Chap23 國民所得的衡量

  • Microeconomics
    • Study of how households and firms
      • Make decisions
      • Interact in markets
  • Macroeconomics
    • Study of economy-wide phenomena
      • Including inflation, unemployment, and economic growth

Gross Domestic Product (GDP)

  • Measures the total expenditure on the economy’s output of goods and services
  • Market value of all final goods and services produced within a country in a given period of time
    • Value of intermediate goods is already included in the prices of the final goods

Circular-flow diagram

  • Households

    • buy goods and services from firms
  • Firms

    • use revenue from sales to pay wages to workers, rent to landowners, and profit to firm owners
  • GDP

    • = total amount households spent for goods and services
    • = total wages, rent, and profit paid by firms in the markets for the factors of production
  • GNP: 國民生產毛額=國內生產毛額+國外要素所得收入淨額

    • 民國103年11月為與聯合國國民經濟會計制度一致,使用詞更能表達經濟內涵將國民生產毛額改為國民所得毛額(Gross National Income, GNI)
      • GNP = GNI
    • NNP(國民生產淨額): GNP-折舊
  • NI(國民所得):工資+租金+利息+利潤

    • 扣除統計誤差後,國民所得(NI)應等於國民生產淨額(GNP)
    • 分為按要素成本(所得)計算者與按市價計算者
      • 要素成本: 國民生產毛額減固定資本折耗、間接稅淨額及統計差異
      • 市價: 國民生產毛額減固定資本折耗及統計差異
    • 凡非由生產而發生之所得,均不可計入國民所得之內
      • 資產重估之增值
      • 國際間之贈與等
  • PI(個人所得)???

    • 國民所得-(營利事業所得稅+企業間接稅+未分配盈餘+政府財產與企業所得+社會安全捐)+國內外對家計單位的移轉支付
  • DPI(Disposable Personal Income, 個人可支配所得)???

    • 個人所得-直接稅與非稅支付(如交通罰單)


  • 2014年11月20日行政院主計總處國民所得統計評審會決議,將研發支出由中間消費改列固定投資(配合聯合國最新版國民經濟會計制度2008 SNA修正編算原則)

  • 以連鎖法取代定基法衡量實質GDP及經濟成長率以連鎖法衡量經濟成長率 GDP編制50年來首度改革 經濟成長率恐下修

  • GDP = C + I + G + NX

    • Consumption
      • Spending by households on goods and services
      • Exception: purchases of new housing
    • Investment
      • Household purchases of new housing
      • Inventory accumulation
    • Government purchases
      • Does not include transfer payments(轉移支付)
        • 政府或企業的一種不以購買本年的商品和勞務而作的支付,即政府或企業無償地支付給個人或下級政府,以增加其收入和購買力的費用。它是一種收入再分配的形式
          • 包括養老金、失業救濟金、退伍軍人補助金、農產品價格補貼、公債利息
    • Net exports
      • Exports - Imports

2012, GDP of the U.S. - over $15 trillion

  • GDP per person = $49,923
  • Consumption = $35,411 per person
  • Investment = $6,557 per person
  • Government purchases = $9,758 per person
  • Net exports = –$1,806 per person

GDP and it’s construction

Real and Nominal GDP

  • goods and services are being sold at higher prices
  • Nominal(名義) GDP
    • Production of goods and services Valued at current prices
  • Real GDP
    • 將名義GDP調整物價水平因素
    • price remain the same as in base year
    • For the base year, Nominal GDP = Real GDP
  • GDP deflator
    • 100 for the base year
    • Measures the current level of prices relative to the level of prices in the base year
  • Inflation rate
    • use deflater to calculate
    • (GDP2-GDP1)/GDP1*100

GDP data

  • Growth – average 3% per year since 1965
  • now is the best single measure of the economic well-being of a society
  • still not a perfect measure of well-being
    • Doesn’t include
      • Leisure
      • Value of almost all activity that takes place outside markets
      • Quality of the environment

Gross Domestic Product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans. - Senator Robert Kennedy, 1968

Chap24 Measuring the Cost of Living

Consumer price index (CPI)

  • overall level of prices
  • overall cost of goods and services ought by a typical consumer

Caluclating CPI

  1. Fix the basket
  • assign different weight for goods and services for typical consumer
  1. Find the prices
  2. Choose a base year
  3. Compute CPI and inflation rate
  • Inflation rate
    • Percentage change in the price index
  • Producer price index(PPI)
    • Measure of the cost of a basket of goods and services bought by firms
    • can simulate the change in CPI

Problems in measuring the cost of living

  • Substitution bias

    • Prices do not change proportionately
    • Consumers substitute toward goods that have become relatively less expensive
      • 尋找替代品
  • New type of goods

  • Unmeasured quality change

    • If quality increase/decrease, CPI doesn’t change
  • Billion Prices Project: 根據70個國家300個線上零售商所銷售的5佰萬個項目(美國大約50萬個項目)編製通膨指標

    • 他們發現零售價格並不常改變,但一旦改變,幅度較過去經濟學家的認知為大
  • Google Price Index: Hal Varian採用Google網站大量資料庫建立

    • 此通膨指標與官方CPI指標走勢接近,但近來反映出通縮的情形
  • 核心物價 (Core Inflation):消費者物價指數扣除蔬果及能源部份又稱核心CPI

    • 因為蔬果及能源的物價波動大
  • 通縮(Deflation):通貨膨脹率低於0%的情形

    • 為何人們所感受的通膨與CPI所顯示的有所差異?
      • CPI的計算誤差
      • 日用品變貴→物價變高的錯覺

GDP deflator versus CPI

  • GDP deflator
    • nominal GDP / real GDP
    • 反映國內的生產價值變動
  • CPI
    • 反映消費物價的變動(包含權重)


  • 有跟據物價波動來付費的合約(如房租)
  • COLA(Cost of living allowance)
    • adjusts salaries based on changes in CPI
    • Salaries are typically adjusted annually. They may also be tied to a cost-of-living index that varies by geographic location if the employee moves. In this later case, the expatriate employee will likely see only the discretionary income part of their salary indexed by a differential CPI between the new and old employment locations, leaving the non-discretionary part of the salary (e.g., mortgage payments, insurance, car payments) unmodified.

Salary Comparison by CPI

  • Babe Ruth 只有A.Rodriguez 的4%
  • President Hoover 1931年的薪資比Obama高了許多


  • Gone with the Wind(飄)在1939年發片,每個星期有9仟萬美國人到戲院觀看,票價才0.25美元

    • 調整後16億零4佰萬美元,躍居第1
  • Star War(星際戰爭)14億1仟4佰萬美元居第2

  • Avatar降為第4

  • Real interest rate

    • Nominal interest rate – Inflation rate
    • 197x: 石油危機
    • 2008: 金融海嘯

Chap25 Production and Growth

  • 根據American heritage雜誌的報導,石油企業家John D. Rockefeller是美國最富有的人,以目前的價值估算,其財高達2,000億美元,是微軟創辦人Bill Gate的三倍
    • 但是在他的年代裏,並沒有電視、冷氣空調,大多數時間沒有汽車或飛機,缺乏電訊、冰箱
    • 請問您願意以目前所享有的方便性換取他的財富嗎?


