National output of goods and services during a

National output of goods and services during a given period is measured as gross domestic product - GDP A nation’s income during a given period is exactly equal to the total of all goods and services it creates during a given period Therefore Y = GDP

Potential output is what the economy could produce if all resources were employed at their normal levels of utilization - often called full-employment output

In the absence of government and international trade, desired aggregate expenditure is:

The simple consumption function is written as:

What might cause a shift in the consumption function (the amount of consumption desired by all households at all levels of income)? - change in wealth - change in interest rates - change in expectations - change in population size or age distribution - change in taste - ?

Three important determinants of aggregate investment expenditure are:

If desired aggregate expenditure exceeds actual output: - what is happening to inventories? falling - there is pressure for output to rise If desired aggregate expenditure is less than actual output: - what is happening to inventories? - there is pressure for output to fall rising

The economy’s adjustment process works following negative demand shocks, too. - although it may be slower because of “sticky wages”

Most economists agree that automatic fiscal stabilizers are desirable and generally work well, but they have concerns about discretionary fiscal policy.

What are three separate terms? Any change in GDP must be associated with a change in one or more of these things. How do these three components change over time?

Increased national saving reduces the real interest rate and encourages more investment - change in taste - change in tax laws - gov’t surpluses Greater flow of investment leads to a higher growth rate of potential output.

Increased investment demand pushes up the interest rate and encourages more saving by households - new products/technology - change in expectations

This theory begins with the idea of an aggregate production function:

In the Neoclassical growth model, technological change is necessary for sustained growth in living standards.

New growth theory emphasizes the process of innovation and the incorporation of new technology:

Chapter 27 Money and Banking

Most modern banking systems have: - a central bank - many commercial banks A central bank acts as a bank to the banking system: - usually a government-owned institution - the sole money-issuing authority

Deposit creation does not happen automatically; it depends on the decisions of bankers. Bankers must find appropriate borrowers to lend their excess reserves to. A cash drain: - if households hold a fraction of their deposits in cash, the deposit-creation process is dampened

Chapter 28 Money, Interest Rates, and Economic Activity

Present value: - the value now of one or more payments or receipts made in the future

This simple present value formula tells how to price any promise of future payments.

There are three reasons for holding money: We focus on three variables: - real GDP (+) - the price level (+) - the interest rate (-)

Three stages:

An increase in the supply of money or A decrease in the demand for money Excess supply of money A fall in interest rates An increase in desired investment expenditure Capital outflow and currency depreciation Increase in net exports An upward shift in the AE curve A rightward shift in the AD curve

Chapter 29 Monetary Policy in Canada

For any given money demand curve, any central bank must choose between: - setting the money supply - setting the interest rate Both cannot be set independently.

The Overnight Interest Rate Commercial banks borrow and lend reserves to each other overnight. The Overnight Interest Rate is the interest rate in this overnight market. You can think of this rate as the cost of reserves to commercial banks.

Monetary policy operates with a time lag that is long and variable for two main reasons:

They argued that attempts to stabilize will more likely be destabilizing - they advocate the use of a monetary rule - increase bank reserves at a constant rate