Consumer price index:

Cost of basket in year t

CPI in year t  100
Cost of basket in base year

Compute the inflation rate:

CPI in Year 2-CPI in Year 1
Inflation Rate in Year 2= 100%
CPI in Year 1

 Wage bargain
 The growth rate of real wage = the growth rate of nominal wage – the
inflation rate

 Government subsidy, wage, exchange rate and monetary policy

 The depreciation of real exchange rate = the depreciation of nominal
exchange rate – (the difference between domestic and foreign
inflation rates)

Labor force participation rate

Labor force
 100%
Adult population

Number unemployed
Unemployment rate= 100%
Labor force
Economic growth rates

 Growth accounting method

 1
Y  AK L
A: Technology L: Productive Labor
variable

: parameters which
K: Stock of capital
is in the range (0,1)

The financial system

Price today = Present value of (DIV1, DIV2,

 DIV=
Present value DIV2 DIV3 DIVt
 1
   ...   ...
1 r  1 r   1 r   1 r 
2 3 t

THE DIVIDEND DISCOUNT MODEL

 Measure the riskiness of a particular financial asset

  Rt  R 
2

Standard deviation    t 1

N 1

How banks create money

 The first case:

 If you keep this amount to purchase goods and services, then
money supply including currency in circulation (Cu) and demand
deposits (D) equals
 M1 = Cu + D = 1000 + 0 = 1000

 The second case

 If you deposit $ 1,000 in cash to open a checking account, and
the commercial bank keeps 100% as reserves, then money supply
equals:

M1 = Cu + D = 0 + 1,000 = $ 1,000

 The third case

 Now, the commercial bank keeps 10% as reserves and makes
loans the rest. Then, money supply equals:

M1 = Cu + D = 900 + 1,000 = $1,900

 Total demand deposit created equals:

1
Money multiplier 
reserve ratio
Money
Money supply = Monetary × multiplier
base

 The general formula of money multiplier

 Cash Ratio + 1
Money multiplier 
Cash Ratio + Reserve ratio
Money
Money supply = Monetary base × multiplier

 The aggregate planned expenditure for a closed economy

AE = C + I + G
 C: consumption by households
 I: planned investment by firms
 G: government purchases of goods and services

1
Y   G
1  MPC
I.E: Y = 1000 + MPC×1000 + MPC2×1000 + MPC3×1000 + …

 Net exports is a component of GDP:

Y = C + I + G + NX

 National saving is the income of the nation that is left after

paying for current consumption and government purchases:
Y - C - G = I + NX
  National saving (S) equals Y - C - G so:
S – I = NX
Or
Domestic Net Capital
Saving - Investment = Outflow
Saving, Investment, and Their Relationship to the
International Flows
 For an economy as a whole, NX and NCO must balance each
other so that:
NCO = NX

Exchange rates

P f
 E n
Er 
Pd
Determine equilibrium exchange rate
 Absolute PPP
d
P
E  f
n

P
 Relative PPP
 %E n  %Pd  %P f
i.e.

 
Depreciation rate of domestic Domestic Foreign
currency inflation rate inflation rate