  • Amount of goods and services produced from each unit of labor input

Why productivity is so important

  • Key determinant(判定) of living standards
  • An economy’s income is the economy’s output

Determinants of productivity

  • Physical capital(物質資本) per worker
    • equipment and structures
    • The things used to produce goods and services
  • Human capital per worker
    • Knowledge and skills aquired through education, training, and experience
      • total effort of acquiring knowledge
  • Natural resources per worker
    • Total inputs for the production
    • 土地、河流、礦產
  • Technological knowledge
    • Society’s understanding of the best ways to produce goods and services
    • 專利、技術、know-how


  • Natural resources set the limit of world’s economy
  • Fixed supply of nonrenewable natural resources will run out
    • Will Force living standards to fall
  • Technological progress yields ways to avoid these limits
    • Improved use of natural resources over time
    • Recycling
    • New materials

Prices of natural resources

  • 因具有稀少性 → 貴
    • 常有短期波動
    • 長期價格平穩
    • 經濟增長愈快,使用愈多,其供給就愈少

Production function

  • Y = A times F(L, K, H, N)
    • F is a function
      • Doubling all inputs causes output to double
        • 2Y = A F(2L, 2K, 2H, 2N)
    • A is the level of technology
      • Relatively important

Raise future productivity

  • Invest more to produce capital
    • But fewer resources to produce goods and services for current consumption
  • Higher savings rate
    • In the long run
      • Capital stock increases
      • Higher level of productivity
      • Higher level of income
      • More rapid growth in GDP
      • Not higher growth in productivity or income
        • 邊際效益遞減
        • 沒辦法無限增加生產力

Catch-up effect(追趕效應)

  • 指在其他條件相同的情況下,如果一國開始時較貧窮,它就更傾向於比開始時就富裕的國家經濟增長更快
    • 少量的資本投資就會大大提高這些工人的生產率

Investment from abroad

  • Foreign direct investment
    • Capital investment that is owned and operated by a foreign entity
  • Foreign portfolio investment(間接投資)
    • 投資者以其資本購買公司債券、金融債券或公司股票等各種有價債券,以預期獲取一定收益的投資
  • Benefits from investment
    • Some benefit flow back to the foreign capital owners
    • Increase the economy’s stock of capital
      • Higher productivity
      • Higher wages
      • State-of-the-art technologies

World Bank and International Monetary Fund(IMF)

  • Encourages investment to poor countries
  • Funds from rich countries(Why?)
  • Advice about how the funds might best be used(Why?)
  • Becuase Economic distress leads to bad consequence
    • Political turmoil, international tensions, and military conflict
      • ISIS, North Korea
    • Every country want to promoting economic prosperity(繁榮) around the world


  • can be considered as both consumption and investment
  • Investment in human capital
  • Opportunity cost: wages forgone(接受教育而不工作的機會成本,即薪水的損失)
  • Problem for poor countries: Brain drain(人才外流)

Human capital

  • Education cost
  • Health cost
    • cause long-run economic growth
      • Improved health – better nutrition
      • Taller workers – higher wages – better productivity
  • Wages
    • Reflect a worker’s productivity

Vicious circle in poor countries

  • Poor countries are poor
    • Because their populations are not healthy
  • Populations are not healthy
    • Because they are poor and cannot afford better health care and nutrition

determinents of economic growth

  • Political stability
  • Government
    • encourages research and development
      • Research grants
    • Tax breaks
    • Patent system
    • Protect property rights(財產權)
    • Corruption
      • Impedes the coordinating power of markets
      • Discourages domestic saving
      • Discourages investment from abroad
  • Large population
    • Advantages
      • More workers → More Output
      • More consumers
      • Promoting technological progress
        • More people → More scientists, more inventors, more engineers
    • Disadvantages
      • But average natural resources decrease
        • Theory of Malthus
          • natural resources cannot affrod the growth of popolation
          • doomed to forever live in poverty
          • In fact, by technology growth, we can break this assumption
      • Diluting(稀釋) the capital
        • Lower productivity per worker
        • Lower GDP per worker
      • Reducing the rate of population growth
        • Government regulation
        • Give More work opportunities for women with no child

Inward-oriented policies(內部導向政策)

  • Avoid interaction with the rest of the world
  • Infant-industry argument(保護產業)
    • Tariffs(關稅)
  • Not good for economic growth

Amount of trade – determined by

  • Government policy
  • Geography
  • 過去有些論點認為國家間所得的不均是因為
    • 法國政治學者Montesquieu:在熱帶地區的人比較懶?(比較熱的原因?)
    • Max Weber:道德?
    • Jeffery Sachs:地理與氣候因素。貧窮國家土壤貧瘠,熱帶瘟疫,尤其是瘧疾。
    • Jared Diamond:歷史既有植物與動物品種以及技術的進步。
    • 人們需要誘因去投資與繁榮。他們需確定辛勤工作的成果會被確保,即法律、安全與管理體制來確保工作成果與創新。

Chap26 Saving, Investment, and the Financial System 投資、儲蓄與金融體系

  • from an employee’s point of view, owning stock in the company can be risky

  • The employee’s wages or salary is already tied to how well the firm performs

    • put eggs to the same bucket
  • If households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future

    • will save more so they can pay the higher future taxes
    • private saving ↑ , supply of loanable funds ↑
      • reducing quantity of investment
        • national saving decline
      • reducing the amount interest rate rises
  • investment can be increased by

    • reducing taxes on private saving
      • which increase the government budget deficit
    • reducing the government budget deficit

Financial Institutions

  • Financial system
    • Moves the economy’s scarce resources from savers to borrowers
  • Financial institutions
    • Financial markets
      • Savers can directly provide funds to borrowers
        • bond market
        • stock market
    • Financial intermediaries

The bond market(債券市場)

  • Terms
    • Date of maturity: when the loan will be repaid
    • Term: length of time until maturity
    • interest will be paid periodically until the date of maturity
    • Principal: amount borrowed
  • Credit risk
    • Probability that the borrower will fail to pay some of the interest or principal
      • U.S. government bonds tend to pay low interest rates
      • Junk bonds, very high interest rates Issued by financially shaky corporations
    • Long-term bonds are riskier than short-term bonds and have higher interest rate
  • Borrowing from the public
    • Used by large corporations, the federal government, or state and local governments
  • Tax treatment
    • Interest usually is taxable income
    • Municipal bonds(市政債券)
      • Issued by state and local governments
      • Owners are not required to pay federal income tax on the interest income
      • Lower interest rate

Stock market

  • Stock: claim to partial ownership and profits in a firm
  • Stock prices: demand and supply
  • Equity finance(股權融資)
    • Sell stock to raise money
  • Stock index
    • Average of a group of stock prices

Financial intermediaries(金融中介)

  • 金融市場上資金融通過程中,在資金供求者之間起媒介或橋樑作用的人或機構(indirectly)
  • Banks
    • Take in deposits from savers
    • Make loans to borrowers
    • Facilitate(使有效率) purchasing of goods and services
  • Mutual funds(共同基金)
    • sells shares(股份) to the public
    • then buy a portfolio of stocks and bonds
    • Advantages
      • Diversification(多樣化)
      • professional money managers

National Income Accounts

  • identities that calculate national income
  • Y = C + I + G + NX
    • Clarify how different variables are related to one another
    • Assume closed economy: NX = 0
      • Y = C + I + G
  • National saving (saving), S
    • Total income in the economy that remains after paying for consumption and government purchases
    • S = Y - C - G = I
  • S = (Y – T – C) + (T – G)
    • T = taxes - transfer payments
    • Private saving: Y – T – C
      • revenue households have left after paying for taxes and consumption
    • Public saving: T – G
      • revenue of government
        • Budget surplus: T – G > 0
          • 支出 < 收入
        • Budget deficit: T – G < 0
          • 支出 > 收入

Accounting identity: S = I

  • Saving = Investment For the economy as a whole
    • doesn’t account foreign economy
  • One person’s savings is another person’s investment

