MACROECONOMICS

SOUTH EAST ASIAN INSTITUTE OF TECHNOLOGY, INC.
National
Highway, Crossing Rubber, Tupi, South Cotabato
COLLEGE OF TEACHER EDUCATION

________________________________________________________________
LEARNING MODULE
FOR
SSE 202: MACROECONOMICS
___________________________________________________________________________ COURSE
OUTLINE
COURSE CODE : SSE 202 TITLE : MACROECONOMICS

TARGET POPULATION : 2ND Year BEED INSTRUCTOR : MS. METHYLENE R.
EGARLE, LPT
Overview:
The Course is designed to understand the cause and effects of inflation, unemployment, fiscal
and monetary policies, mode of taxation, International trade policy, national income, Gross National
Policy, Gross Domestic Policy, and consumer index.
Objectives:
a. Demonstrate knowledge and understanding of the cause and effects of inflation,

unemployment, fiscal and monetary policies, modes of taxation, international trade, Gross
Domestic Policy and Gross National Policy;
b. Execute knowledge on process of how top discover connections of concepts to real-life
situations;
c. Apply critical thinking performing a problem solving;
d. Develop a creative thinking in creating new ideas or concept;
e. Perform a task integrating the technology for learning;
f. Give a sense of value and responsibility in group activity for social improvement;
g. Build strong interest and enthusiasm when working independently.
The following are the topics to be discussed
Week 1 VISION, MISSION, CORE VALUES, CLASSROOM POLICIES, AND

UNDERSTANDING MACROECONOMICS
Week 2 SUPPLY AND DEMAND, ECONOMIC GROWTH, AND BUSINESS
CYCLE
Week 3 MEASURING AND DESCRIBING THE AGGREGATE ECONOMY
Week 4 KEYNESIAN SHORT-RUN POLICY MODEL: DEMAND SIDE POLICIES
Week 5 THE CLASSICAL LONG-RUN POLICY MODEL: GROWTH AND SUPPLY
SIDE POLICIES
Instruction to the Learners
The module is focused on a major lesson according to Macroeconomics as your subject this
semester. Macroeconomics comprises of concepts and data which you can relate to the country’s
event, discover new learnings and develop your rational thinking you might use in the future.
The units are characterized by continuity, and are arranged in such a manner that the present unit is
related to the next unit. For this reason, you are advised to read this module. After each unit, there
are exercises to be given. Submission of task given will be during your scheduled class hour.
WEEK 1
VISION
A premier institution thatprovides quality education and globally

empowered individuals
MISSION
To produce competent, community-oriented and globally competitive

individuals through holistic education
CORE VALUES
Service
Excellence
Accountability
Innovation
Teamwork
CLASSROOM POLICIES
1. Awareness of intended audience
(e. g., classes are meant for students currently enrolled in the course and you must not enter or
share a class meeting with someone)
2. General
(e. g., mute microphones when not speaking, raised hand virtually to ask question, turn off the
camera if you’re stepping away)
3. Discussion
(e. g., you can disagree with others but should do respectfully and constructively)
4. Privacy
(e. g., students should consult with the instructor to receive permission to)
5. Communicate instances of disruptive behaviors to the proper instructor, faculty member or
escalate the complaint when necessary
UNDERSTANDING MACROECONOMICS
When the price of a product you want to buy goes up, it affects you. But why does the price go up? Is demand
greater than supply? Does the cost go up because of the raw materials needed to make it? Or, is it a war in an
unknown country that affects the price? To answer these questions, we need to turn to macroeconomics.
WHAT IS ECONOMICS?
• A branch of social science, study on how people allocate scarce resources for production,
distribution, and consumption, both individually and collectively.
• Is concerned with efficiency in production and exchange and uses models and assumptions to
understand how to create incentives and policies that will maximize efficiency.
Types of Economics
1. Microeconomics
• Focuses on the behavior of individual consumers and producers
1. Macroeconomics
• Examine overall economies on a regional, national, or international scale.
WHAT IS MACROECONOMICS?
• Study of economies as a whole (“Macro” comes from the Greek prefix meaning “large”)
(interrelatedness of multiple industries, markets, the unemployment rate, inflation, and general
economic output of an entire economy, such as that of a country or of the globe as a whole).
• Study of the behavior of large collections of economic agents.

Focuses on the aggregate behavior of consumers and firms, the behavior of governments, the
overall level of economic activity in individual countries, the economic interactions among
nations, and the effects of fiscal and monetary policy. Macroeconomics is distinct from
microeconomics in that it deals with the overall effects on economies of the choices that all
economic agents make, rather than on the choices of individual consumers or firms.
• Study of the structure and performance of national economies and of the policies that
governments use to try to affect economic performance.
HISTORY OF MACROECONOMICS
While the term "macroeconomics" is not all that old (going back to the 1940s), many of the core concepts in
macroeconomics have been the focus of study for much longer. Topics like unemployment, prices, growth, and
trade have concerned economists almost from the very beginning of the discipline, though their study has
become much more focused and specialized through the 20th and 21st centuries. Elements of earlier work
from the likes of Adam Smith and John Stuart Mill clearly addressed issues that would now be recognized as
the domain of macroeconomics.
Macroeconomics, as it is in its modern form, is often defined as starting with John Maynard Keynes and
the publication of his book The General Theory of Employment, Interest, and Money in 1936. Keynes
offered an explanation for the fallout from the Great Depression, when goods remained unsold and workers
unemployed. Keynes's theory attempted to explain why markets may not clear.
Prior to the popularization of Keynes' theories, economists did not generally differentiate between micro- and
macroeconomics. The same microeconomic laws of supply and demand that operate in individual goods
markets were understood to interact between individuals markets to bring the economy into a general
equilibrium, as described by Leon Walras. The link between goods markets and large-scale financial
variables such as price levels and interest rates was explained through the unique role that money plays in the
economy as a medium of exchange by economists such as Knut Wicksell, Irving Fisher, and Ludwig von
Mises.
Throughout the 20th century, Keynesian economics, as Keynes' theories became known, diverged into several
other schools of thought.
MACROECONOMICS SHOOLS OF THOUGHT
The field of macroeconomics is organized into many different schools of thought, with differing views
on how the markets and their participants operate.
1. CLASSICAL
Classical economists held that prices, wages, and rates are flexible and markets tend to clear unless
prevented from doing so by government policy, building on Adam Smith's original theories. The term
“classical economists” is not actually a school of macroeconomic thought, but a label applied first by
Karl Marx and later by Keynes to denote previous economic thinkers with whom they respectively
disagreed, but who themselves did not actually differentiate macroeconomics from microeconomics at
all.
2. KEYNESIAN
Keynesian economics was largely founded on the basis of the works of John Maynard Keynes, and
was the beginning of macroeconomics as a separate area of study from microeconomics. Keynesians
focus on aggregate demand as the principal factor in issues like unemployment and the business
cycle. Keynesian economists believe that the business cycle can be managed by active government
intervention through fiscal policy (spending more in recessions to stimulate demand) and monetary
policy (stimulating demand with lower rates). Keynesian economists also believe that there are
certain rigidities in the system, particularly sticky prices that prevent the proper clearing of supply and
demand.
3. MONETARIST
The Monetarist school is a branch of Keynesian economics largely credited to the works of Milton
Friedman. Working within and extending Keynesian models, Monetarists argue that monetary policy
is generally a more effective and more desirable policy tool to manage aggregate demand than fiscal
policy. Monetarists also acknowledge limits to monetary policy that make fine tuning the economy
illadvised and instead tend to prefer adherence to policy rules that promote stable rates of inflation.
4. NEW CLASSICAL
The New Classical school, along with the New Keynesians, is built largely on the goal of integrating
microeconomic foundations into macroeconomics in order to resolve the glaring theoretical
contradictions between the two subjects. The New Classical school emphasizes the importance of
microeconomics and models based on that behavior. New Classical economists assume that all
agents try to maximize their utility and have rational expectations, which they incorporate into
macroeconomic models. New Classical economists believe that unemployment is largely voluntary
and that discretionary fiscal policy is destabilizing, while inflation can be controlled with monetary
policy.
5. NEW KEYNESIAN
The New Keynesian school also attempts to add microeconomic foundations to traditional Keynesian
economic theories. While New Keynesians do accept that households and firms operate on the basis
of rational expectations, they still maintain that there are a variety of market failures, including sticky
prices and wages. Because of this "stickiness", the government can improve macroeconomic
conditions through fiscal and monetary policy.
6. AUSTRIAN
The Austrian School is an older school of economics that is seeing some resurgence in popularity.
Austrian economic theories mostly apply to microeconomic phenomena, but because they, like the
socalled classical economists never strictly separated micro- and macroeconomics, Austrian theories
also have important implications for what are otherwise considered macroeconomic subjects. In
particular the Austrian business cycle theory explains broadly synchronized (macroeconomic) swings
in economic activity across markets as a result of monetary policy and the role that money and
banking play in linking (microeconomic) markets to each other and across time.
WHAT MACROECONOMICS IS ABOUT?
1. LONG-RUN ECONOMIC GROWTH
• Long-run growth is defined as the sustained rise in the quantity of goods and services
that an economy produces.
• Economic growth is the increase in the market value of the goods and services that an
economy produces over time. It is measured as the percentage rate change in the real
gross domestic product (GDP).
• Determinants of long-run growth include growth of productivity, demographic changes,
and labor force participation.
• When the economic growth matches the growth of money supply, an economy will
continue to grow and thrive.
2. BUSINESS CYCLES (Economic cycle or Boom-bust cycle)
• A concerted cycling upswings and downswings in the broad measures of economic

activity-output, employment, income, and sales.
• The alternating phases of the business cycle are expansions and contractions.
3. UNEMPLOYMENT
• The number of people who are available for work and are actively seeking work but
cannot find jobs
• Unemployment rate, measurement for the total number of unemployed, which is:
The number of unemployed

Unemployed=
Total Labor Force (The number of people either working or seeking work)
Unemployed rate= ___%
4. INFLATION
• The rate at which the value of a currency is falling and, consequently, the general level of
prices for goods and services is rising.
• As a currency losses value, prices rise and it buys fewer goods and services
5. THE INTERNATIONAL ECONOMY
1. Open Economy
• A country that has extensive trading and financial relationships with other national
economies
2. Closed Economy
• A country that doesn’t interact economically with the rest of the world
6. MACROECONOMIC POLICY
• A nations’ economic performance depends on many factors, including its natural and
human resources, its capital stock (buildings, machines, software, and intellectual
property), its technology, and the economic choices made by its citizens, both
individually and collectively. Another extremely important factor affecting economic
performance is the set of macroeconomic policies pursued by the government.
7. AGGREGATION
• The process of summing individual economic variables to obtain economy-wide totals.
• The use of aggregation and the emphasis on aggregate quantities such as aggregate
consumption, aggregate investment, and aggregate output are the primary factors that
distinguish macroeconomics from microeconomics.
THREE MAJOR CONCEPTS OF MACROECONOMICS
1. GROSS DOMESTIC PRODUCT
Output, the most important concept of macroeconomics, refers to the total amount of
goods and services a country produces, commonly known as the gross domestic
product (GDP). This figure is like a snapshot of the economy at a certain point in time.
When referring to GDP, macroeconomists tend to use real GDP, which takes inflation
into account, as opposed to nominal GDP, which reflects only changes in price. The
nominal GDP figure is higher if inflation goes up from year to year, so it is not
necessarily indicative of higher output levels, only of higher prices.
The one drawback of GDP is that information has to be collected after a specified time
period has passed, a figure for the GDP today would have to be an estimate. GDP is
nonetheless a stepping stone into macroeconomic analysis. Once a series of figures is
collected over a period of time, they can be compared, and economists and investors
can begin to decipher business cycles, which are made up of the periods alternating
between economic recessions (slumps) and expansions (booms) that occur over time.
From there we can begin to look at the reasons why the cycles took place, which could
be government policy, consumer behavior, or international phenomena among other
things. Of course, these figures can be compared across economies as well. Hence,
we can determine which foreign countries are economically strong or weak.
Based on what they learn from the past, analysts can then begin to forecast the future
state of the economy. It is important to remember that what determines human
behavior and ultimately the economy can never be forecasted completely.
2. THE UNEMPLOYMENT RATE
The unemployment rate tells macroeconomists how many people from the available
pool of labor (the labor force) are unable to find work.
Macroeconomists agree when the economy witness’s growth from period to period,
which is indicated in the GDP growth rate, unemployment levels tend to be low. This is
because with rising (real) GDP levels, we know the output is higher and, hence, more
laborers are needed to keep up with the greater levels of production.
3. INFLATION as a factor
Macroeconomists look at is the inflation rate or the rate at which prices rise. Inflation is
primarily measured in two ways: through the Consumer Price Index (CPI) and the GDP
deflator. The CPI gives the current price of a selected basket of goods and services that
is updated periodically. The GDP deflator is the ratio of nominal GDP to real GDP.
If nominal GDP is higher than real GDP, we can assume the prices of goods and
services has been rising. Both the CPI and GDP deflator tend to move in the same
direction and differ by less than 1%.
WHAT ARE THE ISSUES ADDRESSED TO MACROECONOMICS?
1. What determines a nation’s long-run economic growth?

(Why do some nation’s economies grow quickly, providing their citizens with rapidly
improving living standards, where areas other nations’ economies are relatively stagnant?)
2. What causes a nation’s economic activity to fluctuate?

(Why do economies sometimes experience sharp short-run fluctuations, lurching between
periods of prosperity and periods of hard times?)
3. What causes unemployment?

(Why does unemployment sometimes reach very high? Why, even during times of relative
prosperity, is a significant fraction of the work force unemployed?)
4. What cause prices to rise?

