Macro1
Macroeconomics 1 (ECON1246 / ECON1273), sem 2 2018
MACROECONOMICS 1 (ECON1246 ECON1273)
Notes:
USA tariffs - Teaching notes Oliver Rose
Macroeconomics 1 Lecture, Topic 4 - slides 14 to 32.
Articles and Macroeconomics notes related to the assignment
Articles:
“Trump Eyes Even Higher Tariffs as China Trade War Escalates” Bloomberg News, 6 July 2018 (relates to Q1, Q4)
“Trump’s Trade War Has Officially Started” Bloomberg Editorial Board, 6 July 2018 (relates to Q2)
“Trade Conflicts and Tariffs won’t hurt US economy, but they do have a dark side” Patti Domm @pattidomm, 3 July 2018 (relates to Q2, Q3)
” Economic reality: Trump is imposing tariffs on Americans, not Europe” AEI 31 May 2018 (relates to Q3)
“Is China fighting trade war with cu
ency?” The Age Business, 3 July 2018 (relates to Q4)
“Yuan’s Fallout for Markets….” Bloomberg 20 July 2018 (relates to Q4)
“How Trump’s steel and aluminium tariffs could affect state economies” Brookings The Avenue, 17 July 2018 (relates to Q2, Q3)
Notes:
USA tariffs - Teaching notes Oliver Rose
Macroeconomics 1 Lecture, Topic 4 - slides 14 to 32
Macroeconomics 1 Tutorial, Topic 4 - Problems and Applications, p297-299: Q1.5, 2.5 and 2.7 and Application Question.
Question 1. Identify and explain the President’s objectives
(a) Use the articles listed above to identify 2 aggregate demand and or aggregate supply factors that the US President’s actions are intended to affect.
(b) Explain these factors and their intended impact on US RGDP, unemployment and price level. For AS factors indicate whether they are long-run or short-run AS factors or both.
(c) Draw a AD-AS diagram to illustrate your answer.
Question 2. Criticism of the US actions
(a) Refer specifically to the Bloomberg editorial “Trump’s Trade War Has Officially Started” and “Trade Conflicts and Tariffs won’t hurt US economy, but they do have a dark side”
Identify 1 aggregate demand and 1 aggregate supply factor that will have a negative impact on the US economy.
(b) Explain these factors and the negative impact on US RGDP, unemployment and price level. For AS factors indicate whether they are long-run or short-run AS factors or both.
(c) Draw a AD-AS diagram to illustrate your answer.
Question 3. Evaluate / express an opinion
Will the US President’s actions be successful in the short to medium term (1 to 3 years)?
Explain your answer giving two reasons for your evaluation of the success or otherwise of the US actions on trade tariffs. [no explanation = no marks]
Question 4. China’s response and Impact on China
(a) What actions have, or can the Chinese government and China’s central bank take in response to the US trade tariffs? In your answer identify two actions (one for the Government and one for the Central Bank).
(b) Explain these actions and their intended impact on China’s RGDP, unemployment and price level. [For AS factors indicate whether they are long-run or short-run AS factors or both].
(c) Draw a AD-AS diagram to illustrate your answer.
Additional information
Diagram template:
The diagram below can be used for your diagrams. (Tips: to create new lines, simply copy the existing curves and move to the new location)
___________________________________________________________________
Suggested word limits:
Q1
100 – 150 words ex diagram
Q2
100 – 150 words ex diagram
Q3
50 – 80 words
Q4
100 – 150 words ex diagram
D
1
LRAS1
SRAS1
Price Level (P)
A
P1
AD1
Yp
Y1
RGDP (Y)
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Topic 4: The Business Cycle and Product market (AD-AS Model)
Topic 4: The Business Cycle and Product market (AD-AS Model)
Learning Objectives:
Understand what happens during business cycles and their relationship to long-run economic growth.
Discuss the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve.
Discuss the determinants of the four components of aggregate expenditure.
Discuss the determinants of aggregate supply, and distinguish between a movement along and a shift of the curve.
Textbook reading:
Chapter 5 p112, pp XXXXXXXXXXBusiness cycles)
Chapter 9 pp229-231, XXXXXXXXXXComponents of Agg Expenditure)
Chapter 10 pp XXXXXXXXXXAgg Demand), pp XXXXXXXXXXAgg Supply), pp280-283
(Equili
ium AD-AS)
Vocational Business Education
Slide 1
Slide 2
Business Cycle
The business cycle refers to the periodic but i
egular ups and downs in the level of growth in economic activity over a period of time.
The economy grows over time, but there are i
egular fluctuations in its rate of growth from year to year.
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Slide 3
Business Cycle
Measured by % change in RGDP.
In most economies economic activity tends to assume a 4 phase cycle:
Expansion-Peak-Contraction-Trough
Real GDP
% change
Time
Peak
Contraction
Expansion
Trough
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Slide 4
Business cycle
A complete business cycle occurs when the of economic activity level fluctuated between peak and peak or trough and trough.
There can be variations in:
The intensity (amplitude) of the cycle
The size of fluctuations in economic activity
The duration of the cycle
The time taken for economic activity to go through a complete 4-phase cycle.