Market for loanable funds

  • Market
    • savers and borrowers
  • cost of borrowing = real interest rate
  • Assumption
    • Only one financial market

Supply and demand of loanable funds(可貸資金)

  • supply of loanable funds: National Saving
    • 利率愈高,可借資金愈多
  • demand for loanable funds: Investment
    • 利率愈高,借貸資金需求愈少
    • Firms: new equipment, factories…
    • Households: new houses

Government policies

  • Can affect the economy’s saving and investment
  • Saving incentives(刺激;鼓勵)
    • raise tax rate to encourage to save more
    • Increase supply
    • → Supply curve shifts right
    • → Lower interest rate and Higher quantity of loanable funds
    • Greater investment
  • Investment incentives(刺激;鼓勵)
    • tax credit(退稅) encouraged firms to invest more
    • Demand ↑: Demand curve shifts right
    • → Higher interest rate
    • → Higher quantity of loanable funds
    • Greater saving
  • Conclusion: Saving incentives and Investment incentives have the same effect for saving and investment, but interest rate changed is different

Government revenue

  • Budget deficit
    • supply ↓
    • → Supply curve shifts left
    • → Higher interest rate
    • → Smaller quantity of loanable funds
    • → Investment falls
    • Crowding out(擠出效應)
      • investment↓ because of government borrowing
  • Budget surplus
    • Increase supply
    • Reduce interest rate
    • Stimulates investment

Debt of U.S. federal government

  • As a percentage of U.S. GDP
    • 0% of GDP in 1836
    • 107% of GDP in 1945
  • 負債的增減和稅收能力有關
    • Fiscal policy(財政政策) cannot be sustained forever at current levels
      • debt-to-GDP ratio will finally increase
  • War: 負債變動主因

Debt History in USA

President Ronald Reagan, 1981

  • Large increase in government debt – not explained by war
  • Committed to smaller government and lower taxes
  • Cutting government spending - more difficult politically than cutting taxes
  • Period of large budget deficits
  • Government debt: 26% of GDP in 1980 to 50% of GDP in 1993

President Bill Clinton, 1993

  • Major goal - deficit reduction
  • Booming economy in the late 1990s brought in even more tax revenue
  • Eventually: surplus (federal budget)
  • By the late 1990s: debt-to-GDP ratio – declining for several years

President George W. Bush

  • Debt-to-GDP ratio started rising again
  • Budget deficit
    • Several major tax cuts
    • 2001 recession - decreased tax revenue and increased government spending
  • Increased government spending on homeland security
    • Following the September 11, 2001 attacks
    • Subsequent wars in Iraq and Afghanistan

2008, financial crisis and deep recession

  • Dramatic increase in the debt-to-GDP ratio
  • Increased budget deficit2008, financial crisis and deep recession
  • Several policy measures passed by the Bush and Obama administrations
    • Aimed at combating the recession
    • Reduced tax revenue
    • Increased government spending

From 2009 to 2012

  • The federal government’s budget deficit averaged about 9% of GDP
    • Levels not seen since World War II
  • The borrowing to finance these deficits Led to the substantial increase in the debt-to-GDP ratio

2008 financial crisis

  • Large decline in some asset prices
    • 2008–2009: Housing prices fell 30%
  • Insolvencies at financial institutions
    • 2008–2009: Banks and other institutions failed when many homeowners stopped paying their mortgages(房地產)
  • Decline in confidence in financial institutions
    • 2008–2009: Customers with uninsured deposits(超額保險存戶) began pulling their funds out of financial institutions
  • Credit crunch(緊縮信貸)
    • 難以取得投資資金的經濟環境
    • 2008–2009: Borrowers unable to get loans because troubled lenders not confident in borrowers’ credit-worthiness
  • Economic downturn
    • 2008–2009: Failing financial institutions(制度) and a fall in investment caused GDP to fall and unemployment to rise
  • Vicious circle
    • 2008–2009: The downturn reduced profits and asset values, which worsened the crisis


Financial markets link the present to the future

  • savers convert current income into future purchasing power
  • borrowers acquire capital to produce goods and services in the future

Chap27 The Basic Tools of Finance 財務金融分析的基本工具

The financial system: saving and investment

  • Two related elements: Time and Risk
    • Participants in the financial system make decisions regarding the allocation of resources over time and the handling of risk
  • Finance is the field that studies such decision making

Present Value: The Time Value of Money

  • To compare sums from different times
    • The present value of future sum: future value - interest from now to the future
    • The future value of a sum: value at a given future date = now value + interest in the future
  • Present value formula: PV = FV/(1 + r )^N
  • Present value helps explain why investment falls when the interest rate rises

Compounding(複利): the accumulation of a sum of money where the interest earned on the sum earns additional interest

  • Because of compounding, small differences in interest rates lead to big differences over time
  • Albert Einstein called compounding “the greatest mathematical discovery of all time”
  • The Rule of 70
    • If a variable grows at a rate of x percent per year, that variable will double in about 70/x years
    • If interest rate is 5%, a deposit will double in about 14 years
    • If interest rate is 7%, a deposit will double in about 10 years

Risk Aversion(風險迴避)

  • Most people are risk averse: they dislike uncertainty
  • You are offered the following gamble. Toss a fair coin. If heads, you win $1000. If tails, you lose $1000
    • Should you take this gamble?
    • If you are risk averse, the pain of losing $1000 would exceed the pleasure of winning $1000, so you should not take this gamble
  • Utility Function
    • measure of well-being that depends on wealth
    • As wealth rises, the curve becomes flatter due to diminishing marginal utility(邊際效用遞減)
      • the more wealth a person has, the less extra utility he would get from an extra dollar

Managing Risk With Insurance

  • A person facing a risk pays a fee to the insurance company, which in return accepts part or all of the risk
  • Insurance allows risks to be pooled, and can make risk averse people better off
    • E.g., it is easier for 10,000 people to each bear 1/10,000 of the risk of a house burning down than for one person to bear the entire risk alone
  • Not to eliminate the risks
    • Spread the risks around more efficiently

Two Problems in Insurance Markets

  1. Adverse selection
  • A high-risk person benefits more from insurance, so is more likely to purchase it
  1. Moral hazard
  • People with insurance have less incentive to avoid risky behavior
  • Insurance companies cannot fully guard against these problems, so they must charge higher prices
  • As a result, low-risk people sometimes doesn’t join insurance and lose the benefits of risk-pooling

We can measure risk by standard deviation

  • which means how likely it is to fluctuate(變動)
  • The higher the standard deviation of the asset’s return, the greater the risk

Diversification reduces risk by replacing a single risk with a large number of smaller, unrelated risks

  • A diversified portfolio contains assets whose returns are not strongly related
  • Some assets will realize high returns, others low returns
  • The high and low returns average out, so the portfolio is likely to earn an intermediate return more consistently than any of the assets it contains
  • Diversification can reduce firm-specific risk, which affects only a single company
  • Diversification cannot reduce market risk, which affects all companies in the stock market
  • Suppose you are dividing your portfolio between two asset classes
    • A diversified group of risky stocks
      • average return = 8%, standard dev. = 20%
    • A safe asset
      • return = 3%, standard dev. = 0%
    • The risk and return on the portfolio(投資組合) depends on the percentage of two asset

Tradeoff Between Risk and Return

  • Riskier assets pay a higher return, on average, to compensate for the extra risk of holding them
  • E.g., over past 200 years, average real return on stocks, 8%. On short-term govt bonds, 3%.

