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Macroeconomics - Coggle Diagram

- - - - to keep unemployment steady GDP needs to grow close to or at its potential
        
        unemployment increases when economic output decreases but there is a TIME LAG between these events
        
        takes time to hire/fire people (employment contracts etc)
      - LAGGED INDICATOR
  - - - multiplier effect
      - crowding out effect
  - - - can use this to offset AD or short run AS curve and smooth business cycles
        
        Money supply can be controlled by
        
        open market operations
        
        changing the reserve requirements
        
        changing the discount rate
        
        money supply not dependent on interest rates VERTICAL CURVE
        
        increase money supply>lowers interest rate>increases demand for gs+s's>shifts AD right
    - - one of the most important factors> interest rates
        
        Higher price level>more money demand>higher interest rates>less demand for gs+s's
        
        negative relationship between money demand and demand for gs+s's
  - - - 3 Effects (why does AD curve slope down)
        
        Interest Rate Effect
        
        affects investment
        
        lower price level>reduces interest rate>more spending on investment goods>more gs+s's demanded
        
        The Exchange Rate Effect
        
        affects net exports
        
        lower price level>interest rate falls>real exchange rate depreciates>stimulates net exports>more gs+s's demanded
        
        Wealth Effect
        
        affects consumption
        
        decrease in price level>consumers feel more wealthy>spend more>higher demand
        
        fall in price level increases demand however other factors affect demand too
        
        shifts:
        
        consumption
        
        more consumption (e.g. tax cut/stock market boom)>shift to right
        
        investment
        
        more investment (optimism about future/fall in interest rate due to rise in money supply)>shift right
        
        Government purchases
        
        more GPs (greater spending on defence or motorway constructions)>shift right
        
        Net exports
        
        more net exports>shift right
        
        shifts cause fluctuations in output in the short term but only change price level in long term
  - - - long run>vertical
        
        depends on available labour capital natural resources and technology (price level does not effect these factors in the long run
        
        immigration increases available labour>shift right
        
        increase in capital stock>shift right
        
        discovery of new natural resource deposit
        
        increased technological knowledge>shift right
        
        decrease in one of the determinants of AS shifts curve left
      - short run>upward sloping
        
        Three Theories (AS p2)
        
        Misperceptions Theory
        
        changes in price level temporarily mislead consumers about what is happening in the market
        
        Sticky wage Theory
        
        nominal wages slow to adjust in short run
        
        Sticky price Theory
        
        prices of some goods adjust sluggishly
- - - - large fluctuations are damaging to the economy so policy makers try to smooth out the business cycle as much as possible
        
        we use time series data to measure the difference between peak and trough (amplitude)
    - - rise in unemployment and decline of real incomes