Lecture 1

Economic Growth (output growth): Long term increase in the capacity of the
economy to produce goods and services
Business cycle: Short term ups and downs in the performance of the economy

Recessions : Downward trend in the cycle ( (GDP falls, firms‘ profits fall,
unemployment rises, households lose income, prices drop, the economy operates
below its potential)
Expansion: Upward trend in the cycle (GDP rises again, profits and share prices
rise, high I, C, full employment, people work overtime, until at some point, the
economy “overheats“)
Depression: a prolonged and deep recession
Mercantilist policy: Raise tariffs on imports
Disposable income: income – Taxes
Counter cyclical: Increase GS in crises and lower it in times of boom

Lecture 2
Shaky/illiquid asset/ IOU: Piece of paper with signature
Fiat money: paper that (in itself/intrinsically) is worthless, but generally accepted as
medium of exchange
Rule of thumb: When the money supply MS (basically, the quantity of money
printed and provided electronically by the Central Bank) grows as much as the
economy itself (basically, as the economy‘s overall productivity), then prices will
stay roughly stable
MS : the volume of cash in circulation
Price discrimination : Charging each customer different price
Uniform pricing :

Lecture 3
Inflation: an increase in the overall price level
Hyperinflation: period of very rapidly increases in the overall price level
Deflation: decrease in the overall price level
Stagflation: both high inflation and high employment
price stability: as a generally agreed-upon policy goal, e.g. +2% is the European
Central Bank‘s, and also the Fed‘s official goal/definition of ‘price stability
(recessionary gap), when actual GDP < potential GDP
(inflationary gap), when actual GDP > potential GDP (an “overheating“ economy)
natural rate of unemployment NAIRU = the rate that occurs when the output gap is
exactly zero
(NAIRU: „non-accelerating inflation rate of unemployment)
cyclical rate of unemployment = the rate that depends on the fluctuations of the
business cycle.
Unemployment rate = natural rate + cyclical rate

Lecture 4
Nominal Interest Rate: It is the stated interest rate paid or earned to the lender or by
investor

Real interest rate : Real rate after inflation

Fisher effect: changing inflation expectations only affect the nominal interest rate,
not the real interest rate.
Lecture 5
The multiplier : a concept to measure the effects of some fiscal policy stimulus
(positive multiplier) or contraction (negative multiplier) on GDP
marginal propensity to consume (MPC): that‘s the increase in consumer spending
when disposable income increases by 1 USD.
MPC = Cons. spending / Disposable income.
MPS = 1 – MPC (MPS: marg. propensity to save)
Total increase of GDP = [1/(1 – MPC)]  initial stimulus
The initial stimulus: is called the autonomous change in aggregate spending (AAS)
Multiplier: GDP/AAS = 1/(1 – MPC)
disposable income: YD = Y – T + TR
Keynes (Keynesian consumption function): Consumers have more money in their
pockets, they will spend more (according to their MPC).
Friedman (Permanent Income Hypothesis): consumers are rational, they cannot be
fooled. They care about their (expected) lifetime income and wish to smooth it over
time. It‘s only changes in their lifetime income that affects their consumption.

Lecture 6
demand shock. It can be positive (shifting AD to the right) or negative (the reverse)
a supply shock. It can be positive (shifting AS to the right) or negative (the reverse)
stagflation: falling GDP and inflation at the same time
Output gap = ((𝑎𝑐𝑡𝑢𝑎𝑙 𝐺𝐷𝑃 -𝑝𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐺𝐷𝑃)/ 𝑝𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐺𝐷𝑃)  100.
Sticky prices: prices that do not always adjust rapidly to restore equilibrium
between supply and demand in the market
Aggregate output: the total quantity of goods and services produced in an economy
in a given period