Value of a share = (PV of any dividends(股息) the stock will pay) + (PV of the price you get when you sell the share)

  • Problem: When you buy the share, you don’t know what future dividends or prices will be
  • One way to value a stock: fundamental analysis
    • the study of a company’s accounting statements and future prospects to determine its value
  • Buy a mutual fund
    • A manager conducts fundamental analysis and makes the decision for you

Your broker calls you with a hot tip about a stock: new information suggests that the company will be highly profitable. Should you buy stock in the company?

  • No!
    • EVERYONE knows this stock is good
    • You are late
  • you can only earns when new information is not spreading yet
  • everyone believes will experience big profits in the future, the price-earnings ratio is likely to be high. The price is high because it reflects everyone’s expectations about the firm’s future earnings. The largest disadvantage in buying these stocks is that they may be currently overvalued and may not pay off in the future

Efficient Markets Hypothesis (EMH)

  • the theory that each asset price reflects all publicly available information about the value of the asset
  • 衡量證券市場是否具有外在效率有兩個標誌:一是價格是否能自由地根據有關信息而變動;二是證券的有關信息能否充分地披露和均勻地分佈,使每個投資者在同一時間內得到等量等質的信息。根據這一假設,投資者在買賣股票時會迅速有效地利用可能的信息.所有已知的影響一種股票價格的因素都已經反映在股票的價格中,因此根據這一理論,股票的技術分析是無效的
  • Stock market is informationally efficient
    • Each stock price reflects all available information about the value of the company
  • Stock prices follow a random walk
    • A stock price only changes in response to new information (“news”) about the company’s value
    • News cannot be predicted, so stock price movements should be impossible to predict
  • It is impossible to systematically beat the market
    • By the time the news reaches you, mutual fund managers will have already acted on it

Index Funds vs. Managed Funds

  • An index fund is a mutual fund that buys all the stocks in a given stock index
  • An actively managed mutual fund aims to buy only the best stocks
    • have higher expenses than index funds
  • EMH implies that returns on actively managed funds should not consistently exceed the returns on index funds
  • Active portfolio managers
    • Lower return than index funds
    • Trade more frequently
    • Incur more trading costs
    • Charge greater fees
    • Only 25% of managers beat the market

Efficient markets hypothesis

  • Assumes that people buying and selling stock are rational
    • In fact, Partly psychological(irrational)
      • J.M. Keynes: stock prices driven by “animal spirits,” “waves of pessimism and optimism”
      • Alan Greenspan: 1990s stock market boom due to “irrational exuberance”
      • Bubbles occur when speculators buy overvalued assets expecting prices to rise further
      • The importance of departures from rational pricing is not known

When price of an asset above its fundamental value

  • experiencing a speculative(投機) bubble
    • Value of the stock to a stockholder depends on
      • Stream of dividend payments
      • Final sale price
  • Debate: frequency and importance of departures from rational pricing
  • Market irrationality
  • Movement in stock market is hard to explain
    • news that alter a rational valuation
  • BREAK Efficient markets hypothesis

Chap28 Unemployment

Based on adult population (16 yrs or older)

  • Labor force = employed + unemployed

    • Employed: paid employees, self-employed, and unpaid workers in a family business, part-time workers
    • Unemployed: people not working who have looked for work during previous 1 month
  • Not in the labor force

    • full-time student, homemakers, and retirees
  • Unemployment rate

    • Fluctuates(變動) around the natural rate of unemployment
  • Labor-force participation rate

    • = labor force / adult population
    • ratio choose to participate in the labor market

Labor markets Analysis

  • Race: black have higher rates of unemployment
  • Gender: women have lower rates of labor force participation
      • similar rates of unemployment
    • Women: Growing participation rate
      • New technologies reduced time for routine household tasks
      • Improved birth control reduced the number of children born
      • Changing political and social attitudes
    • Men: Falling labor-force participation
      • Young men stay in school longer
      • Older men retire earlier and live longer
      • More fathers now stay at home to raise their children
      • More women employed
  • Age
    • Much higher rates of unemployment than older workers
  • Countries
    • Taiwan
    • USA


  • More than one-third of unemployed are new labor force
  • Not all unemployment ends with finding a job
    • Half of unemployment end when the unemployed leaves the labor force
  • Some People reported unemployed
    • May not be trying hard to find a job
      • Want to qualify for a government help
    • Working but paid “under the table”
  • Some People out of labor force
    • Discouraged workers
      • give up looking for a job
  • Most unemployment are short
    • Frictional(摩擦) unemployment
      • It takes time for workers to search for suitable jobs
  • Most unemployment observed at any given time is long-term
    • Structural unemployment
      • insufficient to provide a job for everyone who wants
      • When wages are set above the equilibrium by Minimum-wage laws, unions, and efficiency wages

Job search

  • Information about job is disseminated(散佈) slowly
  • frictional unemployment is inevitable

Government: facilitate job search

  • Employment agencies
  • Public training programs
  • Unemployment insurance
    • protects workers’ incomes when they become unemployed
    • Reduces the hardship of unemployment
      • Increases frictional unemployment
    • More likely to turn down unattractive job offers
    • Less likely to seek guarantees of job security

Three reasons for above-equilibrium wages

  • minimum wage laws
  • unions
  • efficiency wages

Minimum-Wage Laws

  • Structural unemployment
    • Number of jobs is insufficient
  • Can cause unemployment
  • Forces the wage to remain above the equilibrium level


  • Worker association to bargain Wages, benefits, and working conditions
  • 11% of U.S. workers
  • Type of cartel
    • Collective bargaining(集體協商)
    • Strike(罷工)
  • Earn 10-20% more than similar workers who do not belong to unions
  • raises the wage above the equilibrium level
    • Workers in unions get the benefit of collective bargaining
    • Workers not in unions bear some of the cost
  • Critics
    • Inefficient - high union wages reduce employment in unionized firms below the efficient level
    • Inequitable - some workers benefit at the expense of other workers
  • Advocate
    • necessary antidote(解毒劑) to the market power
    • help firms respond efficiently to workers’ concerns
      • Keep a happy and productive workforce

Efficiency wages

  • 效率工資(Efficiency-wage)是指企業付給員工的高於市場出清水平的工資,這樣的工資能夠起到有效激勵專業人員的作用,可以提高生產率與企業經營績效,因此,這樣的高工資就是效率工資,也就是在這樣的工資水平支付下,勞動力成本的相對收益是最高的

Chap29 The Monetary System

Why money is important

  • Without money, trade would require barter(以物易物)
    • a huge waste of additional resources
    • This searching is unnecessary with money
  • Money
    • Set of assets in an economy that people regularly use to buy goods and services from other people

functions of money

  • Medium of exchange: an item buyers give to sellers
  • Unit of account: use to post prices and record debts
  • Store of value: transfer purchasing power from the present to the future
  • Liquidity: asset can be converted into medium of exchange

kinds of money

  • Commodity(日用品) money
    • commodity with intrinsic value
    • Examples: gold coins, cigarettes
  • Fiat(許可) money
    • money without intrinsic value, used as money because of government decree
    • Example: the U.S. dollar

money supply (money stock): the quantity of money available in the economy

  • M1: currency, demand deposits, traveler’s checks, and other checkable deposits
    • M1 = $3.0 trillion (March 2015)
    • Currency: the paper bills and coins
    • Demand deposits(活期存款): balances in bank accounts that depositors can access on demand by writing a check
  • M2: M1 + savings deposits, small time deposits, money market mutual funds…
  • M2 = $11.9 trillion (March 2015)


  • Much of the currency is held abroad
  • Much of the currency is held by criminals
  • Currency is not a particularly good way to hold wealth
    • Can be lost or stolen
    • doesn’t earn interest

The Federal Reserve(Fed)

