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Macro - Coggle Diagram

- - - - savings, taxes, imports
    - - investments, exports, gov spendings
  - - - spending on durables, non durables and services
    - - spending on buildings, capital and infrastructure, as well as inventories
    - - Spending by the government on factors of production, as well as final goods and services
    - - Exports: foreigner spending money on domestic goods
      - Imports: domestic guys spending money on foreign goods
  - - - Definition
        
        1950-60: economic development is a consequence of economic growth
        
        1960-70: LDCs should focus on redistribution of income and access to basic services
        
        Present
        
        three core values of economic development
        
        self-esteem
        
        sustenance
        
        freedom
    - - in the long run, economic growth is needed for economic development
    - - understate
        
        doesnt count DIY
        
        doesnt count underground markets
        
        doesnt take into account increased leisure time
        
        doesnt take into a ccount increased life expectancy
        
        doesnt take into account increased quality of goods
      - overstate
        
        doesnt factor in negative externalities
        
        doesnt factor in depletion of resources
        
        doesnt factor in increased working times
      - both
        
        doesnt factor in composition of goods and services
        
        doesnt include quality of life factors
        
        doesnt include distribution of income
- - - - wealth effect
        
        price level increases, real value of wealth increases
        
        people hence have less money to spend and are worse off
        
        spending decreases, therefore real output demanded decreases
      - interest rate effect
        
        when price levels increase, consumers and investors require more money to maintain their spending-->borrow money
        
        demand for money increases, leading to increase in interest rates
        
        increase in interest rates=decrease consumption and investment spending=decrease real GDP demanded
      - international trade effect
        
        price levels increase=foreigners think domestic goods are more expensive-->buy less -->our exports decrease
        
        we think foreign goods are cheaper, imports increase
        
        net exports decrease, real GDP decrease
    - - Change in C
        
        change in wealth
        
        increase in wealth=increase in consumption ability=increase spending=increase AD
        
        change in personal income taxes
        
        increase taxes=decrease disposable income=decrease spending=AD decrease
        
        change in expectations about future income
        
        expect future income increase=spend more=AD increase
        
        change in interest rates
        
        increase interest rate=increased cost of borrowing+increase saving in the bank=decreased spending=AD decrease
        
        change in household indebtness
        
        increased indebtedness=save more money/repay loans=decrease spending=AD decrease
        
        change in attitudes towards spending
        
        positive attitude to spending=spend more=AD increase
      - Change in I
        
        expectations about future sales
        
        expect future sales to increase=investment spending increase=AD increase
        
        interest rates
        
        increased interest rates=increased cost of borrowing=decrease spending=AD decrease
        
        business taxes
        
        taxes increases=decrease profits=decrease investment spending=decrease AD
        
        legal and institutional changes
        
        if legal changes such that smaller firms have better access to financial services investment spending increases AD increases
        
        improvements in technology
        
        improved technology stimulates investment spending-->AD increase
      - Change in G
        
        deliberate attempt to influence AD
        
        increase spending to increase AD
        
        change in political priorities
        
        change amount of government spending depending on political priorities
      - Change in X-M
        
        change in foreign national income
        
        foreign national income increase=buy more domestic goods=exports increase=AD increase of domestic economy
        
        change in exchange rates
        
        increase in exchange rate=decrease in AD of domestic currency
  - - - SRAS=value of output produced by firms in an economy at different price levels
      - upwards sloping: price level increase=profit increase=firms produce more
      - shift along AS=change in price level leading to change in real GDP
      - Factors
        
        changes in wages
        
        increase wages=decrease SRAS
        
        changes in resource prices
        
        resource prices increase=decrease SRAS
        
        changes in taxes
        
        increase taxes=decrease SRAS
        
        changes in subsidies
        
        increase subsidies=increase SRAS
        
        supply shocks
        
        adverse: decrease SRAS
        
        beneficial: increase SRAS
      - inflexible wages
        
        contracts fixing worker wages for years
    - - neoclassical
        
        prices of resources and output are fully flexible
        
        in the long run LRAS is vertical
        
        when resource prices are fully flexible to a change in price levels, firms' nominal cost of production changes at a constant rate with price of output when there is a change in price levels
        
        hence firm's profits remain constant
        
        as such when there is a change in PL firms do not have incentive to increase or decrease output produced
        
        LRAS=real GDP
        
        recessionary gap
        
        AD decrease, PL and real GDP decrease
        
        increased unemployment, demand for labour decreases
        
        price of labour decrease, cost decrease
        
        SRAS increase
        
        inflationary gap
        
        AD increase, PL and real GDP increase
        
        increased employment, increased demand for resources, price of resources increases
        cost increases, SRAS decrease
        
