Lecture on Macroeconomics Unit 3: National Income and Price

Introduction

• Presenter: Jacob Breed from ReviewEon.com
• Focus: Understanding multipliers, the ASAD Model (Aggregate Supply/Aggregate Demand), fiscal policy, and automatic stabilizers in macroeconomics.

Multipliers

Concept of Multipliers

• Spending by consumers can ripple through the economy, impacting GDP more than the initial spend.
• Disposable Income: Personal income minus taxes.
  • Can be spent or saved.

Marginal Propensity to Consume (MPC) and Save (MPS)

• MPC: Percentage of new income likely to be spent.
• MPS: Percentage of new income likely to be saved.
• Example: If income increases by $1,000, and spending increases by $800:
  • MPC = 0.8
  • MPS = 0.2

Spending and Tax Multipliers

• Spending Multiplier: 1 / MPS or 1 / (1 - MPC)
  • Example: With MPS of 0.2, multiplier = 5; an $800 increase in consumption could raise GDP by $4,000.
• Tax Multiplier: -MPC / (1 - MPC)
  • Usually one less than the spending multiplier.
  • Example: With MPS = 0.2, tax multiplier = -4;

ASAD Model of the Economy

Aggregate Demand (AD)

• AD Curve: Downward sloping, showing inverse relationship between price level and real GDP.
• Reasons for downward slope:
  • Wealth Effect: As prices fall, real wealth increases, spurring consumption.
  • Interest Rate Effect: Price level drops lead to lower interest rates and increased investment.
  • Net Export Effect: Lower prices make exports cheaper, increasing demand from abroad.

Aggregate Demand Shifters

• Consumer spending, gross investment, government purchases, net exports.
  • Formula: C + I_G + G + X_N

Short-run Aggregate Supply (SRAS)

• SRAS Curve: Direct relationship between price level and output quantity.
• Shifters:
  • Resource prices (wages), productivity, inflation expectations, business taxes, regulations.

Long-run Aggregate Supply (LRAS)

• LRAS Curve: Vertical at full employment output.
  • Represents potential output.
  • Shifts with changes in resource quantity, quality, productivity, technology.

Economic Equilibrium and Gaps

• Short-run Equilibrium: Intersection of AD and SRAS.
  • Inflationary Gap: Output exceeds potential.
  • Recessionary Gap: Output is less than potential.

Long-run Equilibrium

• Occurs when current output equals full employment output.
• Natural Rate of Unemployment: Exists without cyclical unemployment.

Fiscal Policy

Expansionary vs. Contractionary Fiscal Policy

• Expansionary: Increases in government spending or tax cuts to combat unemployment.
• Contractionary: Decreases in government spending or tax increases to combat inflation.

Automatic Stabilizers

• Impact budget deficit automatically during economic fluctuations.
• Examples:
  • Taxes: Increase during expansions, decrease during contractions.
  • Transfer Payments: Adjust based on unemployment levels.

Conclusion

• Emphasis on the importance of understanding these concepts for exams.
• Availability of resources and study aids from ReviewEon.com.
• Encouragement to engage with additional resources for deeper understanding.