  • central bank of the United States
  • Purpose: to ensure the health of the nation’s banking system
    • Regulate banks
    • Monitors each bank’s financial condition
    • Facilitates bank transactions - clearing checks
  • Acts as a bank’s bank
    • lender of last resort(救助)
  • Control the money supply

Federal Open Market Committee

  • Setting of the money supply
    • primary tool: open-market operation
      • Purchase & sale of U.S. government bonds


  • Deposits that banks have received but have not loaned out
    • 100% reserve banking: All deposits are held as reserves
  • Banks hold only a fraction of deposits as reserves
    • Reserve ratio: Fraction of deposits that banks hold as reserves
    • Minimum amount of reserves is set by the Fed

Money multiplier

  • Original deposit = $100.00
  • First National lending = $ 90.00 [= .9 × $100.00]
  • Second National lending = $ 81.00 [= .9 × $90.00]
  • Third National lending = $ 72.90 [= .9 × $81.00]
  • Total money supply = 100/0.1 = $1,000.00
    • Reciprocal of the reserve ratio = 1/R
  • The higher the reserve ratio, The smaller the money multiplier
  • Increase in money supply
    • But Does not create wealth

Bank capital

  • Resources a bank’s owners have put into the institution
    • generate profit

Banks create money by

  • Assets(資產): Besides reserves and loans, banks also hold securities.
  • Liabilities(負債): Besides deposits, banks also obtain funds from issuing debt and equity(股東權益).
  • Bank capital: the resources a bank obtains by issuing equity to its owners
  • Leverage(槓杆): the use of borrowed funds to supplement existing funds for investment purposes
    • Leverage ratio: assets / bank capital
      • If ratio = 20, for every $20 in assets, $1 is from the bank’s owners, $19 is financed with borrowed money
      • suppose bank assets appreciate by 5%, from $1000 to $1050. This increases bank capital from $50 to $100, doubling owners’ equity
      • Instead, if bank assets decrease by 5%, bank capital falls from $50 to $0.
      • If bank assets decrease more than 5%, bank capital is negative and bank is insolvent
        • government set minimum amount of capital to ensure banks will be able to pay off depositors and debts

Many banks in 2008 and 2009

  • losses on some of their assets
  • Shortage of capital induced the banks to reduce lending
    • Credit crunch(信用緊縮)
      • Contributed to a severe downturn in economic activity
  • Put public funds into the banking system to increase bank capital
    • Temporarily made the U.S. taxpayer a part owner of many banks
    • Goal: to recapitalize the banking system

Monetary Control

  • Influences the quantity of reserves
    • Open-market operations
      • Purchase and sale of U.S. government bonds by the Fed
      • Easy to conduct
      • Used more often
    • Fed lending to banks
      • Discount window
        • At the discount rate
          • Interest rate on the loans that the Fed makes to banks
      • Term Auction Facility
        • lend highest bidder money
  • Influences the reserve ratio
    • Reserve requirements
      • Minimum amount of reserves that banks must hold against deposits
      • Used rarely – disrupt business of banking
      • Less effective in recent years
        • Many banks hold excess reserves
    • Paying interest on reserves
      • Since October 2008
      • Increase the reserve ratio
      • Lower the money supply


  • Not precise to control money supply
  • The Fed does not control
    • The amount of money that households hold as deposits
    • The amount that bankers choose to lend

Bank runs(擠兌)

  • Depositors suspect that a bank may go bankrupt
  • Problem for banks under fractional-reserve banking
    • Cannot satisfy withdraw requests from all depositors
  • Great Depression, early 1930s
    • Wave of bank runs and bank closings
    • Households and bankers - more cautious
  • Federal Deposit Insurance Corporation (FDIC)
    • Guarantees the safety of deposits at most banks
    • No bank runs today

The federal funds rate(隔夜貸款的利率)

  • Interest rate of overnight loans between banks
  • change federal funds rate will also change other interest rates

Open-market operations

  • The Fed buys bonds
    • Decrease in the federal funds rate
    • Increase in money supply
  • The Fed sells bonds
    • Increase in the federal funds rate
    • Decrease in money supply

Because banks are highly leveraged, a small change in the value of a bank’s assets causes a large change in bank capital. To protect depositors from bank insolvency, regulators impose minimum capital requirements.

Chap30 Money Growth and Inflation

  • 2002 to 2012
    • Prices rose at an average rate of 2.5% per year
  • The 1970s
    • Prices rose by 7.8% per year
    • The price level more than doubled over the decade

International data, 2012, inflation rate

  • -0.1% in Japan
  • 2.1% in the U.S
  • 5.1% in Russia
  • 9.3% in India
  • 21.1% in Venezuela
  • 24,000 percent in February 2008, Zimbabwe

Money demand

  • how much wealth people want to hold in liquid form
  • Depends on
    • Credit cards
    • Availability of ATM
    • Interest rate
    • Average price level

Money supply

  • Determined by the Fed and the banking system
  • If the Fed doubles the supply of money
    • Supply curve shifts right
    • Value of money decreases
    • Price level increases


  • Excess supply of money

  • Increase demand of goods and services

  • Increase price level

  • Increase in quantity of money demanded

  • New equilibrium

  • Nominal variables

    • Variables measured in monetary units
  • Real variables

    • Variables measured in physical units
      • Relative prices, real wages, real interest rate


  • Principle of Monetary neutrality
    • Changes in money supply don’t affect real variables
      • Not true in short run
      • Correct in long run

Velocity of money (V)

  • rate of money flows
  • V = (P × Y) / M
    • P = price level (GDP deflator)
    • Y = real GDP
    • M = quantity of money
  • P x Y : Nominal GDP
  • velocity doesn’t change a lot


  • Inflation that exceeds 50% per month
  • Four classic hyperinflation, 1920s
    • Austria, Hungary, Germany, and Poland

The inflation tax

  • government Revenue by printing money
  • = Tax on everyone who holds money
  • The price level rises
    • dollars in your wallet are less valuable

Fisher effect

  • One-for-one adjustment of nominal interest rate to inflation rate
    • 如果預期通貨膨脹率提高1%,長期來看,名義利率也將提高1%,也就是說,這種效應是一對一的
  • When the Fed increases the rate of money growth
    • Long-run result
      • Higher inflation rate
      • Higher nominal interest rate

Inflation fallacy

  • Inflation robs people of the purchasing power of his hard-earned dollars

    • inflation doesn’t change real purchasing power
  • Shoeleather costs

    • Resources wasted when inflation encourages people to reduce their money holdings
    • 在通貨膨脹時,貨幣的購買力在下降,為了減少損失,人們會更傾向於持有更少的現金而將更多的錢存入銀行,如此當要使用現金時,就需要去銀行取款,持有現金少了就意味著需要增加跑銀行的次數,這種多去幾次銀行所花費的時間和精力被經濟學家稱為皮鞋成本
  • Menu costs

    • Costs of changing prices
    • 企業不經常改變價格是因為改變價格有成本。調整價格的成本被稱為菜單成本
  • Inflation distorts relative prices

    • Consumer decisions are distorted
    • Markets are less able to allocate resources to their best use
  • Taxes distort incentives(?)