(What causes inflation, and what can be done about it?)
5. How does being part of a global economic system affect nation’s

economies?
(How do economic links among nations, such as international trade and borrowing, affect
the performance of individual economies and the world economy as a whole?)
6. Can government policies be used to improve a nation’s economic

performance?
(How should economic policy be conducted to keep the economy as prosperous and
stable as possible?)
Macroeconomics seeks to offer answers to such questions, which are of great practical importance
and are constantly debated by politicians, the press, and the public. In the of the modular lesson, we
consider these key macroeconomics issues in more detail.
THE DIFFERENCE OF MACROECONOMICS TO MICROECONOMICS
1. Microeconomics versus Macroeconomics on Aggregation
• Microeconomists focus on individual consumers, workers, and firms, each of which is too
small to have impact on the national economy
• Macroeconomists ignore the fine distinctions among the many different kinds of goods,
firms, and markets that exist in the economy and instead focus on national totals.
Example:
Macroeconomists do not care whether consumers are buying Huawei Matebook or
Iphone Tablet, beef or chicken, Pepsi or Coke. Instead, they add consumer expenditures
on all goods and services to get an overall total called aggregate consumption.
2. Microeconomics versus Macroeconomics in the same Element
• Macroeconomics seeks to find a general perspective, at a national level, while

Microeconomics focuses on the individual’s perspective, at a consumer level.
• Even though supply and demand apply to both fields of economics, microeconomics is
based on the trends of buyers and sellers, where macroeconomics focuses on the
various cycles of an economy, such as short- and long-term debt cycle, and business
cycles.
MACROECONOMICS VERSUS MICROECONOMICS: THE OVERLAP
It is clear that macroeconomics does not exist in isolation, but rather is entwined with
microeconomics, and works in tandem in order to be efficient.
1. Choices based on microeconomic factors, whether from individuals or businesses, can impact
macroeconomics in the long run. Similarly, a national policy that involves microeconomics could
affect how households and enterprises interact with their economy.
Example:
If the government raises the tax on a certain product (macroeconomics), an individual

shop owner will have to increase the price, which will impact on the consumer and their
decision for or against the product at that price (microeconomics).
2. A key distinction between micro- and macroeconomics is that macroeconomic

aggregates can sometimes behave in ways that are very different or even the opposite
of the way that analogous microeconomic variables do.
Example:
Keynes referenced the so-called Paradox of Thrift, which argues that while
for an individual, saving money may be the key building wealth, when everyone
tries to increase their savings at once it can contribute to a slowdown in the
economy and less wealth in the aggregate.
HOW MACROECONOMICS AND MICROECONOMICS AFFECT EACH OTHER?
• Macro’s effects on micro
Should a national policy be passed, such as when the nation’s central bank cuts the interest
rate (a macro impact) by 100 basis points (100 bps = 1%), this will lower the borrowing
costs of commercial banks. This, in turn, helps their deposit rate to drop, which gives room
to lower the interest rate on credit, and to individuals and business. This causes a rise in
borrowings and creates a climate of greater investment, which helps businesses invest in
new assets, projects, and expansion plans (a micro impact).
• Micro’s effect on macro18
The condition of the microeconomy is one of the many factors that determine
macroeconomic policies. To continue the example, the central bank observes the lending
and investment trends of businesses, individuals and households, now that the interest rate
has been lowered, in order to determine whether or not they should make additional cuts. If
the outlook is weak, keep rates as is, or increase them if the outlook is picking up.
HOW MICRO-AND MACROECONOMICS AFFECT BUSINESS?

• The law of supply and demand
Businesses use microeconomic principles to better understand the behavioural patterns
of their consumers, in order to be successful and generate a profit.
• Decision-making
Large-scale external factors that are uncontrollable, such as competitors, changes in
interest rates, changes in cultural preferences, weather phenomena, and changes in
governmental regulations, all play a role in influencing and affecting a company’s
decisions, performance, and business strategies. Other macroeconomic factors such as
legal, political, and social climates, technological advancements, and climate changes all
impact on the individual’s, household’s and organization’s decisions on resources.
• Start-ups
When starting a business, it is important to do extensive research into the industry you are
interested in. Know where customer demand is, to better provide and develop the products
and services that would best match the needs of your target market. Investing in this
microeconomic research can help you reach a competitive advantage to attract customers.
• Economic cycles
Macroeconomics is cyclic; just as positive influences and changes promote prosperity,
higher demand levels may trigger price increases, which may, in turn, dampen the
economy, as households adopt leaner budgets. Then, when supply starts to outweigh
demand, prices may go down again, leading to further prosperity, until the next cycle of
economic supply and demand.
• The cost of goods and services

Regardless of what a business produces, the goal is usually to keep costs down in
order to improve profits. In microeconomic theory, companies run at the highest level of
efficiency, with production decisions based on how the maximum output can be achieved
with minimal extra costs.
Example:
If production is ramped up, a need for extra labor may arise, resulting in the
wage costs increasing, and a potential change in sales prices. In
microeconomics, the cost of labor is typically the highest expense of a business.
• Pricing decisions
In microeconomics, the price where quantity supplied meets the quantity demanded is
known as the ‘equilibrium price’. The decided price of the product or service will impact
on the number of people willing to buy it.
Example:
Setting a price above the equilibrium doesn’t always mean greater profits, as
fewer people may opt to buy your product, therefore, the price of the product
should match your target market’s budget.
WEEK 1 ACTIVITY
GENERAL INSTRUCTION: Provide what is being asked. Attach your activity to the multimedia outlet (google
classroom/messenger/facebook page) being required by the instructor on or before the deadline.
Fill out the Chart (30 points)
Questions Probable Answers

What Concepts are
implied in the facts?
for
(1 point every correct answer)
What subconcepts can
be identified?
for
What subgeneralization
can be given?
for
What generalization can
be formulated?
for
(15 points to accurate answer)
END OF WEEK 1
National Highway, Crossing Rubber, Tupi, South Cotabato

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LEARNING MODULE
FOR
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WEEK 2
SUPPLY AND DEMAND, ECONOMIC GROWTH, AND BUSINESS CYCLE
Lesson 1
SUPPLY AND DEMAND
Supply and demand. Supply and demand. Roll the phrase around in your mouth! Savor it like a good wine.
Supply and Demand are the most-used words in economics. And for good reason. They provide a good
offto-cuff answer for any economic question. Try it!!
Why are bacon and orange so expensive this water? Supply and demand!
Why are interest rates falling? Supply and demand!!
Why can’t I find decent wool socks anymore? Supply and demand!!!
The importance of the interplay of supply and demand makes it only natural that, early in any economics
course, you must learn about supply and demand. Let’s start with demand!!!
DEMAND
A willingness and ability to pay
THE LAW OF DEMAND

This law is fundamental to the invisible hand’s ability to coordinate individual’s desires. As prices change,
people change how much they’re willing to buy
“Quantity demanded rises as price falls, other things constants or Quantity demanded falls as price rises,
other things constant”
In simplest expression: When price goes up, quantity demanded goes down. When price goes down,
quantity demanded goes up.
To understand the law of demand makes intuitive sense of it. Just think of something you’d really like but
can’t afford. If the price is cut in half, you and other consumers become more likely to buy it. Right? So, this
is… Quantity demanded goes up as price goes down.
THE DEMAND CURVE

The graphic representation of the relationship between price and quantity demanded. Figure 1 shows a
demand curve.
Figure 1
In figure 1, the demand curve slopes downward. That’s

because of the law of demand: As price goes up, the quantity
Price per unit
demanded goes down, other things constant. In other words,

A
)
PA
price and quantity demanded are inversely related.
(
Demand
0
QA
Quantity demanded (per unit of time)
“Other things constant” places a limitation on the application of the law of demand.
SHIFTS IN DEMAND VERSUS MOVEMENTS ALONG A DEMAND CURVE

To distinguish between the effects of price and the effects of other factors on how much of a good is
demanded, economists have developed the following precise terminology.
1. Demand
Refers to a schedule of quantities of a good that will be bought per unit of time at various prices,
other things constant.
• Refers to the entire demand curve. Also, tells how much will be bought at various
price.
2. Quantity demanded
Refers to a specific amount that will be demanded per unit of time at a specific price, other things
constant.
• Refers to a point on a demand curve. Also, tells us how much will be bought at a specific
price. See point A in figure 1
In graphical terms, the term demand refers to the entire demand curve. Demand tells us how much
will be bought at various prices. Quantity demanded tells us how much will be bought at a specific
price; it refers to a point on a demand curve, such as point A in figure 2.
The terminology allows us to distinguish between changes in quantity demanded and shifts in
demand.
• A change in price changes the quantity demanded. It refers to movement along a
demand curve (the graphical representation of the effect of a change in price on the quantity
demanded).
• A change in anything other than price that affects demand changes the entire
demand curve. A shift factor of demand causes a shift in demand (the graphical
representation of the effect of anything other than price on demand ).
To make sure you understand the difference between a movement along a demand curve
and a shift in demand, see and analyze the figure 2.
Figure 2
Demand
B
₱2
A A
₱1
₱1
B
Dₒ
D₁
0 100 200 0 175 200
Cars (per mile each hour) Cars (per mile each hour)
(a) Movement along a Demand Curve (b) Shift in Demand
In figure 2 (a), It shows that increasing the toll charged to use roads from ₱1 to ₱2 per 50 miles of road
reduces quantity demanded from 200 to 100 cars per mile every hour (a movement along the demand
curve).
In figure 2 (b), It shows that providing alternative methods of transportation such as buses and subways
shifts the demand curve for roads in to the left so that at every price, demand drops by 25 cars per mile
every hour.
SOME SHIFT FACTORS OF DEMAND
1. Society’s income
2. The prices of other goods
3. Tastes
4. Expectations
5. Taxes and subsidies
SUPPLY
Supply is the mirror image of demand.
THE LAW OF SUPPLY
This law is fundamental to the invisible hand’s (the market’s) ability to coordinate individual’s
actions. Price determines quantity supplied just as it determines quantity demanded.
“Quantity supplied rises as price rise, other things constant or Quantity supplied falls as price falls,
other things constant”.
THE SUPPLY CURVE

A graphical representation of the relationship between price and quantity supplied. Figure 3 shows a
supply curve.
In figure 3, the supply curve demonstrates graphically the law

Supply
Figure 3 of supply, which states that the quantity supplied of a good is directly related to that good’s
price, other things constant. As
Price (per unit)
A A the price of a good goes up, the quantity supplied also goes
P
up, so the supply curve is upward-sloping.
The upward slope captures the law of supply. It tells that the
quantity supplied varies directly in the same direction with
the price.
0 QA
Quantity supplied (per unit of time)
SHIFTSIN SUPPLY VERSUS MOVEMENTS ALONG A SUPPLY CURVE

The same distinctions in terms made for demand apply to supply:
1. Supply
Refers to a schedule of quantities a seller is willing to sell per unit of time at various prices,
other things constant.
2. Quantity supplied
Refers to a specific amount that will be supplied at a specific price.
In graphical terms, supply refers to the entire supply curve because a supply curve tells how much
will be offered for sale at a various price. “Quantity supplied” refers to a point on a supply curve,
such as point A in figure 3.
A terminology allows us to distinguish changes in prices cause changes in quantity supplied:
• Changes represented by a movement along a supply curve (the graphical

representation of the effect of a change in price on the quantity supplied ). If the amount
supplied is affected by anything other than price, that is, by a shift factor of supply,
there will be a shift in supply (the graphical representation of the effect of a change in
factor other than price on supply).
To make sure you understand the difference between a movement along a demand curve
and a shift in demand, see and analyze the figure 4.
Figure 4
55.70 In figure4-Shifts in Supply versus

S₁
Sₒ
Movement along a supply curve
C A shift in supply results when the shift is
52.55 due to any cause other than a change in
Price ( per gallons)
Movement
price. It is a shift in the entire supply curve
along supply
curve (see the arrow from A to B). A movement
B along a supply curve is due to a change in
51.3 A
price only (see the arrow from B to C ). To
differentiate the two, movements caused by
Shift in changes in the quantity supplied, not
supply
changes in supply.
12 15 18
Gallons per day (in millions)
SHIFT FACTORS OF SUPPLY

1. Price of inputs
2. Technology
3. Tastes
4. Expectations
5. Taxes and subsidies
EQUILIBRIUM
A concept in which opposing dynamic forces cancel each other out.
In supply/demand analysis, equilibrium means that the upward pressure on price is exactly offset
by the downward pressure on price.
• Equilibrium quantity
The amount bought and sold at the equilibrium price
• Equilibrium price
The price toward which the invisible hand drives the market
At the equilibrium price, quantity demanded equals quantity supplied. If the market is not in
equilibrium, if quantity supplied doesn’t equal quantity demanded there will be excess supply or
excess demand, and tendency for prices to change.
Excess Supply (surplus)

Quantity supplied is greater than quantity demanded.
Excess Demand
Quantity demanded is greater than quantity supplied.
Price Adjust
When quantity demanded is greater than quantity supplied, prices tend to rise.
When quantity supplied is greater than quantity demanded, prices tend to fall.
Two other things to note about supply and demand are:
(1) The greater the difference between quantity supplied and quantity demanded, the more
pressure there is for prices to rise or fall
(2) When quantity demanded equals quantity supplied, the market is in equilibrium
GOVERNMENT INTERVENTION: PRICE CEILING AND PRICE FLOOR

• Price Ceiling a government-imposed limit on how high a price can be charged. This limit
is generally below the equilibrium price. The effect of a price that is below the equilibrium
price is the quantity demanded will exceed quantity supplied and there will be excess
demand.
• Price Floor a government limits on how low a price can be charged. The price floor is
generally above the existing price. When there is an effective price floor, quantity
supplied exceeds quantity demanded and the result is excess supply.
GOVERNMENT INTERVENTION: EXCISE TAXES AND TARIFFS • Excise Tax

A tax that is levied on a specific good
• Tariff
An excise tax on an imported good
Lesson 2
ECONOMIC GROWTH AND BUSINESS CYCLE
A. ECONOMIC GROWTH
Increase in real GDP – an increase in the value of national output, income and expenditure.
COSTS AND BENEFITS OF ECONOMIC GROWTH • Potential Costs of economic growth
The costs of economic growth will depend on the type of growth.
(1) Inflation
If Aggregate Demand AD increases faster than Aggregate Supply (AS), then economic
growth will lead to higher inflation as firms put up prices. Economic growth tends to
cause inflation when the growth rate is above the long run trend of growth. It is when
demand increases too quickly that we get a positive output gap and firms push up
prices.
(2) Boom and bust of economic cycles

If economic growth is unsustainable then high inflationary growth may be followed by a
recession. However, if economic growth is at a sustainable rate, recession will not
occur.
(3) Current account deficit

Increased economic growth tends to cause an increase in spending on imports,
therefore, causing a deterioration on the current account.
(4) Environmental cost

Increased economic growth will lead to increased output and consumption. This
causes an increase in pollution, greater use of raw materials, can speed up depletion
of nonrenewable resources, and lead to problems of congestion as more people can
afford to buy a car, but it is hard to increase the supply of roads to meet demand.
(5) Inequality
Higher rates of economic growth have often resulted in increased inequality because
growth can benefit a small section of society more than others. Example, those with
assests and wealth will see a proportionally bigger rise in the market value of rents and
their wealth,. Those unskilled without wealth may benefit much less from growth.
(6) Diseases/problems of affluence
With rising living standards, it can cause unintended consequences. For example, with
rising incomes, there are more goods to steal, can make people more materialistic, and
encourages crime.
• Benefits of economic growth (1) Higher average incomes

Economic growth enables consumers to consume more goods and services and enjoy
better standards of living.
(2) Lower unemployment

With higher output and positive economic growth, firms tend to employ more workers
creating more employment.
(3) Lower government borrowing
Economic growth creates higher tax revenues, and there is less need to spend money
on benefits such as unemployment benefit. Therefore, economic growth helps reduce
government borrowing, and also plays role in reducing debt to GDP ratios.
(4) Improved public services

Higher economic growth leads to higher tax revenues and this enables the government
can spend more on public services.
(5) Money can be spent on protecting the environment

With higher economic growth a society can devote more resources to promote
recycling and the use of renewable resources.
(6) Investment
Economic growth encourages firms to invest, in order to meet future demand. Higher
investment increases the scope for future economic growth.
(7) Increase research and development

High economic growth leads to increased profitability form firms, enabling more
spending on research and development. Also increases confidence and encourages
firms to take risks and innovate.
(8) Economic development

