LYCEUM OF THE PHILIPPINES UNIVERSITY

Manila
College of Business Administration
Department of Accountancy and Management Accounting
ECON07B

 Three Chief Concerns of Macroeconomists

 Level of GDP
 Overall price level
 Level of unemployment
 Concerns of Macroeconomists are influenced by events in three markets as follows:
 Goods-and-services market
 Financial (money) market
 Labor market

 Aggregate Expenditure and Equilibrium Output

 Aggregate Output - The total quantity of goods and services produced (or supplied) in an economy in a given
period.
 Aggregate Income - The total income received by all factors of production in a given period.
 Aggregate Output (Income) (Y) - A combined term used to remind us of the exact equality between aggregate
output and aggregate income.

Note: In any given period, there is an exact equality between aggregate output (production) and aggregate
income. We should be reminded of this fact whenever we encounter the combined term aggregate output
(income) (Y).

 The Keynesian Theory of Consumption

 Consumption Function - The relationship between consumption and income.

Note: An upward slope in the graph above indicates that higher levels of household income lead to higher levels
of household consumption.

 Aggregate Consumption Function - shows the level of aggregate consumption at each level of aggregate
income.
 Planned Investment (I) - Those additions to capital stock and inventory that are planned by firms.
 Actual Investment - The actual amount of investment that takes place; it includes items such as unplanned
changes in inventories.
 Aggregate Demand in the Goods and Money Markets
 Goods market - The market in which goods and services are exchanged and in which the equilibrium level of
aggregate output is determined.
 Money Market - The market in which financial instruments are exchanged and in which the equilibrium level
of the interest rate is determined.

Note: Equilibrium is a state in which market supply and demand balance each other, and as a result, prices
become stable.

 The Aggregate Demand (AD) Curve

 Aggregate Demand - The total demand for goods and services in the economy.
 Aggregate Demand (AD) curve - A curve that shows the negative relationship between aggregate output
(income) and the price level.

Note: Consistent with the definition of aggregate demand curve, a downward slope in the graph above indicates that
the total demand for goods and services aggregate output (income) is less when the levels of price is higher.

 Other Reasons for a Downward-Sloping Aggregate Demand Curve

 The Consumption Link
o The consumption link provides another reason for the AD curve’s downward slope.
o An increase in the price level increases the demand for money, which leads to an increase in the
interest rate, which leads to a decrease in consumption (as well as planned investment), which leads
to a decrease in aggregate output (income).
 The Real Wealth Effect
o Real Wealth, or Real Balance, Effect - The change in consumption brought about by a change in real
wealth that results from a change in the price level.

 The Aggregate Supply Curve

 Aggregate Supply - The total supply of all goods and services in an economy.
 Aggregate Supply (AS) curve - A graph that shows the relationship between the aggregate quantity of output
supplied by all firms in an economy and the overall price level.
 Inflation
 Inflation - An increase in the overall price level.
 Hyperinflation - A period of very rapid increases in the overall price level.
 Deflation - A decrease in the overall price level.
 Causes of Inflation
 Demand-Pull Inflation - An inflation that is initiated by an increase in aggregate demand. Economists describe
it as "too many pesos (money) chasing too few goods."
 Cost-Push, or Supply-Side, Inflation - An inflation caused by an increase in costs. This occurs when
overall prices increase (inflation) due to increases in the cost of wages and raw materials. Higher costs of
production can decrease the aggregate supply (the amount of total production) in the economy.
o Stagflation - occurs when output is falling at the same time that prices are rising.

Note: When firms are making their price/output decisions, their expectations of future prices may affect their current
decisions. If a firm expects that its competitors will raise their prices, in anticipation, it may raise its own price.

 Open-Economy Macroeconomics
 Exchange Rate - The price of one country’s currency in terms of another country’s currency; the ratio at which
two currencies are traded for each other.
 Foreign Exchange - All currencies other than the domestic currency of a given country.
 Balance of Payments - The record of a country’s transactions in goods, services, and assets with the rest of
the world; also the record of a country’s sources (supply) and uses (demand) of foreign exchange.

Note: When people in different countries buy from and sell to each other, an exchange of currencies must also take
place.

References:
Various websites
Principles of Macroeconomics by Case, Fair and Oster