    • Inflation discourages saving
      • Exaggerates the size of capital gains
      • Increases the tax burden
    • How Inflation Raises the Tax Burden on Saving

Unexpected inflation

  • Redistributes wealth among the population
    • debtors and creditors
  • Inflation: volatile(不穩定) and uncertain
    • When the average rate of inflation is high

The Friedman rule

  • moderate(適度的) deflation will
    • Lower the nominal interest rate
    • Reduce the cost of holding money
    • Shoeleather costs of holding money
      • minimized by a nominal interest rate close to zero
      • Deflation equal to the real interest rate
  • Deflation May be worse
    • Menu costs
    • Relative-price variability
    • Arises because of broader macroeconomic difficulties(???)
      • Symptom of deeper economic problems
  • 貨幣發行增長率要保持一個恆定的速度,讓經濟中的個體對通貨膨脹有完全的預期
    • 通膨導因於貨幣供給率高於經濟成長率

The Wizard of Oz

  • 1880-1896, price level fell by 23%
    • Real value of debts increased
  • Major redistribution of wealth
    • Farmers in west were debtors
    • Bankers in east were creditors
      Possible solution to the farmers’ problem
  • Free coinage of silver
  • gold standard
  • Free-silver(自由鑄造銀幣運動) advocates
    • Silver and gold - to be used as money
    • Increase money supply
    • Pushed up the price level
    • Reduced real burden of the farmers’ debts


  • Dorothy: Traditional American values
  • Toto: Prohibitionist(禁酒主義者) party
  • Scarecrow: Farmers
  • Tin Woodsman: Industrial workers
  • Cowardly Lion: William Jennings Bryan - prominent advocate of free silver
  • Munchkins: Citizens of the East (creditors)
  • Wicked Witch of the East: Grover Cleveland
  • Wiicked Witch of the West: William McKinley (1896 president; gold standard)
  • Wizard: Marcus Alonzo Hanna, chairman of the Republican Party
  • Oz: Abbreviation for ounce of gold
  • Yellow Brick Road: Gold standard


  • Lost the debate over the free coinage of silver
  • Get the monetary expansion and inflation that they wanted
    • Increased supply of gold
      • New discoveries - Klondike River in the Canadian Yukon
      • Mines of South Africa
  • Money supply and price level started to rise

Chap31 Open-Economy Macroeconomics: Basic Concepts

  • Net exports (Trade balance)
    • exports - imports
  • Trade surplus (Positive net exports)
  • Trade deficit (Negative net exports)

For Example of US

  • Increasing importance of international trade and finance
    • 1950s, imports and exports: 4-5% of GDP
    • Recent years – about three times that level
  • Largest trading partner, 2012 (imports and exports combined)
    • Canada, China, Mexico, Japan, Germany, and the United Kingdom
  • Technology Improvement
    • Improvements in transportation and telecommunications
    • easy to transport goods
  • Government’s trade policies
  • precentage of US GDP

Net capital outflow(淨資本流出)

  • 本國居民購買的外國資產減外國人購買的本國資產,用於兩個市場(可貸資金市場和外匯市場)之間的聯繫,其關鍵決定因素是真實利率

  • Variables that influence net capital outflow

    • Real interest rates paid on foreign/domestic assets
    • Economic and political risks of holding assets abroad
  • Net exports (NX)

    • Imbalance between a country’s exports and its imports
  • Net capital outflow (NCO)

    • Imbalance between Amount of foreign assets bought by domestic residents And the amount of domestic assets bought by foreigners
  • NCO = NX

    • Every international transaction involves the exchange of an asset for a good or service, so net exports equal net capital outflow

When NX > 0 (trade surplus)

  • Selling more goods and services to foreigners

  • Receives foreign currency

  • Buy foreign assets

    • Capital is flowing out of the country: NCO > 0
      When NX < 0 (trade deficit)
  • Buying more goods and services from foreigners

  • Net purchase of goods needs financed

    • Selling assets abroad
    • Capital is flowing into the country: NCO < 0
  • Open economy: Y = C + I + G + NX

  • National saving: S = Y – C – G

    • Y – C – G = I + NX
    • S = I + NX
  • NX = NCO

    • S = I + NCO
    • Saving = Domestic investment + Net capital outflow
    • 存款 = 國內投資 + 淨資本流出
  • Saving can be used to finance domestic investment or to buy assets abroad

    • saving = domestic investment + net capital outflow

The United States

  • The world’s largest debtor
  • Borrowing heavily in world financial markets during the past three decades
    • large trade deficits
  • Before 1980
    • National saving and domestic investment were close
  • After 1980
    • National saving < domestic investment
    • Net capital outflow is negative

Unbalanced policy: 1980 to 1987

  • Flow of capital into the U.S. declines

    • 3.1 → 0.5% of GDP
  • fall in national saving of 3.2 percentage points

    • Increase government budget deficit
    • President Ronald Reagan cut taxes and increased defense spending
  • An investment boom: 1991 to 2000

    • Increase flow of capital (from 0.5 to 3.9% of GDP)
    • Saving increased
    • Government budget surplus
    • Investment increased from 13.4 to 17.8% of GDP
  • An economic downturn: 2000 to 2012

    • Large capital flow into the U.S.
    • Investment fell 4.5 percentage points
    • Tough economic times starting in 2008 made additional capital less profitable
    • National saving fell 4.5 percentage points
    • Extraordinarily large budget deficits
  • At the end of the economic downturn

    • National saving 2/3 domestic investment + 1/3 NCO
    • Are these trade deficits and international capital flows a problem for the U.S. economy?
      • No easy answer to this question
  • Trade deficit induced by an investment boom (1990s)

    • Borrowing from abroad to finance the purchase of new capital goods
    • For good return on investment - Can handle the debts
    • For lower return on investment - debts will look less desirable
  • Appreciation(strengthen)

    • Increase in the value of a currency compared to foreign currency
      • Buy more foreign currency
  • Depreciation (weaken)

    • Decrease in the value of a currency

Real exchange rate

  • = (e * P) / P_f
  • e: nominal exchange rate
  • P: local price index
  • P_f: foreign price index
  • = Nominal exchange rate x Domestic price / Foreign price

fall in the U.S. real exchange rate

  • U.S. goods: cheaper relative to foreign goods

  • Consumers buy more U.S. goods

    • Higher exports
    • Lower imports
    • Higher net exports
  • Purchasing-power parity, PPP(購買力平價)

    • A unit of any given currency should be able to buy the same quantity of goods in all countries
    • Parity: Equality
    • Based on the law of one price: A good must sell for the same price in all locations
    • Nominal exchange rate between two countries = price levels in those countries
    • does not always hold in practice
      • Many goods are not easily traded
      • Even tradable goods are not always perfect substitutes
      • Not a perfect theory of exchange-rate determination
      • Real exchange rates fluctuate over time
  • Arbitrage(套利交易)

    • Take advantage of price differences for the same item in different markets
    • Result: the law of one price

hamburger standard

  • According to purchasing power parity
    • Real Cost of “Big Mac” is same in both countries
    • Predicted exchange rate = Price in U.S. / Price in foreign country (in foreign currency)
  • reasonable prediction

Chap32: A Macroeconomic Theory of the Open Economy

可貸資金(loanable funds)

  • Definition
    • Domestically generated flow of resources
  • Supply of loanable funds
    • From national saving (S)
  • Demand for loanable funds
    • domestic investment (I)
    • net capital outflow (NCO)
  • When NCO > 0
    • Adds demand for loanable fund
    • 資本流入,國內資金需求增加

Higher real interest rate

  • Encourages people to save
    • Increases loanable funds supplied
  • Discourages investment
    • Decreases loanable funds demanded
  • Domestic assets more attractive
    • Increases demand of domestic capital
    • Reduces net capital outflow
    • Decrease loanable funds demanded


