Framework for macroeconomic analysis

focus on the short run
potential GDP
the maximum amount of GDP that can be produced at any point in time, which depends on the size of labor force, the number of structures, the amount of equipment in the economy, and the state of technology.
short-run policy makers focus on demand side/ long on the supply side
managers mainly pay attention to short-run macroeconomic models- - - - -months, quarters,years

real terms
Measuring expenditures and income with the price level held constant, so that any changes in these values represent changes
in the actual amount of goods, services, and income.

Nominal terms
Measuring expenditures and income with the price level allowed to vary, so that changes in these values represent changes in the actual amount of goods, services, and income; changes in the price level; or a combination of both factors.


Aggregate expenditure
The sum of personal consumption expenditure, investment expenditure, government expenditure, and net export expenditure in a given period of time.

Personal consumption expenditure
The amount of spending by households on durable goods, nondurable goods, and services in a given period of time.

Consumption function
The fundamental relationship in macroeconomics that assumes that household consumption spending depends primarily on the level of disposable income (net of taxes) in the economy, all other variables held constant.

Marginal propensity to consume (MPC)
The additional consumption spending generated by an additional amount of real income, assumed to take a value less than 1.


Saving (S)
The amount of disposable income that households do not spend on the consumption of goods and services.
Marginal propensity to save (MPS)
The additional household saving generated by an additional amount of real income, which equals 1—MPC.


the level of personal taxes
tax cut is a means of financial stimulation, can lead to the increase of MPC, somehow the recent American tax rebates didn't receive the satisfied outcomes.------fiscal

real interest rate
The nominal interest rate adjusted for expected inflation, which is the rate that influences firms’ investment decisions.
Nominal interest rate
The real interest rate plus the expected rate of inflation, which may differ substantially from the real interest rate during periods of inflation.


consumer confidence

Consumer Sentiment index (CSI)
An index, based on a telephone survey of 500 households conducted by the University of Michigan, that measures households’ attitudes regarding expected business conditions, personal financial conditions, and consumer confidence about purchasing furniture and major household appliances.

Consumer Confidence index (CCI)
An index, based on a mail survey of 5,000 households conducted by the Conference Board, that measures households’ perceptions of general business conditions, available jobs in the households’ local area, and expected personal family income in the coming six months.


wealth

consumer credit

Level of Debt

The Consumption Function

C = f (Y, T p , r, CC, W, CR, D) +,-,-,+,+,+,-
where
C = personal consumption expenditure
Y = personal income
T P = personal taxes
r = real interest rate
CC = consumer confidence
W = consumer wealth
CR = available consumer credit
D = consumer debt


C = C0 + c1* Y
where
C0 = autonomous consumption expenditures
c1 = marginal propensity to consume
Y = personal income


Autonomous consumption expenditures
Consumption expenditures that are determined by factors other than the level of real income in the economy.
induced consumption expenditures
Consumption expenditures that result from changes in the level of real income in the economy.


Gross private domestic investment
The total amount of spending on nonresidential structures, equipment, and software; residential structures; and business
inventories in a given period of time.


Business Investment Spending and Real Income

The Real Interest Rate

Business Taxes

relative prices
The price of one good in relation to the price of another good.

Expected Profits and Business Confidence

Capacity utilization rates (CURs)
The ratio of production to capacity calculated monthly for the manufacturing, mining, and electric and gas utilities industries and used as an indicator of business investment spending on structures and equipment.



Residential Investment Spending

Inventory Investment

investment spending function
The functional relationship between investment spending and income, holding all other variables that influence investment spending constant.


I = f (Y,r,T B ,PR,CU) +,-,-+,+
1∙2 1∙2 1∙2 1∙2 1∙2
where
I = investment spending
Y = real income
r = real interest rate
T B = business taxes
PR = expected profits and business confidence
CU = capacity utilization


I = I0 + i1 * Y
where
I0 = autonomous investment expenditure
i1 = marginal propensity to invest
Y = real income


Government expenditure
The total amount of spending by federal, state, and local governments on consumption outlays for goods and services,
depreciation charges for existing structures and equipment, and investment capital outlays for newly acquired structures and equipment in a given period of time.
Fiscal policy
The use of expenditure and taxation policies by the federal government to pursue the macroeconomic goals of full employment and low inflation.
Budget surplus/deficit
The relationship between federal government revenue and expenditure with a surplus indicating revenue greater than
expenditure and a deficit indicating revenue less than expenditure.


