Macroeconomics (copy)

Expansion

Expansion

an upward movement in general economic activity

Recession

a downward movement in general economic activity

Peak

a phase of the business cycle where economic activity is no loner rising

Trend

a long run directional change, up or down in some economic variable – f.e.: real GDP

Meaning of business cycle for FAs

prediction and planning future investments, when it’s worth to invest, if there will be more risk

The great depression

it was the worst economic contraction of the 1930. Real GDP fell nearly 30%, the unemployment rate rose from 3% to nearly 25%, thousand of brand failed. In 1939 unemployment rate was 17%, it ended with start of WWII

Business investment

when economy is expanding, sales and profit keep rising, so companies invest, creating new jobs and more expansion but in recession the contrary is true.

Consumer expectations

forecast of expanding economy encourages people to buy and create more expansion, while people are forecasting recession there is a fear and uncertainty about future so people don’t want to consume.

External shock

those are factors like wars and natural disasters which can cause fluctuations in BC

Interest rates and credits

low interest encourages companies to make investments and adding jobs and creating more expansion while high interest rate make companies not want to invest because it’s not profitable and it creates more recession.

Keynesian Theory

Proposed by John Maynard Keynes, this theory emphasizes the role of aggregate demand in business cycles. Keynes argued that fluctuations in investment, consumption, and government spending can lead to booms and recessions. He advocated for government intervention, such as fiscal policy and monetary policy, to stabilize the economy.

Real Business Cycle Theory

is a theory that suggests that business cycles are a result of technological changes and the availability of resources, both of which influence productivity and cause changes in the long-run aggregate supply.

Monetarist Theory

this theory, associated with economists like Milton Friedman, emphasizes the role of monetary policy in driving business cycles. Monetarists argue that fluctuations in the money supply and interest rates have a significant impact on economic activity. They advocate for a stable and predictable monetary policy to avoid excessive booms and busts.

Mainstream business cycle theory

emphasizes the role of aggregate demand factors in driving business cycles. It emphasizes the significance of government intervention through fiscal policy and monetary policy to stabilize the economy during recessions or stimulate it during downturns

Structural unemployment

due to changes in structure of economy and result in loosing job

Frictional unemployment

due to waiting time between jobs and searching time

Cyclical unemployment

due to labour lay-offs in recession

Seasonal unemployment

due to seasonal changes

Main functions of money

medium of exchange, unit of account, store of value, means of payment

Medium of exchange

is an object that is generally accepted in exchange for goods and services

Unit of account

is an agreed measure for stating in prices

Store of value

money can be held for a time and later exchange for goods

Means of payment

is a method of setting a debt.

Three measures of money

monetary base, M1 and M2

Monetary base

It includes physical currency (coins and banknotes) in circulation and the reserves held by commercial banks at the central bank.

M1

Includes highly liquid and easily spendable forms of money: like physical currency in circulation, demand deposits, travel checks of non-bank issuer( DON’T INCLUDE BANK RESERVES)

M2

It includes M1 money but also savings deposits, time deposits (such as certificates of deposit), money market mutual funds held by individuals, and other similar items.

Quantity theory of money

MV=PY where M is quantity of money; V is velocity of circulation; P is price level; Y is real GDP. This equation of exchange becomes the quantity theory of money if M doesn’t influence V or Y. So, in the long run, the change in P is proportional to change in M

Main measures of inflation

consumer price index, producer price index

Cost-push inflation

It starts because AD increases. It can be caused by any factor that increases AD. We start from full employment, increase in AD shift AD curve to the right, price level rises, real GDP rises, inflationary gap rises.

Philips curve

There is a negative relation between inflation rate and unemployment rate. when unemployment is low, inflation tends to be high, and vice versa. In the long run there is no stable trade-off between unemployment rate and inflation rate

Perception of inflation

refers to how individuals perceive the changes in prices of goods and services. It can influence how people react to inflation and adjust for example their spendings. If people perceive that inflation is high they can reduce their consumption which lead to decrease in demand.

Expectations of inflation

expectation of inflation influence on real inflation. If people expect inflation in future they can increase their present spending to avoid paying higher prices in future

Fighting inflation

stimulate production, privatization of state property, fiscal policy (reducing GOV spending or increasing taxes), monetary policy (increasing interest rates or reducing money supply), supply side policies (improving the efficiency and productivity of the economy)

Main reasons for regulation

excessive competition, excess profits, negative externalities, natural monopolies, achieving social goals.

Distributive policy

refer to government actions aimed at redistributing income and wealth among different segments of society. These policies are designed to address inequalities and promote a more equitable distributionof resources.

Public theory of regulation

regulators have sufficient information and enforcement powers, effectively promote the public interest, regulators aim to purse the public interest.

Private theory of regulation

regulators don’t have sufficient information so they can promote public sector imperfectly, all economics agents pursue their own interest.

Social regulation

environmental regulations focus on protecting and preserving the environment and natural resources. They aim to address issues such as pollution, resource depletion, and climate change. For example, Regulations may establish standards for emissions from industrial activities, vehicles, and other sources to ensure clean air and water.

Economics regulation

transport regulation involves the rules and policies governing various aspects of transportation, including road, air, rail, and maritime. These regulations aim to ensure safety, efficiency, and fair competition within the transportation industry. They cover areas such as licensing and permits, safety standards, infrastructure development, pricing and tariffs, and environmental regulations.

Deregulation

there are too many regulations which are harming efforts of business and consumer. To solve it we need to eliminate government regulations.

Alternatives to GOV regulations

self regulation, lower level of regulations, no regulation, co-regulation, market incentives, informational campaigns

Areas covered by banking regulation

customer protection, restriction to competition, bank capital requirements, disclosure requirements, banks supervision, restriction on asset holding, government safety net

Main types of financial regulations

prevention of systematic risks, prevention of indyvidual risks, promotion of systematic efficiency

Basel I

prescribes minimal financial requirement for financial institutions, with the goal of minimizing credit risk

Basel II

raised the bank capital requirement, banks responded by getting their loans off through securitization so they will have to hold less capital. Bank misclassified the risk of their assets to avoid holding more capital.

Areas covered by trade regulations

size of supermarkets (France), conditions of e-commerce, distance selling, international trade, Brexit talks and regulation of commerce post Brexit times

Trough

the bottom of a business cycle and point when economic activity stop falling