  • 利率增加 需求減少 供給增加

The real exchange rate

  • determined by the supply and demand for foreign-currency exchange

Supply of foreign-currency exchange

  • Net capital outflow
    • Quantity of dollars supplied to buy foreign assets
    • Supply curve is vertical
      • Does not depend on the real exchange rate
      • 供给曲线是垂直的,因为净国外投资(nco)的供给数量与实际汇率无关
        Demand for foreign-currency exchange
  • Net exports
    • Quantity of dollars demanded to buy U.S. goods and services
    • 出超→他國需要用美金買東西→需求上升
  • A higher real exchange rate
    • Makes U.S. goods more expensive and reduces dollar demanded

Equilibrium real exchange rate

  • Demand for dollars
    • from foreigners
    • from U.S. net exports
  • Supply of dollars
    • From Americans
    • from U.S. net capital outflow


  • Market for loanable funds: S = I + NCO

  • Market for foreign-currency exchange: NCO = NX

  • Equilibrium real interest rate, r

    • present Price of goods and services
    • Relative to future price of goods and services
  • Equilibrium real exchange rate, E

    • Price of domestic goods and services
    • Relative to foreign goods and services

Government budget deficits

  • Reduces national saving
  • Reduces supply of loanable funds
  • Increase in interest rate
  • Reduces net capital outflow(tends to save instead buy)
  • Decrease in supply of foreign-currency exchange
  • Currency appreciates
  • Net exports fall
  • trade tends to deficit

Trade policy

  • Tariff(關稅)
  • Import quota(進口配額)
  • Voluntary export restrictions(自動出口配額制)

Macroeconomic impact of trade policy

  • Decrease imports
  • Increase demand for local currency
    • Real exchange rate appreciates
      • Decrease exports
  • No change in net exports
    • Macro
      • No change in real interest rate
        • No change in net capital outflow
    • Micro
      • Decrease in imports and exports
  • Trade policies only affect specific
    • Firms
    • Industries
    • Countries
  • A policy that restricts imports does not affect net capital outflow, so it cannot affect net exports or improve a country’s trade deficit. Instead, it drives up the exchange rate and reduces exports and imports

capital flight in Mexico

  • NCO increase
    • Reduce domestic investment(saving is the same)
    • Slows capital accumulations
    • Slows economic growth
  • Loanable Funds Market
    • NCO increase
    • demand of loanable funds increases
    • Interest rate increases
  • Foreign-Currency Market
    • NCO increase
    • peso supply increase
    • peso depreciate
  • The peso depreciates
    • Exports – cheaper
    • Imports – more expensive
    • Trade balance moves toward surplus
  • influence of U.S. market
    • Fall in U.S. net capital outflow
    • The dollar appreciates
    • U.S. interest rates fall
    • only a little influence

Ongoing policy disputes: U.S. and China
China – tried to depreciate renminbi

  • Chinese goods - less expensive
  • Promote its export industries
    • Accumulate foreign assets($3 trillion, 2012)
      • Including U.S. government bonds
    • wants to accumulate a reserve of foreign assets - national “rainy-day fund”
      • Misguided policy
    • Contributes to the U.S. trade deficit
  • Inflow of capital from China
    • Lowers U.S. interest rates
    • Increases investment in the U.S.
  • Creates winners and losers among Americans
    • Hurts American producers
    • American consumers benefit from lower prices

For US

  • trade deficit is not caused by other countries’ “unfair” trade practices, but by low saving
  • Stagnant(停滯的) living standards are not caused by imports, but by low productivity growth

Chap33: Aggregate Demand and Aggregate Supply

  • real GDP grows about 3% per year on average in the world in the long run
  • Business cycles: Short-run economic fluctuations
    1. irregular and unpredictable
    2. Most macroeconomic values fluctuate together

classical theory describes the world in the long run, but not the short run

  • use model of aggregate demand and aggregate supply

In the short run

  • changes in nominal variables can affect real variables

  • Can’t assume monetary neutrality

  • The model determines price level(nominal) and output (real)

Demand Curve

  • Affected by Y = C + I + G + NX
    • Wealth effect (C)
    • Interest-rate effect (I)
    • Exchange-rate effect (NX)

Price level and consumption (C): the wealth effect

  • Changes in taxes
  • Decrease in price level
    • Increase real value of money
    • Consumers are wealthier
    • Increase consumer spending
    • Increase demanded of goods and services

Price level and investment (I): the interest-rate effect

  • Technology, Tax policy, Money supply
  • Decrease in price level
    • Decrease in the interest rate
    • Increase spending on investment
    • Increase in demanded of goods and services

Price level and net exports (NX): the exchange-rate effect

  • Recession in other country

  • International speculators(國際炒家)

    • change in exchange rate
  • Decrease in U.S. price level

    • Decrease in the interest rate
    • U.S. dollar depreciates
    • Stimulates U.S. net exports
    • Increase in demanded of goods and services
  • Long Run Aggregate-supply(LRAS) curve is vertical

    • Price level does not affect the long-run GDP
    • LRAS curve only shift by output(labor, capital, natural resources, techonology)
  • In long run: both AD and LRAS curve shift right

    • LRAS curve shift by technological progress
    • AD curve shifts to right by Fed increases money supply
    • Result
      • Continuing growth in output
      • Continuing inflation

In the short run

  • price level increase, supply increase

  • Explanation

    • Sticky-wage theory
      • Nominal wages: slow to adjust
        • Long-term contracts: workers and firms
        • based on expected prices
        • Don’t respond immediately when actual price level different from what was expected
    • Sticky-price theory
      • Prices of some goods and services: Slow to adjust
        • Menu costs: Costs to adjusting prices
    • Misperceptions theory
      • Changes in the overall price level can temporarily mislead suppliers
      • supply more goods and services because nominal price up
  • output = Natural level of output + a(Actual price level – Expected price level)

    • a: degree of output responds to unexpected price level changes

Long-run equilibrium

  • Intersection of AD and LRAS curves
    • Natural level of output
    • Actual price level
  • Intersection of AD and short-run AS curve
    • when Expected price level = Actual price level
    • 三線會交於一點

Analyze Macroeconomic fluctuations

  1. Decide the curve and direction to shift
  2. determine the impact in the short run
  3. analyze movement from new short-run equilibrium to long-run equilibrium

  • Early 1930s: large drop in real GDP
    • Cause: decrease in aggregate demand
      • Decline in money supply (by 28%)
      • Decrease C and I
  • Early 1940s: large increase in real GDP
    • World War II
      • Government purchases increased
      • Doubled production of goods and services
      • 20% increase in the price level
      • Unemployment fell from 17 to 1%

2008-2009, financial crisis, severe downturn in economic activity

  • low interest rates
    • rise in housing prices
  • Misguided government policy
    • Encouraged this high-risk lending
  • 2006-2009, housing prices fell 30%
    • Financial institutions losses huge
  • Large contractionary shift in AD
    • By 4% between the forth quarter of 2007 and the second quarter of 2009
    • Unemployment rate rose from 4.4% in May 2007 to 10.1% in October 2009
  • Three actions to resume AD
    • The Fed
      • Cut federal funds rate
        • From 5.25% in September 2007 to about zero in December 2008
      • Started buying mortgage-backed securities and other private loans
        • Provided banks with additional funds
    • October 2008, Congress appropriated $700 billion
      • rescue the financial system
      • make loans
        • U.S. government – temporarily became a part owner of these banks
    • January 2009, Barack Obama
      • Large increase in government spending
      • $787 billion stimulus bill, February 17, 2009
  • From 2010 through 2012
    • Real GDP growth averaged 2.1% per year
  • Unemployment fell, but remained high
    • 7.5% in April 2013

  • 1970 Oil crysis
    • reduces the supply of crude oil flowing from Middle East
    • Price of oil rises
      • Aggregate-supply curve shifts left