G = f(Y,Policy) +,—
where
G = government spending
Y = real income
Policy = institutional policy decisions at all levels of government
G = G 0
where
G = government expenditure
G 0 = autonomous government expenditure

only influenced by policy

Net export expenditure
The difference between export spending on domestically produced goods and services by individuals in other countries and import spending on foreign-produced goods and services by domestic residents in a given period of time.


export expenditure
X = f(Y, Y * , R)  0,+,—
102 1∙2 1∙2
where
X = export expenditure
Y = domestic real income
Y * = foreign GDP or real income
R = currency exchange rate


X = X 0
where
X = export spending
X 0 = autonomous export spending


Currency exchange rate
The rate at which one nation’s currency can be exchanged for that of another, which is determined in foreign exchange markets.


Import Expenditure
M = f(Y, R) +,+
where
M = import spending
Y = domestic real income
R = currency exchange rate
M = M 0 + m 1 Y
where
M = import spending
M 0 = autonomous import spending
m 1 = marginal propensity to import
Y = domestic real income


Net Exports

Aggregate Expenditure
E = C + I  + G + X + M
where
E = aggregate expenditure
C = consumption expenditure
I = investment expenditure
G = government expenditure
X = export spending
M = import spending


Aggregate expenditure function
The relationship between aggregate expenditure and income, holding all other variables constant.


E ∙ f1Y,T P ,r,CC,W,CR,D,T B ,PR,CU,G,Y * ,R2
1∙2 1∙2 1∙2 1∙2 1∙2 1∙2 1∙2 1∙2 1∙2 1∙2 1∙2 1∙2 1∙2
where
E = aggregate expenditure
Y = real income
T P = personal taxes
r = real interest rate
CC = consumer confidence
Aggregate expenditure
function
The relationship between
aggregate expenditure and income,
holding all other variables constant.

E = f（Y,T P ,r,CC,W,CR,D,T B ,PR,CU,G,Y * ,R） +，—，—，+，+，+，—，—,+,+,+,+,—
where
E = aggregate expenditure
Y = real income
T P = personal taxes
r = real interest rate
CC = consumer confidence

W = consumer wealth
CR = consumer credit
D = consumer debt
T B = business taxes
PR = expected profits
CU = capacity utilization
G = government spending
Y * = foreign GDP or real income
R = currency exchange rate


E = E 0 + (c 1 + i 1 ∙ m 1 )Y
where
E = aggregate expenditure
E 0 = sum of all autonomous expenditure components
c 1 = marginal propensity to consume
i 1 = marginal propensity to invest
m 1 = marginal propensity to import
Y = real income


Equilibrium level of income and output
The level of income or, equivalently, the aggregate output where the desired spending by all sectors of the economy just equals the value of the aggregate output produced and the income received from that production.
injections
Any supplement to consumer spending that increases domestic aggregate output and income.
leakages
Any uses of current income for purposes other than purchasing currently produced domestic goods and services.


Simplified Illustration of Equilibrium Income and Output
E = E 0 + c 1 Y
where
E = aggregate expenditure
E 0 = sum of all autonomous expenditure components
c 1 = marginal propensity to consume
Y = real income


Adjustment Toward Equilibrium

Unplanned inventory decrease
An unexpected decrease in inventories that occurs when desired aggregate expenditure exceeds the level of output currently produced.

Unplanned inventory increase
An unexpected increase in inventories that occurs when desired aggregate expenditure is insufficient to purchase the level of
output currently produced.


The Multiplier
Y = E 0 + c 1 Y
Y = c 1 Y + E 0
Y(1 - c 1 ) = E 0
Y =E 0/（1 - c 1 ）


m = 1/（1 - c 1 - i 1 + m 1）
where
m = multiplier
c 1 = marginal propensity to consume
i 1 = marginal propensity to invest
m 1 = marginal propensity to import


The multiple change in income and
output that results from a change in
autonomous expenditure.


multiplier is directly relevant to c1/i1， inversely relevant to m1

interest-related expenditure (IRE) function
The function that shows the inverse relationship between planned consumption and investment spending and the real interest rate, all else held constant.

interest rate - inverse to Expenditure, the slope downward