MDU Macroeconomics Lecture 3

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MDU Macroeconomics Lecture 3

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MDU Macroeconomics Lecture 3

  1. 1. Unemployment, Aggregate Demand and the Surplus Approach MDU Macroeconomics Lecture 3
  2. 2. Today <ul><li>Why are there unemployed resources in the economy? </li></ul><ul><li>Introduction to business cycles </li></ul><ul><li>Aggregate Supply and Demand </li></ul><ul><li>Unemployment </li></ul><ul><li>Income, Consumption, and Saving </li></ul><ul><li>Unemployment and Government Fiscal Policy </li></ul><ul><li>The Multiplier </li></ul><ul><li>Yet another set of Stylised Facts </li></ul>
  3. 3. The Great Depression <ul><li>1929-1933, Real Output Fell by 30% </li></ul><ul><li>Unemployment Increased 3.2%- 25 % </li></ul><ul><li>Price Level fell by 25% </li></ul><ul><li>29 Oct 1929, Stock Prices fell by 12%, by June 1932, had fallen by 85% </li></ul>
  4. 4. Business Cycles & Keynes
  5. 5. Business Cycles <ul><li>Business cycles are the (irregular) pattern of recession (flat or negative GDP growth) followed by expansion (positive GDP growth). </li></ul>
  6. 7. Ireland’s Real GDP Growth vs EU-6, 1960-2000
  7. 9. Aggregate Demand <ul><li>Expenditure on Output is demand </li></ul><ul><li>Total Expenditure is called Aggregate Demand (AD) </li></ul><ul><li>AD schedule relates total spending to the price level </li></ul>
  8. 10. Aggregate Demand Price Level Real GNP A B AD1 AD2 P1 GNP1 GNP2
  9. 11. The Aggregate-Demand Curve... 0 Quantity of Output Price Level Aggregate demand P 1 Y 1 Y 2 P 2 2. …increases the quantity of goods and services demanded. 1. A decrease in the price level...
  10. 12. Shifts in the Aggregate Demand Curve... 0 P 1 Y 1 Quantity of Output Price Level Aggregate demand, D 1 D 2 Y 2
  11. 13. Aggregate Supply (AS) <ul><li>AS is usually upward sloping </li></ul><ul><ul><li>An increase in P leads to an increase in the supply of goods and services </li></ul></ul><ul><ul><li>A decrease in P leads to a decrease in supply of goods and services </li></ul></ul>
  12. 14. Aggregate Supply Price Level Real GNP P1 P2 GNP1 AS1 AS2 A B
  13. 15. Income, Consumption, and Saving <ul><li>Y=C+I+G+X-M </li></ul><ul><li>Y= Output/Expenditure/Income=GDP/GNP </li></ul><ul><li>C = Household Consumption </li></ul><ul><li>I = Planned Investment </li></ul><ul><li>G = Government Expenditure on Goods & Services </li></ul><ul><li>X-M= Exports (X)- Imports (M) </li></ul>
  14. 17. <ul><li>So What? </li></ul><ul><li>Allows us to think of ‘Flows’ of goods and services in the economy </li></ul><ul><li>Problem: Reality very detailed accounts required for a country </li></ul><ul><li>Effects of One variable on another </li></ul>
  15. 18. Aggregate Supply and Demand
  16. 19. Unemployment
  17. 21. Growth & Stylised Facts
  18. 22. Next Time <ul><li>Read Chapter 16 again, and go through chapter 17 of Bowles et al </li></ul>

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