The biggest factor for promoting economic development is sustained economic growth.
Economic growth in Southeast Asia over the past few decades has played a major role
in reducing absolute level of poverty and increasing life expectancy.
B. BUSINESS CYCLES
A short run/temporary upward or downward movement of economic activity, or real GDP, that
occurs around the growth trend.
Describing the Business Cycle
The top of business cycle is called the peak,

where economic experience a great economic
growth. Eventually the economy enters into
downturn and may enter a recession (a decline
in real output that persists for more than two consecutive quarters of the year ). The bottom of a
recession or depression is called trough. As total outputs begin to expand, the economy comes
out of the through, economists say it’s in an upturn.
Economic growth and business cycle will be discussed on Keynesian short-run model policy and
Classical long-run model policy to have a deep understanding on the topic.
WEEK 2 ACTIVITY
GENERAL INSTRUCTION: Provide what is being asked. Attach your activity to the multimedia
outlet (google classroom/messenger/Facebook classroom) being required by the instructor on or
before the deadline.
TASK: Individualized Video Presentation

TASK TOTAL SCORE: 50 POINTS (see criteria as your guide)
Instruction:
(1) Discuss the supply and demand, economic growth, and business cycle with confidence and
articulate it like a pro. You must discuss also the graph shown in the module and you can
add some data you find online or on a textbook to deepen the understanding and to widen
the knowledge to acquire.
(2) Use the Criteria provided. This will be our scoring guide. Failure to follow will result to low
score.
(3) The video time frame will be a minimum of 5 minutes and a maximum of 10 minutes.
Criteria Description Points

Subject Interesting, educational, relevant to audience, provides insight 20 points
into topic, discussed thoroughly, and entertaining
Content Presents interesting information, language is used properly 20 points
and effectively, Images and/or graphics relate well to content,
student behave professionally on camera, and student
demonstrate thoughtful approach to subject
Technical Aspects Camera is stable, smooth movements and pans, subject is 10 points
framed well, images are well composed, subject is lit and
clearly visible, sound is clear and understandable, video is
edited effectively, flows well, and video was completed in a
timely manner
Total 50 points
SOUTH EAST ASIAN INSTITUTE OF TECHNOLOGY, INC. National

________________________________________________________________
LEARNING MODULE
FOR
___________________________________________________________________________
WEEK 3
_____________________________________
WEEK 3
MEASURING AND DESCRIBING THE AGGREGATE ECONOMY
AGGREGATE ACCOUNTING (National Income Accounting)

• A set of rules and definitions for measuring economic activity
• Provides a way of measuring aggregate production, aggregate expenditures, and aggregate
income.
GROSS DOMESTIC PRODUCT (GDP)

• The total market value of all final goods and services produced in an economy in a one-year
period.
WAYS IN MEASURING GDP 1. EXPENDITURE APPROACH

A method for calculating a nation’s gross domestic product
2. VALU-ADDED/ PRODUCTION APPROACH
A method for calculating GDP to express the difference between the value of goods and the
cost of materials or supplies that are used in producing them.
THE COMPONENTS OF GDP IN EXPENDITURE APPROACH
a. Consumption
• Spending by households on goods and services Example:
1. Food, shampoo, televisions, furniture, and the services of
professionals/expert/ skilled worker
2. When you buy smartphone, you are contributing to consumption
expenditures
b. Investment
• Spending for the purpose of additional production
• An output that is used to produce goods and services in the future
• The amount spends on goods that will increase future output Example:
1. Business spending on factories and equipment for production, the
change in business inventories, and purchases by households of new
owner-occupied houses
2. When you buy a bond or stock rather consuming, you are saving
(economist terminology). When that savings is borrowed by businesses to
buy factories, tractors, computers, or other goods or services that will
increase their output (investing)
c. Government spending
• Goods and services that government buys
Note: Government expenditure involve government production, although
government does not its “production” but provides it free, aggregate accounting
rules count government production at the government cost of providing that
output undertaking economic activity.
Example:
1. Government buys the services of professionals/ skilled
workers
• Public servants’ salary (teachers, doctors, analyst, etc.)
1. Government buys equipment for its space program
• Military weapons (Guns, bullets, tanks, etc.), school, building
highways/airports
*Most important category of government spending that is not included in GDP

• Transfer payments- payments to individuals that do not involve
production by those individuals.
These are:
• Social Security, welfare, Medicare, Medicaid, and
unemployment
d. Net exports or Trade Balance
• Spending on goods and services produced in a country that foreigners buy
(exports) minus goods and services produced abroad by the country’s citizens
buy (imports)
The word “Net” in economics and business- it is used to distinguish two off-setting flows
1. Export- represents a spending flow into the country
2. Import- represents a flow out of the country
Note:
• If a country’s exports are larger than its imports, then a country is said to have a
trade surplus.
• If imports exceeded exports, then a country is said to have a trade deficit.
• If exports and imports are equal, foreign trade has no effect on total GDP.
However, even if exports and imports are balanced overall, foreign trade might
still have powerful effects on particular industries and workers by causing nations
to shift workers and physical capital investment toward one industry rather than
another.
GDP on Expenditure Approach Formula:

GDP= Consumption+ Investment+ Government spending+ Net Exports Or
GDP= C+I+G+ (X-M)
Two things to remember about GDP

1. GDP represents a flow (an amount per year), not a stock (an amount at a particular moment of
time)
2. GDP refers to the market value of final output
VALUE-ADDED/PRODUCTION/OUTPUT APPROACH
Many goods produced by one firm are sold to other firms, which use those goods to make other goods. GDP
doesn’t measure total transactions in an economy; it measures final output. when one firm sells products to
another firm for use in the production of yet another good, the firm’s products aren’t considered final output
rather it is Intermediate products. To count intermediate goods as well as final goods as part of GDP would
be double count them.
COMPONENTS:
What is Final output?

• Goods and services purchased for their final
use What is Intermediate product?
• Products used as input in the production of
some other product
Example:
Intermediate good would be wheat sold to cereal company. If we counted both the
wheat (intermediate good) and the cereal (final good) made from that wheat, the wheat would
be double counted.
GDP on Value-added Approach Formula
GDP= Intermediate product- Production of Goods
Example:
Participants Costs of Value of Sales Value-Added Row

Materials
Farmer ₱ 0.00 ₱ 100.00 ₱ 100.00 1
Cone Factory and Ice cream Maker ₱ 100.00 ₱ 250.00 ₱ 150.00 2
Middle person (final sale) ₱ 250.00 ₱ 400.00 ₱ 150.00 3
Vendor ₱ 400.00 ₱ 500.00 ₱ 100.00 4
Totals ₱ 750.00 ₱ 1, 250.00 ₱ 500.00 5
It gives the cost of materials (intermediate goods) and the value of sales on the following scenario:
Say we want to measure the contribution to GDP made by ice cream production of 200 ice cream
cones at ₱ 2.50 each for total sales of ₱ 500.00.
Scenario:
The vendor bought his cone factory and ice cream maker at a cost of ₱ 400.00 from a middle
person, who in turn paid the cone factory and ice cream maker a total of ₱ 250.00. the farmer who
sold the cream to the factory got ₱ 100.00. adding up all these transactions, we get ₱ 1, 250.00, but
that includes intermediate goods. Either by counting only the final value of the vendors sales ₱
500.00, or by adding the value added at each stage of production (column 3), we eliminate
intermediate sales and arrive at the contribution of ice cream production to GDP of ₱ 500.00.
AGGREGATE INCOME
• The total income earned by citizens and firms of a country
AGGREGATE INCOME CATEGORIES
a. Consumption of Employees
• The largest component of national income consists of wages and salaries paid to
individuals, along with fringe benefits and government taxes for Social Security
and unemployed insurance.
b. Rents
• An income from property received by households
c. Interest
• Is the income private business pay to households that have lent the business
money, generally by purchasing bonds issued by the businesses.
d. Profits
• The amount that is left after compensation to employees, rents, and interest have
been paid out
Aggregate Income Formula: Summing up all values of final outputs through the expenditures and
value-added methods or adding up the values of all earnings or income.
INFLATION: DISTINGUISHING REAL FROM NOMINAL
“What happens if GDP increases, but the prices of all goods increase as well? Are we better off? The answer is not
necessarily. For example, if all prices double and output doubles, we are not better off; we are simply paying higher prices
for the same amount of goods. Its simply, we are experiencing Inflation.”
Terminology:
• REAL MEASURES- measures that adjust for inflation
• NOMINAL MEASURES- measures that do not adjust for inflation or price level changes
• GDP DEFLATOR- the price index that includes the widest range of goods and services in the
economy, and is the one used to distinguish Nominal and Real GDP which
expressed relative to a base year of 100.
• REAL GDP- the total amount of goods and services produced, adjusted for price-level
changes • NOMINAL GDP- the amount of goods and services produced measured at current
prices
• PRICE INDEX- a measure of the composite price of a specified group of goods-that deflates
the amount of the nominal measure. And also called Deflator.
HOW TO DETERMINE INFLATION?
Price index provides a way to determine the inflation in an economy with a combination of goods.
The price index underlying the inflation numbers begin with a base year set at 100.
REAL VERSUS NOMINAL GDP: DEFLATION TO INFLATION

Real GDP formula:
Nominal GDP
Real GDP= x 100
GDP Deflator
GDP Deflator formula:
Nominal GDP
GDP Deflator= x 100
Real GDP
Inflation formula:
Change in deflator
Inflation= x 100
Initial deflator
Note: “Real GDP is what is important to a society because it measures what is really produced.
Considering nominal GDP instead to real GDP can distort what’s really happening.” OTHER
REAL AND NOMINAL DISTINCTION
1. Real and Nominal Interest Rates
a. Nominal Interest Rate

• The rate you pay or receive to borrow or lend money
b. Real Interest Rate
• The nominal interest rate adjusted for inflation Formula:
Real interest rate= Nominal interest rate-Inflation rate
Example:
1. Real interest rate=5%-3%
Real Interest rate= 2%
Explanation: The real interest rate is the amount that the loan actually cost you
because you will be paying it off with inflated Peso.
2. Real and Nominal Wealth

a. Real wealth
The value of the productive capacity of the assets of an economy measured by the
goods and services it can produce now and in the future.
b. Nominal wealth
The value of those assets measured at their current market prices.
c. Asset price inflation
A rise in the price of assets unrelated to increases in their productive capacity.
WEEK 3 ACTIVITY
GENERAL INSTRUCTION: Provide what is being asked. Attach your activity to the multimedia outlet
(google classroom/messenger/Facebook classroom) being required by the instructor on or before the
deadline.
TASK: Individualized Video Presentation

TASK TOTAL SCORE: 100 POINTS (see criteria as your scoring guide)
Activity: Recorded Problem solving Instruction:
(1) Demonstrate the calculation of GDP in expenditure and value-added approach through
recorded video. There are 3 sets of problem-solving activities provided below.
(2) The criteria are set as your guide for scoring. Failure to follow criteria will result to undesirable
score.
(3) The video time frame will be a minimum of 3 minutes and a maximum of 5 minutes.
Set of Problems:
1. From the data below, what is the total GDP expenditure of the Philippines?
Net exports- 4 million

Net Imports-6 million
Investment-185 million
Government Spending-195 million
Consumption-500 million
2. Fill in the missing values in the table below:
Real interest Rate Nominal Interest Rate Inflation
5 7 -----
4 ---- 3
---- 12 9
3. Fill in the missing values in the table below and find the Total value added at all stages of
production.
Activity Cost of Price of Value

Inputs Output added
Growing Oranges ₱0 -------- -----
Making Orange Juice ----- ₱ 10.00 ₱ 2.00
Distributing juice to Stores (Wholesale) ₱ 10.00 ------- -------
Selling Juice to consumer (Retail) ₱ 15.00 ------- ₱ 3.50
TOTAL ------- -------- -------
Criteria Description Points
Computation Show a step by step process in a logical manner. 25 points
Comprehension Justification of answer in a reasonable way. 25 points
Technical Aspects Camera is stable, smooth movements and pans, subject is 10 points
framed well, images are well composed, subject is lit and
clearly visible, sound is clear and understandable, video is
edited effectively, flows well, and video was completed in a
timely manner
Correct answer Problem 1: 10 points 40 points
Problem 2: 12 points (4 points for every correct answer on the
missing values)
Problem 3: 18 points (3 points for every correct answer on
missing values)
Total 100 points

________________________________________________________________
LEARNING MODULE
FOR
___________________________________________________________________________
WEEK 4
THE KEYNESIAN SHORT-RUN POLICY MODEL: DEMAND SIDE POLICIES
THE KEYNESIAN AS/AD MODEL IN A SHORT RUN
• The economy can deviate from what it is capable of producing of its potential output and
focuses on the use of monetary and fiscal policy.
• Th AS/AD model is used by most macro policy economists to discuss mild short-run, cyclical
fluctuations in output and unemployment
THREE THINGS TO REMEMBER ABOUT THE KEYNESIAN MODEL
1. Is a short-run model (it does not tell what the long-run effects of any policy will be)
2. Is a pedagogical tool (it is a rough-and-ready framework, not a model developed to capture all the dynamic
forces operating in the economy
3. Starts with aggregate relationships (it loosely relates those empirically observed aggregate relationships to
decisions by firms and individuals)
THE COMPONENTS OF THE AS/AD MODEL

1. Short-run Aggregate Supply (SAS) curve
• The curve describes the supply side of the aggregate economy in the short-run
2. Aggregate Demand (AD)curve
• The curve describes the demand side of the economy
3. Long-run Aggregate Supply (LAS) curve
• The curve describes the highest sustainable level of output
NOTE ON THE AS/AD MODEL:

1. The price level of all goods, not just the price of one good, is on the vertical axis and aggregate
output, not a single good, is on horizontal axis. The shape curves are not directly based on
opportunity cost or substitution.
2. It is a Historical model. This model starts at appoint in time and provides insight into what will
likely happen when changes affect the economy. It means, the model starts from historically
given price and output levels, and given the institutional structure of the economy, considering
the how changes in the economy are likely to affect those levels.
THE AGGREGATE DEMAND CURVE
A curve that shows how a change in the price level will change aggregate expenditures on all
goods and services in an economy.
Figure 1 The Slope of the AD Curve

The AD Curve is a downward-sloping curve that looks like a typical
demand curve, but it is important to remember that it is quite a
Interest rate, international,
and money wealth effects different curve. The reason it slopes downward is not the substitution
effect but, instead the interest rate effect, the international effect, and
the money wealth effect. The multiplier effect strengthens each of
Pₒ
these effects.
Multiplier effect
Aggregate expenditures(demand) is the sum consumption,
invest,government spending, and net exports. The slope of the
AD curve depends on how these components respond to
P₁ changes in the price level.
Aggregate
demand
0 In principle, we would expect the AD curve to be vertical.
Yₒ Y₁ Yₑ
The three standard reasons given for the downward-sloping AD curve

It explains why the quantity of aggregate demand will increase with a fall in the price level.
1. The interest rate

- The effect that a lower price level has on investment expenditures through the effect that a
change in the price level has on interest rate.
2. The International effect