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Slide 5
1. The Expansionary phase
The phase in which economic activity
(% change in Real GDP) increases from a preceding period of slowing or declining economic growth.
Characteristics of expansionary phase
GDP increases at a higher rate than in the preceding period
Employment tends to increase /unemployment to decrease
Inflation tends to increase
Business and consumer confidence increases, reflected by higher C and I spending.
Household savings tend to decrease / bo
owings increase).
Consumption patterns change: consumers buy more expensive and durable products e.g.: Motor vehicles
Capacity utilisation of firms increase.as prod’n levels come closer to 100% of full potential productive capacity
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Slide 6
2. Peak [boom] Phase
The economy experiences its highest level of economic activity (Max. growth in Real GDP)
Low levels of unemployment
Maximum unfilled employment vacancies
Increasing inflation (esp. demand-pull inflation)
Increasing wage levels, due to scarcity of labou
High levels of business & consumer confidence.
Imports generally increase to meet unsatisfied domestic demand for goods and services.
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Slide 7
3. Contraction Phase
The rate of economic growth declines or slows, e.g. it decreases from 4% to 2% (production slows),
4. The Trough
Phase of the business cycle in which the economy experiences its lowest level of economic activity.
Real GDP growth is at its minimum. Note: it is minimum growth, not necessarily negative.
When Real GDP falls (experiences negative growth) for 2 consecutive quarters, the economy is in a “technical recession”.
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Slide 8
Characteristics of the Trough
Increased business bankruptcies
High levels of unemployment
Further reduction /stabilisation of inflation
Further reduction of imports
Continuing and worsening decline in consumer and business confidence.
Lower levels of I and C spending, and higher levels of sings.
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The Product market: AD-AS model
Aggregate Demand
Aggregate demand (AD): spending on real GDP by households, firms and the government.
The aggregate demand for goods and services has four components:
Aggregate Demand = C + I + G + NX
Aggregate Supply = Y
In equili
ium, supply = demand
Therefore, in equili
ium
Y = C + I + G + NX
Slide 9
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10
The aggregate-demand curve
Quantity of
output
Price
level
0
Aggregate
demand
P
Y
Y2
P2
1. A decrease
in the price
level ...
2. ... increases the quantity of
goods and services demanded.
Why is the aggregate-demand curve downward sloping?
(the reasons are very different from a D curve for a good)
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10
AD curve shows the amounts of goods and services (RGDP) that will be purchased at any given price level.
Aggregate demand is the relationship between the overall price level and real GDP.
In ‘Price and Market’, a demand curve concerns about a substitution and relative price change for particular goods.
Also, mention that in a textbook, Inflation rate used in a vertical axis
10
Slide 11
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Aggregate-demand curve is downward sloping
An increase in the price level decreases the value of money because each dollar you have buys less.
When the price level increases how much we can buy with $1 decreases.
A decrease in the price level results in a movement along the AD curve to the right and
An increase in the price level results in a movement along the AD curve to the left.
11
11
Slide 12
Vocational Business Education
Aggregate Demand Slopes Downwards
1. The price level and consumption − the wealth effect:
- Changes in the price level change real wealth, thus changing the level of consumption spending (C).
2. Interest Rate Effect
- P↓ causes nominal interest rate ↓
nominal interest rate ↓ encourages greater investment spending by businesses (I ↑)
Higher interest rates result in a movement along the AD curve to the left.
3. The price level and net exports − Foreign Purchases Effect
- Higher prices causes consumers to spend less on domestically produced goods and services and more on imported goods and services. This results in a movement along the AD curve to the left.
12
12
Shifts in the Aggregate Demand Curve
Quantity of
Output
Price
Level
0
Aggregate
demand, D1
P1
Y1
D2
Y2
Many other factors, however, affect the quantity of goods and services demanded at any given price level.
Aggregate demand increases to Y2 even if the price level stays put at P1?
P2
Y2
13
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Shifts in aggregate demand
In the short run, shifts in aggregate demand cause fluctuations in the economy’s output of goods and services.
In the long run, shifts in aggregate demand affect the overall inflation rate but do not affect output.
Why the Aggregate-Demand Curve Might Shift
Shifts arising from changes to the components of aggregate demand
(C) Consumption: consumer optimism, tax rates, prices of assets (stocks, bonds, real estate)
(I) Investment: technological progress, business confidence, tax rates, money supply
(G) Government Purchases
(NX) Net Exports: foreign GDP, expectations about exchange rates
Y
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Slide 14
Slide 15
RMIT University
Determinants of Consumption Spending
Dete
minants are non-price factors that change the level of aggregate demand and consequently result in shifts of the AD curve.
Determinants or factors that influence consumption spending
The level of personal disposable income (PDI)
Changes in tax rates
Expectations / Confidence – e.g. future incomes or prices
The cost & availability of credit
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3-16
Level of Personal Disposable Income (PDI = Gross income – Direct taxes)
PDI refers to income available to individuals/ households for either consumption or saving.
The level of C tends to increase as PDI increases
Changes in direct taxes directly impacts on PDI and may influence the level of consumption expenditure.
Generally:
Increases in direct tax reduces both