,Chapter 1
1-2 The Euro Area
Nineteen countries now belong to this common currency area.
Main issues: reduce unemployment + how to function ef ciently as common currency area.
Should workers be protected less to eliminate labor market rigidities?
Euro area: no exchange rate + common interest rate.
1-3 The United States
Looking at health of a country: output growth + unemployment + in ation rate.
Role Fed: to ght recessions + control the interest rate (constraint: zero lower bound).
Without output growth there cannot be a sustained increase in income per person.
To eliminate increasing inequality: raise productivity growth or limit rise of inequality or both.
1-4 China
Attention China; higher purchasing power parity + rowing rapidly for more than three decades
(high accumulation of capital + rapid technological progress).
In China there is low effect of world wide crises.
1-5 Looking ahead
Doesn’t matter at which country we look, we can apply macroeconomic issues to all of them.
Chapter 2
2-1 Aggregate output
The measure of aggregate output in the national income accounts is called the gross
domestic product, or GDP.
Intermediate good: good used in the production of another good.
Ways of measuring GDP:
● Final goods excluding the intermediate goods to avoid double counting (made within
Dutch border).
● By expenditure (adds up value of purchases made by nal users): Y = C + G + I + NX.
● By income (income generated by production): Y = wage + pro t + prop. Income + rent +
interest.
Nominal GDP: the sum of the quantities of nal goods produced times their current price
Real GDP: the sum of the quantities of nal goods times constant prices (real GDP in chained
(year) euros/ dollars).
Real GDP per person: the ratio of real GDP to the population of the country.
G
fi fi fi fi fi fifl
, GDP growth are called expansions, negative GDP growth are called recessions.
2-2 The unemployment rate
Employment: The number of people who have jobs.
Unemployment: the number of people who do not have a job bur are looking for one.
Labor force: the sum of employment and unemployment.
Unemployment rate: the ratio of ht bummer of people who are unemployed to the number of
people in the labor force.
People who have given up looking for a job are not in the labor force (discouraged workers).
Participation rate: the ratio of the labor force to the total population of working age.
Care about unemployment: direct effect on the welfare + provide signal economy is not using
some of its resources.
2-3 The in ation rate
In ation: a sustained rise in the general level of prices (the price level).
GDP de ator: nominal GDP in year t / real GDP in year t (it is an index number).
Rate of in ation: percentage change of GDP de ator or CPI.
Consumer Price Index (CPI): price level of the consumption basket.
Care about in ation: Not alle price/ wages rise proportionately + in ation leads to distortions.
2-4 Output, unemployment, and the in ation fate: Okun’s law and
the Phillips curve
Okun’s law: higher output growth leads to decrease in unemployment (a growth of 2% keep
the unemployment constant).
Phillips curve: ralation between core in ation rate (left out volatile goods) and unemployment
rate. Okun’s law is only true on average. The rate of unemployment associated with given
rate of in ation can be computed.
2-5 The short run, the medium run, and the long run
I the short run the level of output is determined by the movements in demand, in the medium
run by supply factors, and in the long run by for example education, saving rate and role of
the government.
Chapter 3
3-1 The composition of GDP
C = Consumption (purchases of goods and services by consumers).
I = ( xed) Investment (sum of nonresidential ( rms) and residential (people) investments).
fl fi flflfl flfl fl fi fl fl fl
, G = government spending (purchases of goods and service by governments).
X = exports, IM= Import. Net exports (NX) = (X - IM). Trade balance, surplus/ de cit.
Inventory investment = production - sales.
3-2 The demand for goods
Total demand for goods = Z = C + I + G + Z - IM (identity).
Assumptions: all rms produce same good + supply = demand + closed economy.
Then X - IM = 0, thus: Z = C + I + G.
Yd (disposable income) = income - taxes.
Consumption function (behavioural equation) C = C0 + C1(Yd).
C1 is propensity to consume and C0 is autonomous spending.
Endogenous variables depend on other variables, exogenous are taken as given.
G and T describe the scal policy.
3-3 The determination of equilibrium output
In equilibrium Z = Y (equilibrium condition), thus substitute Z by Y.
Y = C0 + C1Y - C1T + I + G —> (1-C1)Y = C0 + I + G - C1T —> Y = (1/(1-C1)) * (C0 + I + G -
C1T).
Blue part is the autonomous spending (balanced budget: T=G). Purple is multiplier.
We can put it in a graph (45 degree line + Y = C0 + C1Y - C1T + I + G).
According to assumptions output changes right away, in reality we have dynamics (process).
3-4 Investment equals saving: an alternative way of thinking
about goods-market equilibrium
Private saving (S): disposable income - consumption - taxes
Public saving (T-G): taxes - government spending (surplus or de cit).
Equilibrium in goods market requires: S = I (IS relation). And Y = Z ofc.
Propensity to save = (1 - C1).
3-5 Is the government omnipotent? A warning
Complicating governments tasks: changing spending/ taxes is not easy + assumption I
remains constant + expectations are likely to matter + given level of output can come with
unpleasant side effects + cutting taxes are increasing G, can lead to de cits in long run.
Chapter 4
4-1 The demand for money
Money is used for transactions, plays no interest, is a currency or a checkable deposit.
fi fi fi fi
1-2 The Euro Area
Nineteen countries now belong to this common currency area.