- As the price level falls (assuming the exchange rate does not change), net exports will rise.
3. The money wealth effect (Real balance effect)
- A fall in the price level, the value of money will increase
The Slope of the AD curve is determined by:
1. The money wealth effect; 2. The interest rate effect; 3. The International effect; and
4. The multiplier effect (the amplification of initial changes in expenditures)
In Multiplier effect, the aggregate demand includes repercussions (the initial changes in
expenditures set in motion a process in the economy that amplifies these initial effects ) that
these initial changes in changes have throughout the economy.
The repercussions multiply the initial effect that a change in the price level has on expenditures.
The multiplier effects amplify the initial interest rate, international, and money wealth effects,
thereby making the slope of the AD curve flatter than it woul d have been. You can see figure 1.
The three effects discussed above increase output from Yₒ to Y₁. the repercussions multiply that
effect so that output increase to Yₑ.
Repercussions Example:
The price level in a country (Philippines) rises. A country citizen will reduce their purchase of local goods
and increase their purchases of foreign goods. (That’s International effect). The country’s firm will see
demand for their goods and services fall and will decrease their output. profits will fall and people will
demand still fewer goods and services. (if you are unemployed, you cut back your purchase). Again,
production and income fall which leads to a drop in expenditures.
THE IMPORTANCE OF THE MULTIPLIER EFFECT IN DETERMINING

THE SLOPE OF THE AD CURVE: Example
The multiplier effect amplifies the interest rate, international, and money wealth effects by a factor of 2 and
the Interest rate, international, and money wealth effects reduce output by 4 when the price level
rises from
100 to 110.
The slope of the AD curve will be -10/8 or -1.25
Since the multiplier effect is 2, the total decline in output will be 2x4=8
DYNAMIC PRICE-LEVEL ADJUSMENT FEEDBACK EFFECTS

These dynamic effects can overwhelm the standard effects and make the aggregate economy
unstable, making expansions stronger and contractions larger. They can reduce or completely offset
the stabilizing effects of a price-level adjustment in bringing about an aggregate equilibrium.
The forces work in an opposite direction to the standard effects that cause the quantity of aggregate
demand to increase when the price level falls. If these dynamic forces are stronger, aggregate
demand will fall (shift to the left) when the price level falls.
Here is the problem: Pressure for the price level to fall bring with it:
• Expectations of falling aggregate demand

• Lower asset prices, making society on average feel poorer, even though, theoretically, it is not actually poorer
• Financial panics, triggered by a decline in the value of financial assets, causing individuals and banks, who relied
on those financial assets as a collateral for loans, to require full payment on (to call in) those loans, which forces
borrowers (mainly firms) to reduce production and lay off workers, decreasing aggregate demand further.
Dynamic forces will be discussed further more in the Financial crises and macro policy.
SHIFTS IN THE AD CURVE
A shift in the AD curve means that at every price level, total expenditures have changed. Anything other than
the price level that changes the compositions of aggregate demand (consumption, investment, government
spending, and net exports) will shift the AD curve.
FIVE IMPORTANT SHIFT FACTORS OF AGGREGATE DEMAND
1. FOREIGN INCOME
A rise in foreign income leads to an increase in country’s exports and a rightward shift of the
country’s AD curve.
2. EXCHANGE RATES
The currencies of a various countries are connected through exchange rates. When a
country’s currency loses value relative to other currencies, its goods become more competitive
compared to foreign goods.
• The effects of Foreign demand for domestic goods increases and domestic demands for
foreign goods decreases as individuals shift their spending to domestic goods at
homethese effects increase net exports and shift AD curve out to the right
• When a country’s currency gains value, the AD curve shifts in the opposite direction.
3. DISTRIBUTION OF INCOME
As income distribution changes, aggregate demand affected. One of the most important
distributional effects concerns the distribution of income between wages and profits.
• Assuming that not all saving is translated into investment, as the proportion of income
going to profit increases, total expenditures are likely to fall, shifting the AD curve in to
the left.
• As wages (both as a proportion of total income and absolutely) increase, total
expenditures are likely to rise, shifting the AD curve out to the right.
4. EXPECTATIONS
Two expectational shift factors:
(1) Expectations of future output
• When businesspeople expect demand to be high in the future, they will want to
increase their productive capacity; their investment demand, a component of
aggregate demand, will increase. Thus, positive expectations about future demand
will shift AD curve out to the right.
(2) Expectations of prices
• If you expect the prices of goods to rise in the future, it pays to buy goods now that
you might want in the future before the prices rise. The current price level hasn’t
changed, but aggregate quantity demanded at that price level has increased,
indicating a shift of the AD curve out to the right.
5. MONETARY AND FISCAL POLICIES

One of the most important reasons why the aggregate demand curve has been so important in
macro policy analysis is that often macro policy makers think that they can control it, at least to
some degree.
• If the government spends lots of money without increasing taxes, it shifts the AD
curve out to the right.
• If the government raises taxes significantly and holds spending constant,
consumers will have less disposable income and will reduce their expenditures,
shifting the AD curve in to the left.
Increase or decrease in aggregate demand to influence the level of income in the economy is
what most policy makers mean by the term macro policy. Expansionary macro policy shifts
the AD curve out to the right; Contractionary macro policy shifts it in to the left.
6. MULTIPLIER EFFECTS OF SHIFT FACTORS
You cannot treat the AD curve like a micro demand curve where other factors or things are
constant. In macro, the AD curve may shift by more than the amount of the initial shift factor
because of the multiplier effect.
Effect of a shift Factor on the AD Curve

Figure 2
Change in total
expenditures=300 The AD curve shifts out by more than the initial change
in expenditures. In this example, exports increase by
Initial Multiplier
effect
100. The multiplier magnifies this shift, and the AD
effect
Pₒ
curve shifts out to the right by a multiple of 100, in this
case by 300.
Price level
In Figure 2
AD₁
AD When an initial shit factor of aggregate demand is 100
and the multiplier is 3, the AD curve will shift out to the
right by 300, three times the initial shift. The extra 200
shift is due to the multiplier effect.
Real
THE AGGREGATE SUPPLY CURVE

The other side of the aggregate economy is the supply side. We divide the supply side into short-run
components. Let’s first consider the short-run supply curve
The SAS curve is upward-sloping, which means that in short-run, other
things constant, an increase in output is accompanied by a rice in the price
level. That is, when aggregate demand increases, the price level-the
composite of all prices-rises. The shape of the SAS curve reflects two
different types of markets in the economy:
1. Auction market
(the markets represented by the supply/demand model)
2. Posted-price markets
THE SHORT-RUN (Prices are set by the producers and change only infrequently)
AGGREGATE SUPPLY
Figure 3
The Short -run Aggregate
Supply Curve
SAS
CURVE The Slope of the SAS Curve
Short-run Aggregate Supply (SAS) curve is a curve that specifies how a shift in the aggregate
demand curve affects the price level and real output in the short run, other things constant. A
standard SAS curve is shown in Figure 3.
Auction Market
• These markets make up only a small percentage of final goods markets. (Much more common in
markets for resources such as oil or farm products)
Posted-price markets or Quantity-adjusting markets
• These markets comprise of 90% of total final goods markets. In these markets, firms set prices
as a markup over costs.
Two reasons the SAS curve slopes upward

1. Upward-sloping supply curves in auction markets
2. Firms tendency to increase their markup when demand increases
Along SAS curve: Other things Are assumed remain constant

1. Cost of production/Input prices (Increases in input prices shift the SAS curve)
SHIFTS IN THE SAS CURVE
Figure 4
Note:
SAS₁
As discussed above, this does not mean that other
things will remain constant. It simply means that
Input prices
changes in other things, such as input prices, shift SAS
increases
curve shifts down. So, a change in input prices, such as
wages,SASₒ is a shift factor of aggregate supply.
Real Output
Shift factor of Aggregate Supply
1. Change in Wages due to expectations of inflation

If workers expect prices to rise by 2%, they are far more likely to ask for at least a 2 percent
rise in wages simply to keep up with inflation and maintain their real wages. If they expect the
price level to fall by 2%, they are far more likely to be happy with their current wage. S,
expectation of inflation is a shift factor that works through wages.
2. Change in productivity
An increase in productivity, by reducing the amount of inputs required for a given amount of
output, reduces input costs per unit of output and shifts the SAS curve down. A fall in
productivity shifts the SAS curve up.
3. Changes in import prices of final goods and changes in excise and sales taxes
Import prices are a shift factor because they are a component of an economy’s price level.
When import prices rise, the SAS curve shifts up; when import prices fall, the SAS curve up,
and lower sales taxes shift the SAS curve down.
THE LONG-RUN AGGREGATE SUPPLY CURVE
Figure 5
LAS
Long-run aggregate C SAS

supply (LAS) B
A
Underutilized Overutilized
resources resources
Real Output Low-level High-level

potential potential
output output
Real output
The Long-run Aggregate Supply curve
The long-run aggregate supply curve shows the output that an economy can produce when both labor and
capital are fully employed. It is vertical because at potential output a rise in the price level means that all
prices, including input prices, rise. Available resources do not rise and thus neither does potential output.
The final curve that makeup the AS/AD model is the long-run aggregate supply (LAS) curve (a
curve
that shows the long-run relationship between output and the price level ).
Whereas the SAS curve holds input
prices constant, no prices are assumed held constant on the LAS curve. The position of the LAS
curve is determined by potential output ( the amount of goods and services an economy can produce when both
labor and capital are fully employed).
In figure 5, notice that LAS curve is vertical. Since at potential output all resources are being fully
utilized, a rise in the price level means that the prices of goods and factors or production, including
wages, rise. If all prices doubled, including your wage, your real income would not change. Since
potential output is unaffected by the price level, the LAS curve is vertical.
A range for Potential Output and the LAS Curve

In figure 5, the range is bounded by a high-level of potential output and a low-level of potential
output. the LAS curve can be thought of as being in the middle of that range. This range is important
because how close actual output ( the position of the economy on the SAS curve ) is to potential output is a
key determinant of whether the SAS curve is expected to shift up or down. At points on the SAS
curve to the left of the LAS curve (such as point A), resources are likely to be underutilized and we
would expect factor prices (prices of inputs to production) to fall and, other things equal, the SAS curve
shift down. At points of the LAS curve ( such as point C), we would expect factor prices to be bid up and,
other things equal, the SAS curve to shift up. Moreover, the further actual output is from potential
output, the greater the pressure we would expect on factor prices to rise or fall. At the point of
intersection between the SAS curve and the LAS curve ( point B), other things equal, factor prices have
no pressure to rise or fall.
Shifts in the LAS curve

The position of LAS curve plays an important role in determining long-run equilibrium and in determining
whether policy should focus on long-run or short-run issues.
• The position of the LAS curve is determined by potential output, it shifts for the same reasons
that potential output shifts: changes in capital, available resources, growth-compatible
institutions, technology, and entrepreneurship. Increases in any of the reduce potential output
and shift the LAS curve in to the left.
EQUILIBRIUM IN THE AGGREGATE ECONOMY

Now, we already have introduced the SAS, AD, and LAS curve, we’ll consider short-run and long-run
equilibrium and how changes in the curves affect those equilibria. Let’s start at the Short-run!
Figure 6
SAS₁
SAS
G
F
P₂
P₁ SASₒ
E E
Pₒ Pₒ
AD₁
AD
ADₒ
Yₒ Y₁ Y₂ Yₒ
Real Output Real Output
(a) Shift to AD (b) Shift to SAS

Equilibrium in the AS/AD Model
Short-run equilibrium is where the sh ort-run aggregate supply and aggregate demand curves intersect.
Point E in (a) is one equilibrium; (a) also shows how a shift in the aggregate demand curve out to the right
change’s equilibrium from E to F, increasing output from Yₒ to Y ₁ and increasing price level from Pₒ to P₁.
In (b) a shift up in the short-run aggregate supply curve changes equilibrium from E to G.
Figure 6 (a and b) Analysis

In figure 6 (a), the short-run, equilibrium in the economy is where the short-run aggregate supply
curve and the aggregate demand curve intersect. Thus, one short-run equilibrium is shown by point E
in figure (a). If the AD curve shifts out to the right, from ADₒ to AD₁, equilibrium will shift from point E
to point F. the price level will rise to P₁ and output will increase to Y₁. A decrease in aggregate
demand will shift output and the price level down.
In figure 6 (b), shows the effect on equilibrium of a shift up in the SAS curve. Initially equilibrium is at
point E. An upward shift in the SAS curve from SASₒ to SAS₁ increases the price level from Pₒ to P₂
and reduces equilibrium output from Yₒ to Y₂.
Figure 7
LAS LAS
SAS₁
A
P₁
SASₒ
P₁ H E
Pₒ
AD₁
SAS₂
Pₒ P₂ B
E
AD₁ Recessionary
Inflationary ADₒ
gap
ADₒ gap
Yᵨ Y₁ Yᵨ Y₂
Real Output Real Output
(a) Shift in AD (b) Movement to Long-run Equilibrium
Long-run Equilibrium
Long-run equilibrium is where the LAS and AD curves intersect. Point E is long -run equilibrium. In (a) you
can see how a shift in the Aggregate demand curve changes equilibrium from E to H, increasing the price
level from Pₒ to P₁ but leaving output unchanged. The economy is in both short-run and long-run
equilibrium when all three curves intersect in the same location. In ( b) you can see the adjustment from
recessionary
and inflationary gaps to long-run equilibrium.
Figure 7 (a) Analysis

Long-run equilibrium is determined by the intersection of the AD curve and the LAS curve, as shown
by point E in figure 7 (a). since in the long run output is determined by the position of the LAS curve,
which is at potential output Yp , the aggregate demand curve can determine only the price level; it
does not affect the level of real output. Thus, as shown in figure 7 (a), when aggregate demand
increases from ADₒ to AD₁, the price level rises (from Pₒ to P₁) but output does not change. When
aggregate demand decreases, the price level falls and output remains at potential. In the long run,
output is fixed at potential output and the price level is variable, so aggregate output is determined
not by aggregate demand but by potential output. aggregate demand determines the price level.
Figure 7 (b) Analysis: Integrating the short-run and Long-run

We start with the economy in both long-run and short-run equilibrium. In figure 7 ( b) at point E, with
output and price level Pₒ, the economy is in both a long Yp -run equilibrium and a short-run
equilibrium, since at point E the AD curve and SAS curve intersect at the economy’s LAS curve. That
is the situation economists hope for that aggregate demand grows as just the same rate as potential
output, so that growth and unemployment are at their target rates, with no, or minimal, inflation.
Recessionary Gap
The economy is not always at that point E. an economy at point A in figure 7(b) is in a situation where
the quantity of aggregate demand is below potential output and not all the resources in the economy
are being fully used. The distance Yp - Y₁ shows the amount of output that is not being produced
but could be. This distance is often referred to as a recessionary gap (the amount by which equilibrium
output is below potential output).
If the economy remains at this low level of output for a long time, costs and wages would tend to fall
because there would be an excess supply of factors of production. As costs and wages fall, the price
level also falls. Assuming the standard price-level effects are sufficiently strong, the short-run
aggregate supply curve would shift down (SAS₁ to SASₒ) until eventually the long-run and short-run
equilibria would be reached at point E. if the government expands aggregate demand, or some other
shift factor expands aggregate demand, the AD curve shifts out to the right (AD₁) eliminating the
recessionary gap and keeping the price level constant.
Inflationary gap
An economy at point B in figure 7 (b) demonstrates a case where the short-run equilibrium is at a
higher income than the economy’s potential output. in this case, economists say that the economy
has an inflationary gap (aggregate expenditures above potential output that exist at the current price level, shown
by Y₂-Yp). Output cannot remain at Y₂ for long because the economy’s resources are being used
beyond their potential. Factor prices will rise and the SAS curve will shift up from SAS₂ to SASₒ; the
new equilibrium is at point E.
Limitations of the AS/AD Model
• It does not include many important feedback effect
Macroeconomic policy is difficult to conduct because:

