This document provides an overview of key macroeconomic concepts including: 1. Living standards, inflation, and unemployment are discussed as important macroeconomic indicators across countries and over time. 2. GDP, GDP deflator, and real GDP are introduced as measures of economic output, and alternative measures like GNP are mentioned. 3. Classical and Keynesian macroeconomic theories are contrasted, discussing concepts like aggregate demand, aggregate supply, and fiscal/monetary policy approaches. 4. Additional macro topics covered include money supply, international trade, exchange rates, economic growth models, and factors influencing currency movements.

7. Consumer Prices 1800 - 2000 price level 1800 1860 1910 1940 1970 2000

10. Value Added = Sales - Cost of Purchased Materials Cotton $5 5-0 = 5 Shirt-Wholesale 15 15-5 = 10 Shirt-Retail 30 30-15 = 15 30 Sales Value Added

11. Nominal GDP, Real GDP & the GDP Deflator Nominal (Y) = ( P 2005 x Q 2005 ) - (P 2005 x Q 2005 ) [sales] [materials] Real (y) = (P 1997 x Q 2005 ) - (P 1997 x Q 2005 ) GDP Deflator = Nominal GDP/Real GDP Base Year? Chain-Weighted Real GDP

26. MPN N Rule: Proceed as long as MR > MC Here: MR = P x MPN MC = W N VMP = P x MPN W 0 N D STOP View of Employment (N)

27. What if W Changes? W, VMP N W 0 W 0 ’ N D N D ’ VMP

30. Labor Market Equilibrium W N N S N D (P x MPN) W E N E Full Employment?

31. Overall Equilibrium for y, N y N W N y N S N D y E N E

35. Consumer Prices 1800 - 2000 price level 1800 1860 1910 1940 1970 2000

36. Classical View of y d P y y d Monetary vs. Nonmonetary Factors

37. The Classical Theory of Interest Rates R NPS, I E R E NPS Key Factors: 1) Net Private Saving 2) Gross Investment I

39. The Impact of the Government’s Budget R R B R A A B S (NPS) D (I + PSBR) I LF I A I B

40. Budget Surplus NPS S (NPS + SURPLUS ) R I R A R B A B LF I A I B

45. Simple Keynesian Multipliers: No Crowding Out k E = 1/1-b k T = -b/1-b k BB = 1 Closing the GDP Gap

46. Housing Bubble 1975 1995 2005 HOUSING CONSUMER GOODS

47. Keynesian y s Curve P y y d y d’ y s A B y A y B =y p P

49. Classical, but with W = W P y y s P 0 P 1 y 0 y 1

50. The Liquidity Preference Theory of Interest Rates R M M S M D = L(R,Y) R E E Note Bond Market and LF

51. The Federal Reserve: June 2004 R M M D M S M S’ E E’ 1.00% 1.25%

54. Keynesian y s Curve P y y d y d’ y s A B y A y B =y p P

55. Classical, but with W = W P y y s P 0 P 1 y 0 y 1

57. Restrictive Monetary Policy y D y D’ y S SR y S’ SR y S LR P y A B C

58. Stimulative Monetary Policy P y y D y D’ y S SR y S’ SR y S LR A B C

61. The Phillips Curve

62. Phillips Meets Friedman PC SR U P The Natural Rate of Unemployment PC LR Why Increased Inflation Can Only Temporarily Reduce Unemployment . A B C

63. Phillips Curve Movements

67. Austrian Business Cycle Theory R NPS, I NPS NPS +  M S I I 0 I 1 Natural Market PV & Duration; Misdirection E E’

68. A Metaphor: Pour in Honey P K P C

69. Share Prices: Japan vs. US CPI-Japan

71. Housing Price Bubble? 1975 1995 2005 HOUSING CONSUMER GOODS

76. Flexible ER, Trade Deficit , BP = 0 foreign currency/$ $ Q (Q + CO ) (S) E ER E X (X + CI ) (D) (X-Q)<0 ER (X-Q=0)

77. Flexible ER, Trade Surplus, BP=0 X (X + CI) (D) foreign currency/¥ E ER E Q (Q + CO ) (S) ER (X-Q)=0 ¥