        AKA change in AD is matched by a opposite change in SRAS, cancelling out any change in real GDP
        
        Economic growth in neoclassical perspective
        
        shift in LRAS=economic growth
        
        any shift in LRAS leads to shift in SRAS (but not vice versa)
        
        increase in efficiency and decrease in unemployment (increase in actual output)
        
        increase in Q and Q of resources and technological advancements (increase in potential output)
      - keynesian
        
        wages are downwards inflexible: labour unions, minimum wages laws, idea of equality dictating wages, worker morale (sticky wages)
        
        in a recessionary gap, real output decreases
        
        but wages do not go down, and hence firms resist cutting prices of goods as it will negatively affect their profits
        they also fear a price war
        
        GETTING STUCK IN A SHORT RUN RECESSIONARY GAP
        
        when price levels do not fall in a recessionary gap, firm's cost of production remains unchanged
        firms do not have the incentive to increase production of output to increase real GDP
        economy is stuck in recessionary gap
        
        shape of Keynesian AS curve
        
        3 segments
        
        horizontal
        
        constant price level unaffected by real GDP
        
        at horizontal segment, there is high unemployment
        
        firms can increase output by recruiting unemployed without hiking up the resource prices
        therefore PL doesn't change when real GDP increases
        
        upwards sloping
        
        there is increased employment, firms have to bid for resources, leading to increased in price levels if real GDP were to increase
        
        also, firms have to employ less efficient resources, increasing the cost of production, and firms increase the price of goods to maintain profits-->price level increases
        
        vertical
        
        maximum employment of resources, therefore price levels cannot affect real GDP
        
        any attempt to increase real GDP by bidding for more resources will only increase the price levels
        
        Yp and Ymax
        
        Yp=potential output
        
        Ymax=maximum output when 100% of resources in an economy is utilised
        
        short run equilibrium states similar to neoclassical perspective
        
        economic growth: rightwards shift of AS
        
        AD shifts with it
        
        similar factors to neoclassical perspective
  - - - real GDP>potential GDP
    - - real GDP<potential GDP
    - - real GDP=potential GDP
  - - - theory assumes that economy can adjust itself to alleviate short run fluctuations like inflationary and recessionary gaps
      - government should not intervene by increasing/decreasing AD as this may make the fluctuations worse
      - instead, the government should focus on maintaining competition in the economy such that prices are fully flexible to adjust and respond to a change in AD and change in SRAS
      - the government should also focus on policies leading to LRAS increase aka economic growth
    - - government should make use of policies to adjust AD to eliminate inflationary and recessionary gap as the economy fails to do so itself
      - shifts in AD is believed to be caused by change in investment opinion, the shift in pessimism and optimism is known as animal spirits
    - - decrease unemployment
        
        decrease fluctuations of business cycle
      - increase real GDP
        
        increase steepness of potential GDP curve
      - price stability
        
        decrease fluctuations of business cycle
- - - - expenditure<revenue=surplus
        
        expenditure=revenue=balanced budget
    - - if theres a surplus, debt decreases
        
        if theres a deficit, debt increases
  - - - expansionary
        
        increase AD (in a recessionary gap)
        
        increase government spending
        
        decrease personal income taxes
        
        decrease business taxes
      - contractionary
        
        decrease AD (in a inflationary gap)
        
        decrease government spending
        
        increase personal income taxes
        
        increase business taxes
  - - - changing money supply
        
        Discount rates
        
        increase discount rate=decrease money supply=increase interest rate
        
        Open market operations
        
        buy bonds=increase money supply=decrease interest rate
        
        sell bonds=decrease money supply=increase interest rate
        
        Reserve requirement
        
        increase reserve requirement=decrease money supply=increase interest rate
      - interest rate increase=decrease C and I=decrease AD
      - increase money supply=decrease interest rate
      - Expansionary
        
        increase money supply-->decrease interest rates-->increase AD
      - Contractionary
        
        decrease money supply-->increase interest rate-->decrease AD
  - - - strength
        
        combatting deep recession
        
        combating inflation
      - weakness
        
        time lag
        
        inadequate information
        
        tax cuts may not be effective in a recession
        
        crowding out effect
        
        inability to fine tune
        
        political constraints
    - - strength
        
        quicker implementation
        
        no crowding out
        
        no political constraint
        
        better suited to fine tuning economy
      - weakness
        
        timing
        
        banks may not loan out money in recessionary gap
        
        inadequate information