1. Implementing fiscal policy is a slow process
2. We don’t really know where potential output is
3. There are interrelationships not included in the model 4. The economy can become
dynamically unstable WEEK 4 ACTIVITY
deadline.
TASK: Group Video Presentation

TASK TOTAL SCORE: 40 POINTS (see rubric as your guide)
For this activity, your class will be divided into 4 or 6 groups. Each person in the group has a same
task which is discussion according to the topic chosen.
(1) Each member has a freedom to select the topic/concept to be discussed which is covered in
week 4 module.
(2) The video of every member must be compiled as one to be edited by a volunteering member.
(3) The member or group has a free will to add a short clip or information from the other sources
but make sure to indicate/credit the source (rightful owner) to avoid plagiarism/stealing.
(4) You must use graphs and elaborate the concept to understand the process and the concept.
(5) The video time frame will be minimum of 10 and maximum of 20 minutes.
(6) Use the Criteria provided. This will be our scoring guide. Failure to follow will result to low
score.
Topic to be discussed:
1) Keynesian short-run model to Aggregate Demand curve
2) Dynamic price-level adjustment feedback effect- shifts in AD curve
3) The Aggregate Supply curve
4) The long-run aggregate supply curve
5) Equilibrium in the Aggregate Economy
Group Video Presentation Rubric
Content, Organization, and Delivery______

3 points 7points 10 points
The main idea is not clear or Work is moderately well There is very clear main idea that
welldevelop. Information has little organized. The main idea is clear well developed with lots of detail
or nothing to do with the main and the development throughout throughout the presentation.
idea. Inadequately organized the presentation can be seen. Information clearly relates to the
work. No clear outline or flow to Information clearly relates to the main topic and includes several
the presentation. Quality of work main idea and provides some supporting details/examples.
falls far short of expectations. supporting details/examples. Superior and carefully organized
Evidence of lack of effort or Outline not completely clear/ work. Clear outline. Quality of
enthusiasm. No evidence of the quality of work meets work exceeds expectations. Work
use of supporting programs or expectations. Work seems is extremely polished and
attempts at organizing the material reasonably polished with poignant. Student use of outside
presented supporting points. Students use of programs such PowerPoint or
outside programs was insufficient video clips. The presentation is
to effectively guide the very attractive and technically
presentation. sound.
Mathematical accuracy________
3 points 7 points 10 points
Several mathematical statements Mathematical statements are Mathematical statements are not
are inaccurate or incorrectly cited. mostly accurate. Mathematical only accurate, but are effectively
Examples/problems are not notation and justification of used to provide context and
explained clearly. Too much or too statements are appropriate and explanation. Appropriate
little justification of mathematical consistent. The work may exhibit a justification of mathematical
statements makes the work hard few problems in clarity when statements with consistent use of
to follow. Inconsistent or effective dealing with problems or notation. The usage of
use of notation. example/s. mathematical concepts indicates a
deeper understanding of the
assigned topic/problem.
Screencast Quality________
Video is choppy and hard to Video and audio quality are Video and audio quality exceed
watch. Audio is very quiet. Pace of acceptable. Pace of narration was expectations. Narration was
narration was much too fast and appropriate. Some evidence of professional and effective. Video
failed in drawing the listener in. video or audio editing which and Audio editing highlighted key
little to no evidence of edited video added depth to the work. points of the talk, and provided a
or audio. Presentation took too Presentation was completed rich viewing experience to the
little time to exceeded the allotted within an acceptable time frame. work. Presentation was crisp with
time. little filler time and was completed
within an acceptable time frame.
Preparedness/Teamwork/Group dynamics/timelines_______
Multiple group members not Somewhat of the group member All presenter knew the
participating and evident lack of has moderate to average information/knowledgeable
preparation/rehearsal and knowledge/ information presented. enough to present the topic,
dependence on a copy or slides. Members helped each other. participated equally, and helped
Group presentation was submitted Almost of them are prepared. each other as needed. Extremely
after 4 or more days on the given Group presentation was submitted prepared and rehearsed. Group
deadline. after 1 to 3 days on the set presentation is submitted on or
deadline. before the deadline.
TOTAL SCORE:___________
COMMENTS:
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END OF WEEK 4

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LEARNING MODULE
FOR
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WEEK 5
THE CLASSICAL LONG-RUN POLICY MODEL: GROWTH AND SUPPLY-SIDE POLICIES
Growth matters. In the long run, growth matters a lot. Given the importance of growth, it is not surprising that modern
economics began with a study of growth. In the Wealth of Nations by Adam Smith noted that what was good about market
economies was that they raised society’s standard of living. He argued that people’s natural tendency to exchange and
specialize was the driving force behind growth. Specialization and trade, and the investment and capital that made these
possible, were responsible for the wealth of nations.
GROWTH AND THE ECONOMY’S POTENTIAL OUTPUT

Long-run growth occurs when the economy produces more goods and services from existing
production processes and resources. Growth increase potential output and shifts the production
possibility curve out, allowing an economy to produce more goods.
In growth, economist used the term “potential output” (the highest amount of output an economy
can sustainably produce from existing production processes and resources). Potential output conveys
a sense of the growth that is possible. Potential output is also called potential income
Long-run growth analysis focuses on supply; it assumes demand is sufficient to buy whatever is
supplied. That assumption is called Say’s law.
Say’s Law
• Supply creates its own demand

“People work and supply goods to the market because they want other goods. The very fact that they
supply goods means that they demand goods of equal value”.
Growth Analysis is a consideration of why an economy’s potential shifts out, and growth policy is
aimed at increasing an economy’s potential output.
Classical long-run policy model is different from Keynesian short run policy model. In figure 1
will show you the difference of the demand-side and Supply side models.
Figure 1
LASₒ LAS₁
LAS 1
SAS SAS
2
B A
A
AD₁
AD
ADₒ
LASₒ LAS₁
Real Output
Real Output
(a) Keynesian View (b) Classical view
The Demand-side and Supply-side models
Keynesian view
The economy’s output can vary from potential output. in this case the economy is below potential at point A.
government policy focuses on expansionary policy to shift the aggregate demand curve.
Classical view
The economy is always at potential. The focus of government policy is on the supply side; its goal is to shift the
long-run aggregate supply curve to the right (shift 1). Because supply creates its own demand, the A D curve
also shifts to the right (shift 2).
SOURCES OF GROWTH
• Growth-compatible institutions
An institution that foster growth that must have incentives built in to them that lead people to
put forth effort and discourage people from spending a lot of their time in leisure pursuits or
creating impediments for others to gain income for themselves.
• Markets-private ownership property
• Corporation
• Investment and accumulated capital
Investment
Savings to investment method on financial market. The role of financial markets in transferring
savings into investment is captured in the loanable fund market.
Savings is the supply of loanable funds, the interest rate rises, more people are willing to save
more. Investment is the demand for loanable funds that will be used by businesses to buy
goods and services. However, as the interest rate falls, it pays businesses to borrow more and
invest more.
In the market, the interest rate is the key, it equilibrates the supply and demand for loanable
funds. When the supply of loanable funds (savings) increases, the interest rate falls and the
quantity of loanable funds demanded (investment) increases. Therefore, societies interested in
growth look carefully at the interest rate in the economy. (The interest rate that is important
to this market is the real interest rate- the nominal rate minus the rate of inflation).
Accumulated capital
Capital accumulation (where capital was thought of just physical capital) and investment were
seen as the key elements in growth.
Physical capital: (1)Private capital (buildings and machines available for production), (2)
Public capital (infrastructure such as highways and water supply)- however, the physical
capital is now deemphasized because it is seen as not necessarily lead to growth.
Types of capital
• Human capital
(the skills that are embodied in workers through experience, education, and on-the-job
training, or more simply, people’s knowledge)
- A skilled labor force is far more productive than an unskilled labor force
• Social capital
(the habitual way of doing things that guides people in how they approach production) -
the social capital is embodied in institutions such as the government, the legal system,
and the fabric of society.
Note: Anything that contributes to growth can be called a type of capital. Anything that
slows growth can be called a destroyer of capital
• Available resources
If an economy is to grow, it will need resources. A resource in one time period may not be a
resource in another. What’s considered a resource depends on technology.
• Technological development
Advances in technology shift the production possibility curve out by making workers more
productive. Technological advances increase their ability to produce more of the things they
already produce but also allow them to produce new and different products.
In some way’s growth involves more of the same, a much larger aspect of growth involve
changes in technology (the way it makes the goods and services, and changes in the goods
and services people buy).
• Entrepreneurship
Entrepreneurship is the ability to get things done. That ability involves creativity, vision,
willingness to accept risk, and a talent for translating that vision into reality.
Example: In United States, entrepreneurship is the central of growth. It created large

companies, produced new products, and transformed the landscape of the economy. Like, Bill
Gates (who led the Microsoft as it transformed and dominated the computer industry), Mark
Zuckerberg (who created facebook and transformed the social networking culture), and Jeff
Bezos (whose amazon company transformed the consumer shopping).
TURNING THE SOURCES OF GROWTH INTO GROWTH
Capital and Investment

The economic growth change has changed over time.
• Early Economist focused on savings and investment as sources of growth.
Law of diminishing marginal productivity

As more and more of a variable input is added to an existing fixed input, eventually the
additional output produced with that additional input falls.
The early economist believed that eventually growth in capitalist countries would slow down
because of the law of diminishing marginal productivity.
• Classical Economist (capitalist economies) focused on their analysis, and also their policy advice
on how to increase investment. The way to do that was for people to save:
Saving Investment Increase in capital Growth
Classical growth model

A theory of growth that emphasizes the role of capital in the growth process
“If society wants its economy to grow, it has to save, the more saving, the better. Saving is
good for both private individuals and governments because it is good for the economy”
Technology
This new emphasis on the role of technology has led economists to develop a different path to
growth:
New growth Theory Model:
(a theory of growth that emphasizes the role of technology in the growth process)
Technological advancement Investment Further technological advance Growth
Investment in technology increases the technological stock of an economy just as investment in

capital increases the capital stock of an economy.
Investment in technology is called research and development; firms hire researchers to explore
options. Some of those options pay off and others do not, but the net return of that investment in
technology is an increase in technology.
WEEK 5 ACTIVITY
deadline.
Activity: WQF Instruction:

Study the topic on the process of the WQF diagram. List down the “W” (word/s) that has a
connection to the topic. And then, create a 3 “Q” (question/s) on the list words that you want to
find the answer. To complete the diagram, provide the “F” (facts) about the topic during your
discovery.
For the scoring, 2 points each for the correct answer in “W”, 5 points each formulated question
on “Q”, and 15 points for the “F” facts. For a total score of 40 points.
TOPIC: THE CLASSICAL LONG-RUN POLICY MODEL: GROWTH AND SUPPLY-SIDE POLICIES
W Q F
END OF WEEK 5


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LEARNING MODULE
FOR
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WEEK 7
THE FINANCIAL SECTOR AND THE ECONOMY
What Is the Financial Sector?

 The financial sector is a section of the economy made up of firms and institutions that provide
financial services to commercial and retail customers. This sector comprises a broad range of
industries including banks, investment companies, insurance companies, and real estate firms.
 The market for the creation and exchange of financial assets such as money, stocks, and
bonds which plays a central role in organizing and coordinating our economy; it makes modern
economic society possible.
The positive factors that affect the financial sector
 Moderately rising interest rates. As rates rise, financial services companies can earn
more on the money they have and on credit they issue to their customers.
 Reducing regulation. Whenever the government decides to cut back on red tape,
members of the financial sector will benefit. This means it could lessen the burden while
increasing profits.
 Lower consumer debt levels. as consumers decrease their debt loads, they lessen the risk
of defaults. This lighter load also means they may have a tolerance for more debt, further
increasing profitability.
The negative factors that affect this sector (investors)
 Rapid interest rate increases. If rates rise too quickly, demand for credit such as
mortgages could drop, which could negatively affect certain parts of the financial sector.
 Yield curve flattening. If the spread between long- and short-term interest rates drop too
far, the financial sector could start to struggle.
 More legislation. Government regulation can have a big impact on the financial sector.
While it may help protect consumers, more red tape can bog down a business that operates
in financial services.
What is Money in financial sector?
 A highly liquid (to be easily changeable into another for another asset) financial asset that’s generally
accepted in exchange for other goods, is used as a reference in valuing other goods, and can
be stored as wealth.
Functions of Money
1. A medium of exchange. Money doesn’t have to have any inherent value to function as a
medium of exchange. The use of money makes it possible to trade real goods and services
without bartering.
2. A unit of account. A measure of value.
 Money prices is relative to prices (Example: 25 cents for pencil in relative price-1 pencil= ¼ of the 1 piso).
 Money is used as a unit of account at a point in time, and also a unit of account over time.
(Example: payment of college loans. The value of loan payments depends on how the money prices of all other
goods change over time.)
 Money as a useful unit of account only as long as its value relative to the average of all prices
doesn’t change too quickly.
3. A store of wealth. Money serves as a medium of exchange, also serve as a store of wealth.
Banks and The Creation of Money

What is a Bank?
 A financial institution whose primary function is accepting deposits for, and lending money to,
individuals and firms.
(Banks borrow the people’s money deposited and use the money to make loans to other individuals through this
the banks make a profit by charging a higher interest rate on the money they lend out than they pay for the money
they borrow. Individuals keep their money in banks, accepting lower interest rates, through this the money is safer
and more convenient than the alternatives.)
Banking is generally analyzed from the perspective of ASSET MANAGEMENT (how a bank
handles its loans and other assets) and LIABILITY MANAGEMENT (how a bank attracts deposits
and what it pays for them). When banks offer people “free checking” and special money, market
accounts paying 1 percent, they do so after carefully considering the costs of those liabilities to them.
The Process of Money Creation
1. Determining how many demand deposits will be created.

The total amount of demand deposits (money in checking and savings account).
Example: Let’s say an individual has ₱100.
To determine the amount of money that will eventually be created by multiplying the initial ₱100
in money printed by the Central Bank through:
Wherein:
1 means the amount deposited
r means the reserve ratio (the percentage banks keep out each round including both the required and
excess reserve ration)
1 1
= = 10
r .10
So, the amount of demand deposits that will ultimately exist at the end of the process is: (10x₱100) =
₱1,000
The ₱1,000 is in the form of checking account deposits (demand deposits). The entire ₱100 in currency
that you were given, and that started the whole process, is in the bank as reserves, which means that
₱900 (₱1,000- ₱100) of money has been created by the process.
2. Calculating the money multiplier.