Main issues: reduce unemployment + how to function ef ciently as common currency area.
Should workers be protected less to eliminate labor market rigidities?
Euro area: no exchange rate + common interest rate.
1-3 The United States
Looking at health of a country: output growth + unemployment + in ation rate.
Role Fed: to ght recessions + control the interest rate (constraint: zero lower bound).
Without output growth there cannot be a sustained increase in income per person.
To eliminate increasing inequality: raise productivity growth or limit rise of inequality or both.
1-4 China
Attention China; higher purchasing power parity + rowing rapidly for more than three decades
(high accumulation of capital + rapid technological progress).
In China there is low effect of world wide crises.
1-5 Looking ahead
Doesn’t matter at which country we look, we can apply macroeconomic issues to all of them.
Chapter 2
2-1 Aggregate output
The measure of aggregate output in the national income accounts is called the gross
domestic product, or GDP.
Intermediate good: good used in the production of another good.
Ways of measuring GDP:
● Final goods excluding the intermediate goods to avoid double counting (made within
Dutch border).
● By expenditure (adds up value of purchases made by nal users): Y = C + G + I + NX.
● By income (income generated by production): Y = wage + pro t + prop. Income + rent +
interest.
Nominal GDP: the sum of the quantities of nal goods produced times their current price
Real GDP: the sum of the quantities of nal goods times constant prices (real GDP in chained
(year) euros/ dollars).
Real GDP per person: the ratio of real GDP to the population of the country.
G
fi fi fi fi fi fifl
, GDP growth are called expansions, negative GDP growth are called recessions.
2-2 The unemployment rate
Employment: The number of people who have jobs.
Unemployment: the number of people who do not have a job bur are looking for one.
Labor force: the sum of employment and unemployment.
Unemployment rate: the ratio of ht bummer of people who are unemployed to the number of
people in the labor force.
People who have given up looking for a job are not in the labor force (discouraged workers).
Participation rate: the ratio of the labor force to the total population of working age.
Care about unemployment: direct effect on the welfare + provide signal economy is not using
some of its resources.
2-3 The in ation rate
In ation: a sustained rise in the general level of prices (the price level).
GDP de ator: nominal GDP in year t / real GDP in year t (it is an index number).
Rate of in ation: percentage change of GDP de ator or CPI.
Consumer Price Index (CPI): price level of the consumption basket.
Care about in ation: Not alle price/ wages rise proportionately + in ation leads to distortions.
2-4 Output, unemployment, and the in ation fate: Okun’s law and
the Phillips curve
Okun’s law: higher output growth leads to decrease in unemployment (a growth of 2% keep
the unemployment constant).
Phillips curve: ralation between core in ation rate (left out volatile goods) and unemployment
rate. Okun’s law is only true on average. The rate of unemployment associated with given
rate of in ation can be computed.
2-5 The short run, the medium run, and the long run
I the short run the level of output is determined by the movements in demand, in the medium
run by supply factors, and in the long run by for example education, saving rate and role of
the government.
Chapter 3
3-1 The composition of GDP
C = Consumption (purchases of goods and services by consumers).
I = ( xed) Investment (sum of nonresidential ( rms) and residential (people) investments).
fl fi flflfl flfl fl fi fl fl fl
, G = government spending (purchases of goods and service by governments).
X = exports, IM= Import. Net exports (NX) = (X - IM). Trade balance, surplus/ de cit.
Inventory investment = production - sales.
3-2 The demand for goods
Total demand for goods = Z = C + I + G + Z - IM (identity).
Assumptions: all rms produce same good + supply = demand + closed economy.
Then X - IM = 0, thus: Z = C + I + G.
Yd (disposable income) = income - taxes.
Consumption function (behavioural equation) C = C0 + C1(Yd).
C1 is propensity to consume and C0 is autonomous spending.
Endogenous variables depend on other variables, exogenous are taken as given.
G and T describe the scal policy.
3-3 The determination of equilibrium output
In equilibrium Z = Y (equilibrium condition), thus substitute Z by Y.
Y = C0 + C1Y - C1T + I + G —> (1-C1)Y = C0 + I + G - C1T —> Y = (1/(1-C1)) * (C0 + I + G -
C1T).
Blue part is the autonomous spending (balanced budget: T=G). Purple is multiplier.
We can put it in a graph (45 degree line + Y = C0 + C1Y - C1T + I + G).
According to assumptions output changes right away, in reality we have dynamics (process).
3-4 Investment equals saving: an alternative way of thinking
about goods-market equilibrium
Private saving (S): disposable income - consumption - taxes
Public saving (T-G): taxes - government spending (surplus or de cit).
Equilibrium in goods market requires: S = I (IS relation). And Y = Z ofc.
Propensity to save = (1 - C1).
3-5 Is the government omnipotent? A warning
Complicating governments tasks: changing spending/ taxes is not easy + assumption I
remains constant + expectations are likely to matter + given level of output can come with
unpleasant side effects + cutting taxes are increasing G, can lead to de cits in long run.
Chapter 4
4-1 The demand for money
Money is used for transactions, plays no interest, is a currency or a checkable deposit.
fi fi fi fi