John Maynard Keynes, 1883–1946

  • Argued recessions and depressions can result from inadequate demand
  • policymakers should shift AD
  • Famous critique of classical theory
  • The long run is a misleading guide to current affairs. In the long run, we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us when the storm is long past, the ocean will be flat

Chap34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

For U.S. economy

  • The wealth effect - least important
    • Money holdings – a small part of household wealth
  • The exchange-rate effect - not large
    • Exports and imports – small fraction of GDP
  • The interest-rate effect
    • The most important

liquidity preference

  • Keynes’s theory
  • Assumption: expected rate of inflation is constant
  • If interest rate > equilibrium
    • money demand < supply
    • People holding the surplus
      • Buy assets
      • Lowers the interest rate

Money supply

  • Controlled by the Fed
    • Changing reserves
    • open-market operations

Money Demand

  • Interest rate – opportunity cost of holding money
  • Increase in the interest rate
    • Raises the cost of holding money
    • Reduces the quantity of money demanded

Monetary policies to AD

  • If price level ↓

    • → money demand ↑
    • → interest rate ↑
    • product demand ↓
  • increases money supply

    • Money-supply curve shifts right
    • Interest rate falls
    • Increase demanded of goods and services
    • Aggregate-demand curve shifts right
  • Summary

    • expanding aggregate demand
      • Increasing the money supply
      • Lowering the interest rate
    • contracting aggregate demand
      • Decreasing the money supply
      • Raising the interest rate
  • Stock market boom expands the AD

    • Households – wealthier
      • Stimulates consumer spending
    • Firms – want to sell new shares of stock
      • Stimulates investment spending
  • The Fed’s goal: stabilize AD

    • The Fed’s response to a stock-market boom
      • Keep money supply lower
      • Keep interest rates higher
    • The Fed’s response to a stock-market fall
      • Increase money supply
      • Lower interest rates
  • Liquidity trap: when the interest rate is zero

    • nominal interest rates cannot be reduced further
    • Solution
      • make real interest rates negative by raising inflation expectations
      • open market operations: provide assets to lower rates
        • Fed pursued this option in 2008–2009

Fiscal Policies to AD

Fiscal policy: about government spending and taxation

  • Multiplier effect
    • Additional shifts in aggregate demand
      • Investment accelerator
      • Higher government demand
        • Higher demand for investment
    • Positive feedback from demand to investment
    • Spending multiplier
      • Marginal propensity to consume(MPC, 邊際消費傾向)
        • percentage of extra income that consumers spend
        • Size of the multiplier depends on the MPC
      • Spending multiplier = 1/(1 – MPC)
        • (1 + MPC + MPC2 + MPC3 … )
  • Crowding-out effect
    • when expansionary fiscal policy raises the interest rate
    • reduces investment spending
    • 擠出效應是指增加政府投資對私人投資產生的擠佔效應,從而導致增加政府投資所增加的國民收入可能因為私人投資減少而被全部或部分地抵消
      • AD shifts right
      • Interest rate – increases
      • AD shifts left
    • Decrease in personal income taxes
      • Households income – increases
      • Multiplier effect
        • Aggregate demand – increases
      • Crowding-out effect
        • Aggregate demand – decreases
      • Permanent tax cut – large impact on AD
      • Temporary tax cut – small impact on AD

stabilize the economy

  • The government

    • Use fiscal policy
  • The Fed

    • Use monetary policy
  • Respond to changes in the private economy(Ex. stock) to stabilize

  • Keynes

    • government should actively stimulate aggregate demand
      • When AD insufficient to full-employment level
    • 1964, President John F. Kennedy
      • Advocated a tax cut to stimulate the economy
      • Tax break to firms that invest in new capital
        • Higher investment
      • Fiscal policy
        • Short-run: increase production through higher aggregate demand
        • Long-run: increase production through higher aggregate supply
    • 2009, President Barak Obama
      • Substantial increase in government spending
  • Automatic stabilizers

    • Without policymakers having to take any deliberate action
      • The tax system
      • Government spending


  • Policymakers need to consider all the effects of their actions
    • Congress cuts taxes, it should consider the short-run effects on AD and employment, and the long-run effects on saving and growth
    • When the Fed reduces the rate of money growth, it must take into account not only the long-run effects on inflation but the short-run effects on output and employment

Chap35: The Short-Run Trade-off between Inflation and Unemployment

One of the Ten Principles

  • In the short run, society faces a trade-off between inflation and unemployment

Phillips curve

  • short-run trade-off between inflation and unemployment

  • nominal wage growth was negatively correlated with unemployment

    • High unemployment and low inflation
    • low unemployment and high inflation
  • That arise in the short run

    • As shifts in the AD curve
  • 1968: Milton Friedman and Edmund Phelps

    • tradeoff was temporary
    • Natural-rate hypothesis: unemployment eventually returns to its natural rate
  • In the long run: Increase in money supply

    • AD shifts right
    • Price level – increases
    • Output – natural rate
    • Philip Curve
      • Inflation rate increases
      • natural rate of Unemployment
      • vertical in the long run
    • If reduce the natural rate of unemployment
      • Long-run Phillips curve shifts left
      • Long-run aggregate-supply shifts right

Use new variable to prove

  • expected inflation
    • how much people expect the price level to change
  • Unemployment rate = natural unemployment rate - a (actual inflation - expected inflation)
    • short run: Fed can reduce u-rate by making inflation > expected
    • long run: expectations catch up reality inflation
      • u-rate become natural
  • Expected inflation determines short-run AS curve

Natural-rate hypothesis

  • Unemployment - eventually returns to its normal/natural rate
  • Late 1960s (short-run)
    • Vietnam War
      • Expansionary fiscal policy
        • Government spending rose
        • Expand AD for goods and services
      • The Fed try to hold down interest rates
        • Money supply – rose 13% per year
        • High inflation (5-6% per year)
        • Unemployment increased
    • late 1970s (long-run)
      • Inflation – stayed high
        • People’s expectations of inflation caught up with reality
      • Unemployment – natural rate

Supply shock

  • firms’ costs and prices directly change

    • Shifts economy’s aggregate-supply curve
    • Shifts the Phillips curve
  • Increase in oil price

    • Aggregate-supply curve shifts left
    • Stagflation
      • Lower output
      • Higher prices
    • Short-run Phillips curve shifts right
      • Higher unemployment
      • Higher inflation
      • If temporary – revert back
      • If permanent – needs government intervention

Reducing Inflation

  • Contractionary monetary policy
    • Aggregate demand – contracts
      • Higher unemployment
      • Lower inflation
    • Over time
      • Phillips curve shifts left
        • Lower inflation
        • Unemployment – natural rate

Sacrifice ratio

  • Number of percentage points of annual output
  • Lost in the process of reducing inflation by 1 percentage point
  • Typical estimate: 5
    • For each percentage point that inflation is reduced
    • 5 percent of annual output must be sacrificed in the transition

Rational expectations - smaller sacrifice ratio

  • Government - credible commitment to a policy of low inflation
  • People: lower their expectations of inflation
  • Short-run Phillips curve - shift downward
  • Economy - low inflation quickly
  • Without temporarily high unemployment & low output!
  • volcker-disinflation

2006 – 2009

  • House prices fell by about one third
    • Financial institutions – difficulties
  • Expansionary monetary and fiscal policy
    • Goal: increase aggregate demand

Supply shocks and changes in expected inflation shift the short-run Phillips curve, making the tradeoff more or less favorable
Some economists argue that a credible commitment to reducing inflation can lower the costs of disinflation by inducing a rapid adjustment of expectations.


  • WCS講義
  • http://wenku.baidu.com/view/f5e81fe8b8f67c1cfad6b806