1
= the money multiplier (the measure of the amount of money ultimately created per cash
r
deposited in the banking system, when people hold no currency ). It tells us how much money will
ultimately be created by the banking system from an initial inflow of money:
Amount of money created = Multiplier x New deposit
The higher the reserve ratio, the smaller the money multiplier, and less money will be created.
3. An example of the creation of Money
To make sure you understand the process, take a look at table and the situation:
“The bank reserve ratio is 20%. Juliana deposits ₱10,000. Thus, she has ₱10,000 in her checking
account and the bank has ₱8,000 (₱10,000 – 2,000 in reserves) to lend out. Then, the banks lend the
₱8,000 to Joseph, which he uses to buy a new oven from Mary. Mary deposits the ₱8,000, the bank has
₱6,4000 (₱8,000 – 1,600 in reserves) to lend out. Now the process occurs for five rounds. ” See the
Table 1 below.
R B Ban Ban
o1 a ₱10,000 k k
u2 n ₱8,000₱2,000 Kee Loan
n3 k ₱6,400 ₱8,000
₱2,000 ps s
d (Res
₱8,000 (80
4 ₱1,600
G ₱5,120 ₱5,120erve %)
5 e ₱4,096₱1,024 ratio Pers
₱
t ₱819₱4,096 ₱
: on₱
3
s
Total 20%
₱3,277 6 Borr2
3
₱50,000
money ), = ows6
, 5
after 7
₱10,000 + ₱40,000 ,
Eventu
6 2 8
round
al1
smoney 3 9
6 3
creatio
n
Table 1 shows the effect of the process for five rounds, starting with the initial ₱10,000. Each time the
bank lends the money out, the money returns like a boomerang and serves as reserves for more
loans. After five rounds we reach a point where total demand deposits are ₱33,616, and the bank has
₱6,723 in reserves. This is approaching the ₱50,000 we’d arrive at using the money multiplier:
1 1
(₱10,000) = (₱10,000) = 5 (₱10,000) = ₱50,000
r .2
Financial Sector Roles

1. Facilitates Trade. Lubricant of the economy. Makes it possible for normal business to happen.
2. Transfer Saving. Outflows from the spending stream in hundreds of different forms back into
spending.
Financial Assets and Financial Liabilities

To understand the financial sector and its relation to the real sector, you must understand how financial assets and
liabilities work and how they affect the real economy.
Assets
 Something that provides its owner with expected future benefits.
 Types of Assets
1. Real Assests (an assests whose services provide direct benefits of the owners either now or in the
future. Example: House-you can live in it, Machine-you can produce goods with it)
2. Financial Assets (an assets, such as stocks or bonds, whose benefit to the owner depends on the
issuer of the asset meeting certain obligations). Financial liabilities (a liabilities incurred by the issuer
of a financial asset to stand behind the issued asset). Every financial asset has a corresponding
financial liability.
Example:
a. A stock is a financial asset that conveys ownership rights in a corporation. It is a
liability of the firm; it gives the holder ownership rights that are spelled out in the
financial asset. An equity liability such as stock usually conveys general right to
dividends, but only if the company’s board of directors decides to pay them.
b. A bond is a promise to pay certain amounts of money at specified times in the
future. A debt liability such as a bond usually conveys legal rights to interest
payments and repayment of principal.
Conclusions:
Money is to the operation of the macroeconomy. If money functions smoothly, it keeps the outflow
from the expenditure stream (saving) and the flow back into expenditure stream at a level that reflects
people’s desires. Money can be treated simply as a mirror of people’s real desires. When money
doesn’t function smoothly, it can cause serious problems.
End of Week 7 module content

WEEK 7 ACTIVITY
deadline.
ACTIVITY #1 (To be submitted on Monday, October 31, 2021) Discussion Points and Exercise
Questions Direction: Read and understand this module. Provide what is being asked. Write your
answer in a paper (Hand written).
TASKS: Define each of the following in your simplest way.
1. Discuss the functions and measures of money.

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2. Define banks and explain how they create money.
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3. Explain why the financial sector is so important to macroeconomics debates.
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END OF WEEK 7


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LEARNING MODULE
FOR
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WEEK 8
MONETARY POLICY
What Is Monetary Policy?

Monetary policy, the demand side of economic policy, refers to the actions undertaken by a nation's
central bank to control money supply and achieve macroeconomic goals that promote sustainable
economic growth.
Understanding Monetary Policy

 Monetary policy is the process of drafting, announcing, and implementing the plan of actions
taken by the central bank, currency board, or other competent monetary authority of a country
that controls the quantity of money in an economy and the channels by which new money is
supplied.
 Monetary policy consists of the management of money supply and interest rates, aimed at

meeting macroeconomic objectives such as controlling inflation, consumption, growth, and
liquidity. This is achieved by actions such as modifying the interest rate, buying or selling
government bonds, regulating foreign exchange (forex) rates, and changing the amount of
money banks are required to maintain as reserves.
 Monetary policy is formulated based on inputs gathered from a variety of sources. For
instance, the monetary authority may look at macroeconomic numbers such as gross domestic
product (GDP) and inflation, industry/sector-specific growth rates and associated figures, as
well as geopolitical developments in international markets—including oil embargos or
trade tariffs. These entities may also ponder concerns raised by groups representing industries
and businesses, survey results from organizations of repute, and inputs from the government
and other credible sources.
Monetary Policy in the Philippines
About the BSP
The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines. It was
established on 3 July 1993 pursuant to the provisions of the 1987 Philippine Constitution and the New
Central Bank Act of 1993. The BSP took over from Central Bank of Philippines, which was
established on 3 January 1949, as the country’s central monetary authority. The BSP enjoys fiscal
and administrative autonomy from the National Government in the pursuit of its mandated
responsibilities.
What is BSP main responsibility?
The BSP's main responsibility is to formulate and

implement policy in the areas of money, banking
and credit with the primary objective of preserving
price stability. Price stability refers to a condition
of low and stable inflation. By keeping price
stable, the BSP helps ensure strong and
sustainable economic growth and better living
standards.
The BSP Mandate, Functions and Responsibilities
Monetary Operations in the Philippines
Monetary operations refer to the buying/selling of government securities, lending/borrowing against underlying
assets as collateral, acceptance of fixed-term deposits, foreign exchange swaps, and the use of other
monetary instruments of the Bangko Sentral aimed at influencing the underlying demand and supply conditions
for central bank money.
On 3 June 2016, the BSP formally adopted an interest rate corridor (IRC) system as a framework for
conducting its monetary operations. The IRC is a system for guiding short-term market rates towards the BSP
policy interest rate which is the overnight reverse repurchase (RRP) rate. It consists of a rate at which the
central bank (CB) lends to banks (typically an overnight lending rate) and a rate at which it takes deposits from
them (deposit rate). In a standard corridor, the lending rate will be above the CB target/policy rate (thereby
forming an upper bound for short-term market rates), and the deposit rate will be below the CB policy rate
(thereby forming the lower bound).
1. Open Market Operations (OMO)
 Reverse Repurchase/Repurchase transactions

In a repurchase transaction, the BSP buys government securities (GS) from a bank with a commitment
to sell them back at a specified future date at a predetermined rate, resulting in an expansionary effect
on liquidity. Conversely, in a reverse repurchase (RRP) operation, the BSP also acts as the seller of GS
and the bank’s payment to the BSP has a contractionary effect on liquidity.
 Issuance of BSP Securities

BSP Securities refer to negotiable monetary instruments issued by the BSP as part of its structural
liquidity management operations. The issuance of securities by the BSP absorbs excess liquidity from
the financial system by locking funds in longer-term monetary instruments. Securities issued by the
BSP, which may be in the form of bills and/or bonds, can be traded in the secondary market.
 Outright purchases and sales of securities

An outright contract involves direct purchase/sale of government securities by the BSP from/to the
market for the purpose of increasing/decreasing money supply on a more permanent basis. In such a
transaction, the parties do not commit to reverse the transaction in the future, creating a more
permanent effect on the banking system’s level of money supply.
 Foreign exchange swaps

Foreign exchange swaps refer to transactions involving the actual exchange of two currencies (principal
amount only) on a specific date at a rate agreed on the deal date (the first leg), and a reverse exchange
of the same two currencies at a date further in the future (the second leg) at a rate (different from the
rate applied to the first leg) agreed on deal date.
2. Acceptance of term deposits
The BSP, like other central banks, offers term deposits as one of the monetary tools to absorb liquidity. In
November 1998, the BSP offered the Special Deposit Accounts (SDA) to banks and later expanded the access
in April 2007 to trust entities of banks and non-bank financial institutions. With the adoption of the IRC system
in 2016, the SDA facility was replaced by the term deposit facility (TDF).
 Term Deposit Facility (TDF)

The TDF is a liquidity absorption facility used by the BSP for active liquidity management.
Counterparties are asked to submit bids (volume and rate) for term placements with the BSP. Currently,
the BSP offers three tenors—seven, 14, and 28 days—in term deposit auction.
3. Standing Liquidity Facilities
The BSP offers standing liquidity (lending and deposit) windows to provide or absorb liquidity at the initiative of
the counterparty. These standing overnight facilities are available on demand to qualified counterparties during
BSP business hours. The two standing facilities that form the upper and lower bound of the corridor are set at
± 50 basis points (bps) around the policy rate (the overnight RRP rate under the new IRC structure).
 Overnight Deposit Facility

The standing overnight deposit facility will absorb any residual system liquidity to prevent market
interest rates from falling below the corridor. Interest rate for the O/N deposit facility is the RRP rate
minus 50 bps (0.50 percentage point). The interest rate for the O/N deposit facility serves as a floor for
the O/N interbank rate.
 Overnight Lending Facility

The standing overnight lending facility provides collateralized overnight funding to BSP counterparties
to clear end-of-day imbalances. Interest rate for the O/N lending facility is the RRP rate plus 50 bps
(0.50 percentage point). The interest rate for the O/N lending facility serves as a ceiling for the O/N
interbank rate.
Price Stability - Inflation Targeting: The BSP's Approach to Monetary Policy
The primary objective of the BSP's monetary policy is

“to promote price stability conducive to a balanced and
sustainable growth of the economy” (Republic Act
7653). The adoption of inflation targeting framework of
monetary policy in January 2002 is aimed at achieving
this objective.
Inflation targeting is focused mainly on achieving a low

and stable inflation, supportive of the economy’s
growth objective. This approach entails the
announcement of an explicit inflation target that the
BSP promises to achieve over a given time period.
To achieve the inflation target, the BSP uses a suite of

monetary policy instruments in implementing the
desired monetary policy stance, depending on its
assessment of the outlook for inflation. If the BSP
perceives the inflation forecast to exceed the target,
then it implements contractionary monetary policy to
bring down inflation to its target path. On the other
hand, if the BSP sees the inflation forecast to be lower
than the target or there is need to increase liquidity in
the financial system, then it can implement
expansionary monetary policy. The reverse repurchase
(RRP) or borrowing rate is the primary monetary policy
instrument of the BSP.
WEEK 8 ACTIVITY
deadline.
ACTIVITY #2 (To be submitted on Thursday, November 12, 2021) Discussion Points and Exercise
Questions Direction: Read and understand this module. Provide what is being asked. Write your
answer in a paper (Hand written).
TASK: Illustrate (Explain) the relationship between Monetary Policy, Central Bank of the Philippines
and the supply of money in the economy.


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WEEK 9
FINANCIAL CRISES, PANICS, AND UNCONVENTIONAL MONETARY POLICY
The Central Bank’s Role in a crisis
 Lender of last resort- lending to banks and other financial institutions when no one else will. It
determined were solvent (having sifficient assets to cover their long-run liablities) but were not
sufficiently liquid (having assets that could readily be converted into cash and money at non-fire-sale
prices). Without liquid assets banks couldn’t pay their short-run liabilities, such as interest on
money they had borrowed.
Anatomy of a Financial Crisis

 A financial crisis begins with the creation of an asset price bubble (unsustainable rapidly rising
prices of some type of asset). Price increases in a bubble are unsustainable because they do not
refclect an increase in the real productive value of the asset.
 The key to bubble is extrapolative expectations (expectations that a trend will accelerate). In a
bubble, expectations feed back on themselves, and prices rapidly spiral upward. This is how it
works:
Rise in price Expectations of a further rise in price Rise in demand at the current price
Rise in price Expectations of a further rise in price…..and so on
 The bubble can be reverse into bubble burst. The bursting of bubble involves the same
process that leads to bubble-extrapolative expectations; it just works in reverse. The price
stops rising, which reverses the expectations of rising prices into falling prices. People begin
selling their assets, which leads prices more people to sell and so on. Those loans exceeded
the value of their assets (underwater) are forced to sell or to default on their loans. Those
defaults lead to expectations of further price declines, which bring about further defaults.
Three General Principles of Regulation dealing with financial crises

1. Set as few bad precedents as possible
2. Deal with moral hazard
3. Deal with the law of diminishing control
WEEK 9 ACTIVITY
deadline.
TASK: READ The Three General Principles of Regulation dealing with financial crises and
explain how it deals with financial crisis.
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END OF WEEK 9

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WEEK 10
Deficits and Debt:

The Austerity Debate
Defining Deficits and Surpluses
Deficit- is a shortfall of revenues under payments

Surplus- is an excess of revenues over payments
Both are flow concepts for example. If your income (revenue) is 700,000 pesos per year and your
expenditures (payments) are 800,000 pesos per year you are running a deficit. This definition tell us that the
government budget deficit occurs when government expenditure exceed government revenues.
The table below shows the government total expenditures, total revenues, and the difference between the
two for various years since 1980
(Billions of Pesos) 1980 1990 2000 2010 2017
Revenues 517.1 1,032.0 2,025.5 2,162.7 3,316.2
Expenditures 590.9 1,253.0 1789.2 3,457.1 3,981.6
(-) Deficit (+) surplus -73.8 -221.0 236.2 -1,294.4 -665.4
As you can see in the table, the deficit fluctuates. The reasons for the fluctuations are; are changes in economic
growth rates, which affect revenue (in recessions deficits rise and in booms deficits fall changes in the level of
taxation: and in spending increases. They advise a policy of fiscal austerity – increasing taxes and decreasing
pending. The problem is that cutting back governments deficits will likely slow the economy and increase
unemployment.
Social Security System- a social insurance program that provides financial benefits to individuals who are
elderly and disabled and to their eligible dependents and/or survivors
Nominal and Real Deficits and Surpluses
Nominal deficit - is the deficit determined by looking at the difference between expenditures and receipts
Real deficit – is the nominal deficit adjusted for inflation
We can calculate the real deficit by subtracting from the nominal deficit the decrease in the value of the
government’s total outstanding debts due to inflation.
Specifically:
Real deficit = Nominal deficit- (Inflation x Total debt)
Let’s consider an example. Say that the nominal deficit is 300 billion, inflation is 4% , and the total debt is 4
trillion . Substituting into the formula gives us a real deficit of 140 billion [300 billion – (0.04 X 4 trillion) =
300 billion -160 billion = 140 billion]
CONCLUSION
This has been a relatively short chapter; but the points in it are important. Deficits debts and surpluses are all
accounting measures. Whether a budget is in surplus or deficit is not especially important. What is important is
the health of economy. The economic framework tell us that if the economy is in a normal recession, you
shouldn’t worry much about deficits- they can actually good for the economy. If you are in a economic boom,
then the macroeconomic arguments for deficits are significantly reduced. Booms are a good time to get a
country’s financial house in order maintaining, and possibly increasing, the country’s capacity to run large
deficits in recessions.
WEEK 10 ACTIVITY
deadline.
Task 1 Complete the table
The table below shows the government total expenditures, total revenues, and the difference between the two
for various years since 2000
(Billions of Pesos) 2000 2010 2020 2030 2040

Revenues 617.1 3,032.0 8,025.5 5,162.7 12,316.2
Expenditures 690.9 3,253.0 7,789.2 3,457.1 12,981.6
(-) Deficit (+) surplus
END OF WEEK 10
WEEK 11
FISCAL POLICY
What Is Fiscal Policy?

