demand = f(price)
Qd = f(P,
Shift in Quantity demanded = shift along the demand curve = shift
in the quantity supplied
Shift in demand = the entire curve moves
Marginal benefit = An increase in an activity's overall benefitt that is
caused by a unit increase in the level of that activity, all other factors
remaining constant.
Consumer surplus = willingness to buy less market price
Supply
MAIR Approach
M Market

A Action
I Interpretation of action (Change in demand, or quantity)
R Results in Equilibrium Price and Quantity
Economic costs = accounting costs + opportunity cost
Change in quantity supplied = shift along the supply curve

5 parameters of equilibrium
Business Cycle
Peak
Contraction
Trough
Expansion
Peak
Contraction
De Soto legal systems around the world
Production function: Y = f (A,K,eL)
Y = Income, GDP Provides productivity
A = Ideas, Entrepreneurship, innovation
K = Capital (Physical capital: Machines, tools, buildings)
L = Labor

e = Education and training (Increasing the productivity of labor)

Y = f (inputs)
Land (N) Rent, Labor (L) Wages, Capital (K) i: Investment,
Entrepreneurship (E) Profit

Y = C (consume) or S (Save)
Savings provide loanable funds for investment in K.
= % of output in new capital

The house that uncle Sam built book

econtalk
i(nominal) = real rate of intrest + E(inflation)
E(inf)=f(recent inflation + Increase in money supply m)
AD=C+I+G+(x-m)
Five Transmission Mechanisms:
1. Intertemporal substitution
Decisions are effected by the general economy. Stay-at-home
mother decides to go to work during an economic boom.

2. Uncertainty and irreversible investment

Negative shocks increase uncertainty
3. Labor adjustment costs
Carrier change, outdated and not competitive labor
4. Time bunching
Network externality
5. Sticky wages and prices
6. Lags timing problem
Recognition lag (3-4 months)
Action by congress (3-5 months)
o Policy action lag
Implementation lag (1-20 months)
Monetary
Economists, Central bank
Fiscal policy
Government spending
Sunk costs:
Irretrievable costs
The FED & Open Market Operations
Money multiplier (MM) = amount the money supply expand each
dollar increase in reserves.
1/RR
The fraction of deposits held on reserve:
Reserve Ratio (RR)=value of reserves/value of deposits

Tools the FED uses to control the money supply (Counter

Cyclical Policy)
1. Buy bonds to inject money into the economy. This expands the
Ms and stimulates the economy.
2. Discount rate lending and term auction facility. Interest rate
when banks borrow directly from the FED.
1. Open market operations
Buy (expansionary monetary policy) or sell bonds (restrictive
monetary policy)
2. Discount rate
Decrease or increase discount rate
3. Paying interest on reserves
lower rate of payment (expansionary) or raise rate (restrictive)
4. Set reserve requirement
Lower or raise requirement
Fiscal Policy:
AD=C+I+G+(x-m)
Multiplier:
One persons spending becomes another persons income.
Multiplier: 1/MPS
1= The marginal prosperity to consume (MPC) + marginal
prosperity to save (MPS)
1=C+S
MPS
0,02
0,05
0,10
0,20

M
50
20
10
5

Full effect of injection= Increase in G x multiplier

Crowding out
International Trade:
1. Gains from trade occur when people trade across different
countries
2. Rate of saving is a key variable
3. Market equilibrium means that, the gains are determined by
supply and demand.
US dollars:
- Import goods and services
- Demand domestic currency to trade for the dollars
- Invest
If there is a good and services deficit (trade deficit), then for the
balance of payment to balance there must be a capital account surplus.
Interest rate nominal =I real rate+risk premium+inflation premium