Economics II

January June 2011

Mid term
Overview Macroeconomics Measuring Economic Activity Consumption and Investment Business Fluctuations and the Theory of Aggregate Demand Financial Markets and the Special Case of Money

Final exam
Central Banking and Monetary Policy Unemployment and the Foundations of Aggregate Supply Ensuring Price Stability Policies for Growth and Stability

Macroeconomics
What is Macroeconomics? Is the study of the behavior of the economy as a whole. It examines the forces that affect firms, consumers, and workers in the aggregate.

Macroeconomics
Two central themes will run through our survey of macroeconomics:
The short-term fluctuations in output, employment, financial conditions, and prices that we call the business cycle. The longer-term trends in output and living standards known as economic growth.

Objectives in Macroeconomics
Output:
High level and rapid growth of output

Employment:
High level of employment with low involuntary unemployment

Stable prices:

Macroeconomics instruments
Monetary policy:
Buying and selling bonds, regulating financial institutions

Fiscal policy:
Government expenditures Taxation

Measuring Economic Success

Output: the ultimate objective of economic activity is to provide the goods and services that the population desires. The most comprehensive measure of the total output in an economy is the gross domestic product (GDP) Producto Interno Bruto (PIB)

Measuring Economic Success

GDP is the measure of the market value of all final goods and services produced in a country during a year. Nominal GDP is measured in actual market prices. Real GDP is calculated in constant or invariant prices. Potential GDP represents the maximum sustainable level of output that the economy can produce.

Real GDP
GDP in 2006 was $ 11,294.8 billion GDP in 2007 was $ 11,523.9 billion (2000 prices for both amounts) What was the real growth?

High Employment
The unemployment rate is the percentage of the labor force that is unemployed. The labor force includes all employed persons and those unemployed individuals who are seeking jobs.

Price stability
Price indexes: are measures of the overall price level; e.g. consumer price index (CPI) (Indice de precios al consumidor IPC, otro puede ser el IPC de la bolsa de valores Indice de precios y cotizaciones).

Price stability

Economists measure price stability by looking at the inflation or inflation rate.

Goals of macroeconomic policy:

A high level and growing level of national output. High employment with low unemployment. A stable or gently rising price level.

Tools of Macroeconomic policy

Fiscal Policy: denotes the use of taxes and government expenditures.
Government expenditures can be of two forms: Government purchases and/or Government transfer payments. Taxation, which affects the overall economy in two ways: taxes affect peoples income; and taxes affect the prices of goods and factors of production and thereby affect incentives and behavior.

Tools of Macroeconomic policy

Monetary policy: The government conducts it through managing the nations money, credit, and banking system. In Mexico is handled by the Banco de Mexico (BM) in the U.S. by the Federal Reserve Bank (Fed).

Aggregate Supply and Demand

Aggregate Supply refers to the total quantity of goods and services that the nations business willingly produce and sell in a given period. It depends upon the price level, the productive capacity of the economy, and the level of costs.

Aggregate Supply and Demand

Aggregate demand refers to the total amount that different sectors in the economy willingly spend in a given period. Aggregate demand equals total spending on goods and services. It depends on the level of prices, as well as on monetary policy, fiscal policy, and other factors.

Aggregate Supply and Demand

Components of Aggregate Demand:
Consumption Investment Government purchases Net Exports