 Fiscal policy refers to the use of government spending and tax policies to influence economic
conditions, especially macroeconomic conditions, including aggregate demand for goods and
services, employment, inflation, and economic growth.
 Fiscal policy is largely based on ideas from John Maynard Keynes, who argued
governments could stabilize the business cycle and regulate economic output.
Understanding Fiscal Policy
Fiscal policy is largely based on the ideas of British economist John Maynard Keynes (1883-1946),
who argued that economic recessions are due to a deficiency in the consumption spending and
business investment components of aggregate demand. Keynes believed that governments could
stabilize the business cycle and regulate economic output by adjusting spending and tax policies to
make up for the shortfalls of the private sector. His theories were developed in response to the Great
Depression, which defied classical economics' assumptions that economic swings were self-
correcting. Keynes' ideas were highly influential and led to the New Deal in the U.S., which involved
massive spending on public works projects and social welfare programs.
In Keynesian economics, aggregate demand or spending is what drives the performance and growth
of the economy. Aggregate demand is made up of consumer spending, business investment
spending, net government spending, and net exports. According to Keynesian economists, the private
sector components of aggregate demand are too variable and too dependent on psychological and
emotional factors to maintain sustained growth in the economy.
Pessimism, fear, and uncertainty among consumers and businesses can lead to economic recessions
and depressions, and excessive exuberance during good times can lead to an overheated economy
and inflation. However, according to Keynesians, government taxation and spending can be managed
rationally and used to counteract the excesses and deficiencies of private sector consumption and
investment spending in order to stabilize the economy.
When private sector spending turns down, the government can spend more and/or tax less in order to
directly increase aggregate demand. When the private sector is overly optimistic and spends too
much, too fast on consumption and new investment projects, the government can spend less and/or
tax more in order to decrease aggregate demand.
This means that to help stabilize the economy, the government should run large budget deficits during
economic downturns and run budget surpluses when the economy is growing. These are known as
expansionary or contractionary fiscal policies, respectively.
Expansionary Policies
Expansionary fiscal policy is meant to help the economy grow, recover or generally expand, such
as after a large economic dip or crash. This might include lowering taxes to give consumers more
money to spend or increasing government spending on projects that will help stimulate the economy,
like programs that aid people and businesses at risk of poverty or failure.
To illustrate how the government can use fiscal policy to affect the economy, consider an economy
that's experiencing a recession. The government might issue tax stimulus rebates to increase
aggregate demand and fuel economic growth.
The logic behind this approach is that when people pay lower taxes, they have more money to spend
or invest, which fuels higher demand. That demand leads firms to hire more, decreasing
unemployment, and to compete more fiercely for labor. In turn, this serves to raise wages and provide
consumers with more income to spend and invest. It's a virtuous cycle, or positive feedback loop.
Rather than lowering taxes, the government may seek economic expansion through increases in
spending (without corresponding tax increases). By building more highways, for example, it could
increase employment, pushing up demand and growth.
Expansionary fiscal policy is usually characterized by deficit spending, when government
expenditures exceed receipts from taxes and other sources. In practice, deficit spending tends to
result from a combination of tax cuts and higher spending.
The Downsides to Expansion
Mounting deficits are among the complaints lodged about expansionary fiscal policy, with critics
complaining that a flood of government red ink can weigh on growth and eventually create the need
for damaging austerity. Many economists simply dispute the effectiveness of expansionary fiscal
policies, arguing that government spending too easily crowds out investment by the private sector.
Expansionary policy is also popular—to a dangerous degree, say some economists. Fiscal stimulus is
politically difficult to reverse. Whether it has the desired macroeconomic effects or not, voters like low
taxes and public spending. Due to the political incentives faced by policymakers, there tends to be a
consistent bias toward engaging in more-or-less constant deficit spending that can be in part
rationalized as “good for the economy”.
Eventually, economic expansion can get out of hand—rising wages lead to inflation and asset
bubbles begin to form. High inflation and the risk of wide-spread defaults when debt bubbles burst
can badly damage the economy and this risk in turn leads governments (or their central banks) to
reverse course and attempt to "contract" the economy.
Contractionary Policies
Contractionary fiscal policy aims to help cool off periods of too rapid growth that might pose a
threat to a steady economic growth rate. (For context, experts generally consider a healthy growth
rate about 2% to 3%.) Though it might not seem bad for there to be too much economic growth, it can
lead to runaway inflation, asset bubbles and uber-low unemployment levels that leave businesses
unable to find enough employees. All of these combined can set the stage for a recession or
economic collapse. To prevent this, the government might raise taxes to discourage business and
consumer spending or taper off on government spending programs to temporarily suppress the
economy and get it back to a stable growth level.
In the face of mounting inflation and other expansionary symptoms, a government can pursue
contractionary fiscal policy, perhaps even to the extent of inducing a brief recession in order to restore
balance to the economic cycle. The government does this by increasing taxes, reducing public
spending, and cutting public-sector pay or jobs.
Where expansionary fiscal policy involves deficits, contractionary fiscal policy is characterized by
budget surpluses. This policy is rarely used, however, as it is hugely unpopular politically. Public
policymakers thus face a major asymmetry in their incentives to engage in expansionary or
contractionary fiscal policy. Instead, the preferred tool for reining in unsustainable growth is usually
contractionary monetary policy, or raising interest rates and restraining the supply of money and
credit in order to rein in inflation.
How Fiscal Policy Is Implemented
To meet fiscal policy goals, governments deploy two primary tools to maximize economic outcomes—
collecting taxes and then spending them. These are generally enacted by elected officials and their
appointees in legislative and executive branches of governments.
Taxes. By collecting tax revenues on individuals and businesses, via tax vehicles like capital gains
and property taxes, among others, the federal government can steer financial assets to areas of
the economy where they’re needed most. Those tax amounts are substantial. In 2020, the U.S.
government collected $3.42 trillion in taxes. That amounts to $108,000 collected in taxes every
second.
Government spending. When a nation collects taxes, it has the financial means to establish
fiscal policy. Federal tax dollars are spent on nationwide needs like infrastructure, defense, public
works, government employment, subsidies and public health, research and welfare programs.
The financial figures tied to government spending are huge. In 2020, the U.S. government spent
$6.55 trillion. That spending amount accounts for 31% of U.S. gross domestic product (GDP),
which stood at $21.0 trillion in 2020.
By spending trillions annually, the government aims to pour more cash back into the U.S.
economy and to boost demand for private sector products and services.
How Fiscal Policy Relates to the AD-AS Model
Expansionary policy shifts the aggregate demand curve to the right, while contractionary policy
shifts it to the left.
When setting fiscal policy, the government can take an active role in changing its spending or the
level of taxation. These actions lead to an increase or decrease in aggregate demand, which is
reflected in the shift of the aggregate demand (AD) curve to the right or left respectively.
It is helpful to keep in mind that aggregate demand for an economy is divided into four
components: consumption, investment, government spending, and net exports. Changes in any of
these components will cause the aggregate demand curve to shift.
Expansionary fiscal policy is used to kick-start the economy during a recession. It boosts
aggregate demand, which in turn increases output and employment in the economy. In pursuing
expansionary policy, the government increases spending, reduces taxes, or does a combination of
the two. Since government spending is one of the components of aggregate demand, an increase
in government spending will shift the demand curve to the right. A reduction in taxes will leave
more disposable income and cause consumption and savings to increase, also shifting the
aggregate demand curve to the right. An increase in government spending combined with a
reduction in taxes will, unsurprisingly, also shift the AD curve to the right. The extent of the shift in
the AD curve due to government spending depends on the size of the spending multiplier, while
the shift in the AD curve in response to tax cuts depends on the size of the tax multiplier. If
government spending exceeds tax revenues, expansionary policy will lead to a budget deficit.
A contractionary fiscal policy is implemented when there is demand-pull inflation. It can also be
used to pay off unwanted debt. In pursuing contractionary fiscal policy the government can
decrease its spending, raise taxes, or pursue a combination of the two. Contractionary fiscal policy
shifts the AD curve to the left. If tax revenues exceed government spending, this type of policy will
lead to a budget surplus.
Expansionary Versus Contractionary Fiscal Policy
When the economy is producing less than potential output, expansionary fiscal policy can be used
to employ idle resources and boost output.
Keynesian economists argue that private sector decisions sometimes lead to inefficient
macroeconomic outcomes which require active policy responses by the public sector in order
stabilize output over the business cycle. Keynes advocated counter-cyclical fiscal policies (policies
that acted against the tide of the business cycle). This means deficit spending and decreased
taxes when an economy suffers from a recession and decreased government spending and higher
taxes during boom times.
According to Keynesian economics, if the economy is producing less than potential output,
government spending can be used to employ idle resources and boost output. Increased
government spending will result in increased aggregate demand, which then increases the real
GDP, resulting in a rise in prices. This is known as expansionary fiscal policy. Conversely, in times
of economic expansion, the government can adopt a contractionary policy, decreasing spending,
which decreases aggregate demand and the real GDP, resulting in a decrease in prices.
In instances of recession, government spending does not have to make up for the entire output
gap. There is a multiplier effect that boosts the impact of government spending. The government
could stimulate a great deal of new production with a modest expenditure increase if the people
who receive this money consume most of it. This extra spending allows businesses to hire more
people and pay them, which in turn allows a further increase in spending, and so on in a virtuous
circle.
In addition to changes in spending, the government can also close recessionary gaps by
decreasing income taxes, which increases aggregate demand and real GDP, which in turn
increases prices. Conversely, to close an expansionary gap, the government would increase
income taxes, which decreases aggregate demand, the real GDP, and then prices.
The effects of fiscal policy can be limited by crowding out. Crowding out occurs when government
spending simply replaces private sector output instead of adding additional output to the economy.
Crowding out also occurs when government spending raises interest rates, which limits
investment.
When the Economy Needs to Be Curbed
When inflation is too strong, the economy may need a slowdown. In such a situation, a
government can use fiscal policy to increase taxes to suck money out of the economy. Fiscal
policy could also dictate a decrease in government spending and thereby decrease the money in
circulation. Of course, the possible negative effects of such a policy, in the long run, could be a
sluggish economy and high unemployment levels. Nonetheless, the process continues as the
government uses its fiscal policy to fine-tune spending and taxation levels, with the goal of
evening out the business cycles.
WEEK 11 ACTIVITY
deadline.
Task 1
1. According to Ricardian equivalence theorem, what is the effect of each of the following on output in the
economy? Explain your answers.
a. Government pays an increase in spending by raising taxes.
b. Government pays for an increase in spending by issuing bonds
c. What is the implications of your answers to a and b?
END OF

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WEEK 13
JOBS and UNEMPLOYMENT
The Debate about the Nature and Measurement of Unemployment
There is an ongoing debate about whether unemployment is voluntary or involuntary. The reality is that even in a
recession, most educated people can either find a job or create one. The jobs they can find or create pay less and are far
less desirable than the jobs they want. Here’s an example: In 2009 more than half of students who graduated with a
humanities degree either were unemployed or worked at a job that didn’t require a college degree. Even new PhDs in
these discipline often don’t have much better prospects. It’s even worse for those who have dropped out of college or
high school. As college- educated people look for jobs that don’t require a college education they will squeeze out those
who don’t have that education. It is like a game of musical chairs, and the people with the least education usually end up
with a chair.
How many fewer chairs than people looking for chairs depends on the economy. The stronger the economy the more
jobs available. There more job vacancies than people unemployed. However, many of the available jobs were ones that
few people found acceptable, and worker’s looking for jobs didn’t have the skills needed for the good acceptable jobs
available. What this mean is that if everyone is going to have an acceptable job, some people are going to have to create
one for themselves.
Entrepreneurship and Employment

Creating a job for yourself isn’t that far-fetched. Even teenagers can create jobs- babysitting, dog walking, washing cars,
or teaching the technically challenged older generation how to use a smartphone or an iPad. Truly entrepreneurial
people will never be unemployed; they will simply create jobs for themselves.
Microeconomic Categories of Unemployment
In the decades after world war II. Unemployment was seen primarily as cyclical unemployment, and the focus of
microeconomic policy was on how to eliminate that cyclical unemployment with monetary and fiscal policy. Today,
economist believe that’s not enough. Unemployment has many dimensions, different types of unemployment are
susceptible to different types of policies
Today’s view is that you don’t use a sledgehammer to pound in finishing nails, and you don’t use macro policies to deal
with certain types of unemployment; instead you use micro policies. To determine where microeconomics policies are
appropriate as a supplement to micro economic policies. Economist break unemployment down into a number of
categories and analyze each category separately. These categories include, how people become unemployed,
demographic characteristics, duration of unemployment, and the reason for unemployment (see figure above.)
Another measure of the changing nature of employment is the duration of unemployment, shown in the figure below.
As you can see, in the downturn in 2008 the duration of unemployment increased significantly. While it came down after
the recession ended. It remained above its historic average. This means fewer unemployed were finding and accepting
another job soon after being unemployed. Some couldn’t find work; more people were unable to find the type of job
they had at the pay they were getting. It isn’t that the government wasn’t trying to lower unemployment; the
government was running expansionary monetary and fiscal policy as it dared (or at least as much as was politically
feasible). And still the long term unemployment rate only decreased slowly.
Unemployment and Potential Output
The Relationship between changes in output and unemployment is generally captured by Okun’s rule of thumb, which
states that a 1 percentage point rise in the unemployment rate will tend to be associated with a 2 percent fall in output
from its trend and vice versa.
This means for example, if the trend growth rate is 3 percent and the employment rate rises by 2 percentage points,
output will actually fall by 1 percent ( 3 percent – 2 x2 percent ). In terms of number of workers, a 2 percentage point
increase in the unemployment rate means about 3 million additional people are out of work than would be if the
economy had stayed on its growth path.
Is Unemployment Structural or Cyclical
Cyclical unemployment -is a temporary unemployment that can be expected to end as the economy recovers. A person
being temporarily laid off as a server because fewer people are going to restaurants in a recession is an example of
cyclical unemployment.
Structural unemployment – is a long term unemployment that occurs because changes in the structure of the economy.
A person who loses his job as a stenographer because his job is replaced by voice recognition software is an example of
structural employment, Structural unemployment cannot be resolved by expansionary monetary and fiscal policy.
The distinction between structural and cyclical is not watertight. What starts out to be cyclical unemployment may well
end up being structural unemployment, as the firms that lay off workers in recession don’t hire them back.
Why has the Target Rate of Employment Changed over Time?
1. Demographics- Different age groups have different unemployment rates. And as populations age structures changes.
So does the target rate of unemployment. Because younger people jobs more frequently, a younger workforce will mean
overall job change will be higher, leading to higher structural unemployment.
2. The target rate of unemployment changes is our economy’s changing in structural and institutional structure. For
example women today comprise greater percentage of the labor force than they did earlier
3. Government institution have also changed. Unemployment benefits created in 1911 and public welfare created in
1939 were established to reduce suffering associated with unemployment and change response to unemployment
4. Technology- Automation, artificial intelligence, deep learning apps and other advancements are continually changing
the nature of jobs- making previous skills obsolete and requiring workers to develop new skills. Often the new jobs that
technology creates will pay less and seem less fulfilling than the jobs they replace.
5. Globalization- As job moves abroad, people must find new jobs that are globally competitive to remain employed in
the tradable sector.
Conclusion
The problems that people call “unemployment “ involve broader issues of social justice, fairness of the system, and the
degree to which what one gets should be associated with the job one has, This issues go far beyond economics alone;
they involve social philosophy, psychology, and cultural issues. Thus, in many ways the question of unemployment is not
a question that economist can answer. It is a question society must answer through its political system. Unfortunately,
our political system does not seem to be doing an especially good job dealing with these hard issues that must be
answered before any serious attempt to deal with the unemployment problem can work.
Expanding aggregate demand can decrease unemployment, but little of that aggregate demand actually flows down to
those most in need. Thus if one’s concern about social justice is a concern about the least well off, alternative
approaches, such as a direct method to guarantee a job to anyone who wants one, may have to be considered.
WEEK 13 ACTIVITY
deadline.
TASK 1
ANSWER THE FOLLOWING (CHOOSE 2 QUESTIONS)
1. What happened to the duration of unemployment during the 2008-2009 recession and what likely is
the reason?
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2. College degrees are usually associated with higher wages. Does that association mean that what
one learns in college increase college students’ productivity?
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3. Entrepreneurship creates job; if someone is entrepreneurial he or she can never be unemployed.

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END OF WEEK 13

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WEEK 14
Inflation, Deflation and Macro Policy

Defining Inflation
Inflation as a continual rise in the price level, and we focused on measuring inflation with the GDP
deflator, which is the most inclusive measure of good and services that we have. We mentioned that
there are number of other measures of goods and services inflation that focus on personal
consumptions goods, consumer goods and producer goods. But generally, these alternative goods
inflation measures move in tandem, so distinguishing among them is not especially important for the
recent debates about monetary policy.
Asset Price Inflation and Deflation

The distinction between goods inflation and asset inflation, however is important. The reason is that
asset prices and goods prices don’t always move in tandem and can diverge significantly for long
periods of time. These are periods of asset price bubbles.
For example, goods prices could remain essentially constant, but asset prices could rise by 30
percent. Such different movements can continue for a number of years, as was the case in the
housing market and other asset markets in the US during the early 2000s. Using the goods market
measure of inflation, such as asset price rise is not seen in inflation (except to the extent that the
rental value of housing changes with the price of housing, which it often doesn’t
Estimating Asset Price Inflation and Deflation

One reason economist have not developed a measure of asset price inflation is that it’s difficult to
know when increases in asset prices reflect an increase in their real value and when they are just
increase in their real value. In individual cases estimating an asset’s real value is essentially
impossible, but for the aggregate of assets it is easier since, based on accounting rates over the long
run, real wealth should increase at a similar rate as real output. For example, if nominal output and
increase 6 percent per year, nominal wealth should be increasing at about the same rate in what
economist call the steady- state equilibrium. This means that the ratio of nominal wealth to nominal
GDP can serve as a rough estimate whether there is asset price inflation in excess in goods price
inflation. When that ratio is increasing, asset price inflation is likely occurring.
Does Asset Inflation Matter?

One of the problems of asset inflation for an economy is that it (and the low interest rates that
accompany it) can lead to serious misallocation of resources from conservative of risky investments,
since risk – preferring borrowers, who fear that assets prices are too high, will not want to borrow. So
asset price inflation strongly encourages and reward risk taking.
Another problem is that asset price inflation gives people the illusion that their real wealth has
increased much more than really it has, causing them to spend more than they would have otherwise.
Asset Price Deflation

The Problem with asset inflation is that it cannot last; it is based on the illusion that the real value of
assets has risen when, in fact in their real value has not. Asset price inflation is an alternative name
for financial bubble, and bubbles are, at same point, followed by an asset price deflation. This
deflation reverse many of the positive effects of the asset price inflation and creates additional
problems as well.
Asset price deflation can create serious problems for the economy. If asset price inflation leads to
pleasure and asset price deflation leads to pleasure and asset price deflation leads to pain, then
maybe, on average, the two even out.
The Costs and Benefits of Inflation
The Cost of Inflation
The cost of inflation that economist focus on are more subtle. They include what are called
informational, institutional, and distributional cost.
Informational Costs of Inflation

Consider a person who wants to buy a house who laments the high cost of housing, pointing out that
it has doubled in 10 years a doubling of housing prices should be expected. In fact. With 7 percent
inflation, on average all prices double 10 years. That means the individual wages have probably also
doubled so he or she is no better off and no worse off than 10 years ago.
Institutional Costs of Inflation

People rely on government to provide a stable infrastructure within in which to make decisions and
enter to contracts. People and businesses rely on government to provide a relatively stable unit of
account.
Distributional Costs of Inflation

A third cost of inflation can be its distributional effects. The inflation could redistribute income to
people you are rooting for. In that case you might say that there are distributional benefits of inflation
Distributional Effects of Goods Inflation

Who wins and who loses in an inflation?
The winners are people who can raise their wages or prices and still keep their jobs or sell their
goods. The losers are people who can’t raise their wages or prices or who lose their jobs because
their wage is too high
Distributional Effects of Asset Price Inflation

People who bet in rising asset prices are helped and those who did not are hurt. In summary, the
increase in the money supply that affects asset prices can have significant distributional effects on
wealth even when it does not result in higher goods prices
The Benefits of (low) Inflation

Inflation can Facilitate Relative Price Changes
Inflation allows some nominal wages and prices to stay constant or rise, but for those same wages
and prices to fall in terms. For example, say your nominal wage goes up by 3 percent, and the price
level rises by 6 percent
Allowing More Expansionary Monetary Policy
The benefits of inflation are especially apparent when policy makers are trying to stimulate economic
growth when interest rates are zero or close to zero. With conventional monetary policy, policy
makers face a zero interest rate lower bound--- A limit on how much interest rates can fall.
The Danger of Accelerating Inflation

Hyperinflation when inflation hits triple digits---- 100 percent or more per year.
Productivity, Inflation and Wages
Inflation=Nominal wage increase-Productivity growth

For example, if productivity is increasing at 2 percent, as it did in the early 2000’s, wages can go up
by 2 percent without generating any inflationary pressure. Let’s consider another example—the mid-
1970s, when productivity growth slowed to 1 percent while wages went up by 6 percent. Using our
rule of thumb, inflation was 5 percent (6 percent-1 percent).
The Quantity Theory of Money and Inflation

The quantity theory of money can be summed up in one sentence: Inflation is always and everywhere
a monetary phenomenon. If the money supply rises, the price level will rise. If the money supply don’t
rise, the price level won’t rise. A quantity theory advocate argues; Forget all other explanations of
inflation – they just obscure the connection between money and inflation.
The Equation of Exchange

The quantity theory of money centers on the equation exchange. An equation stating that quantity of
money times the velocity of money equals the price level times the quantity of real goods sold. This
equation is;
Where
M= Quantity of Money
V= Velocity of Money
P= Price Level
Q= Quantity of real goods sold
Q is the real output of the economy (real GDP) and P is the price level, so PQ is the economy’s
nominal output (nominal GDP) .V, the velocity of money, is the number of times per year, on average,
put another way velocity is the amount of income per year generated. Since MV= PQ, MV also equals
nominal output.
Velocity Is Constant
The first assumptions is that velocity remains constant (or changes at a predictable rate). Money is
spent only so fast; how fast is determined by the economy’s institutional structure, such as how close
individuals to live to stores, how people are paid (weekly biweekly, or monthly. And what sources of
credit are available.
Real Output Is Independent of the Money Supply

The second assumptions is that Q is independent of the money supply. That is, Q is autonomous,
meaning real output is determined by forces outside those forces in the quantity theory. If Q grows, it
is because of factors that affect the real economy. Thus according to the quantity theory of money,
policy discussions of the real economy. Should focus on the real economy, --- the supply side of the
economy, not the demand or monetary.
Causation Goes From Money to Prices

With both V (velocity) and Q (Quantity of output) assumed unaffected by changes in M (money
supply), the only thing can change as money changes is P (price level). Given the two assumptions
so far, either prices or money could be the driving force. The quantity theory makes the additional
assumptions that causation goes from money to prices.
MV--- PQ
In its simplest terms, the quantity theory of money says that the price level varies in response to
changes in the quantity of money,
Which way does the Causation Go?
According to the quantity theory of money, change in the money supply cause changes in the price
level. The direction of causation goes from left to right:
MV PQ
More institutionally focused economist see it the other way around. Increases in prices force
government to increase the money supply or cause employment. The direction of causation goes
from left to right.
MV PQ
According to these critics of the quantity theory, the source of inflation is in the price setting process
firms. When setting prices, firms and individuals find it easier to raise prices than to lower them and
do not take into account the effect of their pricing decisions on the price level.
Inflation and the Philips Curve Trade-Off
Short run Phillips curve- is a downward – slopping curve showing the relationship between inflation
and employment when expectations of inflation are constant.
Stagflation – the combination of high and accelerating inflation and high unemployment.
The-Long run Phillips curve- is thought to be a vertical curve at the unemployment rate consistent
with potential output.
Conclusion
Inflation is not an easy topic. It is made more challenging by definitional and measurement problems
that make it difficult to know precisely what type of inflation one is talking about. Should we define
inflation in terms of goods prices, or more broadly terms of both asset and goods prices? These
definitional choices make a big difference in how we view policy. If one judges inflation terms of both
goods and asset prices, then the period up until the financial bubble burst was a more inflationary
time period than it seemed. If one judges inflation only in terms of increases in the price of goods, it
was not.
WEEK 14 ACTIVITY
deadline.
Task 1
ANSWER THE FOLLOWING QUESTIONS (CHOOSE 2 QUESTIONS)
1. True or false? Inflation on average, makes people neither richer nor poorer. Therefore it has no
cost. Explain.
2. Why do lenders tend to lose out in an expected inflation?

3. Draw a short- run Phillips curve. What does it say about the relationship between inflation and
unemployment?
4. Draw a long- run Phillips curve. What does it say about the relationship between inflation and
unemployment?
________________________ END OF WEEK 14 _________________________


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WEEK 15
COMPARATIVE ADVANTAGE, EXCHANGE RATES, AND GLOBALIZATION
The Principle of Comparative Advantage

The basic idea of the principle of Comparative advantage is that as long as the relative opportunity
costs of producing goods (what must be given up of one good in order to get another good) differ
among countries, then there are potential gains from trade.
These graphs represent the two countries’ production possibility curves. Each combination of
numbers in the table corresponds to a point on the curve. For example point B in each graph
corresponds to the entries in row B, columns 2 and 3 in the relevant table.
Let’s assume that the United States has chosen point C (production of 60 barrels of oil and 400
tons of food) and Saudi Arabia has chosen point D (production of 400 barrels of oil and 60 tons of
foods.
Now I.T., who understands the principle of comparative advantage, comes along and offers the
following deal to the United States;
If you have produce 1,000 tons of food and no oil[ point f 17-1(a) and give me 500 tons of food
while keeping 500 tons for yourself, I’ll guarantee you 120 barrels of oil, double the amount you’re
now getting. I’ll put you on point H, which is totally beyond your current production possibility curve.
You’ll get more oil and have more oil and have more food. It’s an offer you can’t refuse.
I.T. then flies off to Saudi Arabia, to which he makes the following offer.
If you produce 1,000 barrels of oil [ point f 17-1(b) and give me 500 tons of food while keeping
500 tons for yourself, I’ll guarantee you 120 barrels of oil, double the amount you’re now getting. I’ll
put you on point G, which is totally beyond your current production possibility curve. You’ll get more
oil and have more oil and have more food. It’s an offer you can’t refuse.
Both countries accept; they’d be foolish not to so the two countries’ final consumptions
positions are as follows
Oil (barrels) Food ( tons)
Total Production 1,000 1,000
U.S. consumption 120 500
U.S. gain in consumption +60 +100
Saudi consumption 500 120
Saudi gain in consumption +100 +60
I.T.s profit 380 380
For arranging the trade, I.T. makes a handsome profit of 380 tons of food and 380 barrels of
oil. I.T has become rich because he understands the principle of comparative advantage.
Dividing Up the Gains from Trade
Three Determinants of the terms of trade are:

1. The more competition, the less the trader gets
The more competition that exist among traders, the less likely it is that the trader gets big gains of
trade; more of the gains from the trade will go to the citizens in two countries, and less will go to the
traders. It means that where entry into trade is unimpaired, most of the gains of trade will pass from
the trader to the countries Thus, the trader’s big gains from trade occur in markets that are newly
opened or if the product is unique and cannot be easily copied.
2. Smaller countries get a larger proportion of the gain than larger countries
Once competitions prevails, smaller countries tend to get larger percentage of the gains of the trade
than do larger countries. The reason, briefly is that more opportunities are opened up for smaller
countries by trade than for larger countries. The more opportunities, the larger the relative gains.
3. Countries producing goods with economies of scale get a larger gain from trade.
Trade allows an increase in production, If there are economies of scale, that increase can lower the
average cost of production of a good. Hence, an increase in production can lower the price of the
good in the producing country. The country producing the good with the larger economies of scale
has its costs reduced by more, and hence gains more from trade than does its trading partner
Inherent and Transferable Sources of Comparative Advantage

Inherent Comparative Advantage – Comparative advantages that are based on factors that are
relatively unchangeably
Transferable Comparative Advantage- Comparative advantages based on factors that can change
relatively easily.
Determination of Exchange Rates and Trades

Exchange Rates – is the rate at which one country’s currency can be traded for another country’s
currency
The market for foreign currencies is called the foreign exchange of (forex) market. It is this market
that determines the exchange rates that newspapers report daily in tables such as the table below,
which shows the cost of various currencies in terms of dollars and the cost of dollar in terms of those
currencies,
Exchange Rates, June 2018

U.S. Equivalent Currency per U.S.
Argentina (peso) 0.040 24.98
Canada (dollar) 0.769 1.30
Denmark (krone) 0.158 6.31
European Union (euro) 1.176 0.85
Israel (shekel) 0.280 3.57
Japan (yen) 0.009 109. 75
Pakistan (rupee) 0.009 116. 11
Philippines (peso) 0.019 52.60
Russia (ruble) 0.016 62.38
Saudi Arabia (riyal) 0.267 3.75
U.K. (pound) 1.333 0.75
China (yuan) 0.156 6.39
Currency depreciation – is a change in the exchange rate so that one currency buys fewer units of a
foreign currency. For example, when the dollar price of euros from 1.20 dollars to 1.10 dollars, the
euro is depreciating; 1 euro buys fewer dollars. The dollar, on the other hand, appreciated in value
because 1 dollar can be exchanged for more euros.
Currency Appreciation- is a change in the exchange rate so that one currency buys more units of a
foreign currency.
WEEK 15 ACTIVITY
deadline.
Task 1
ANSWER THE FOLLOWING QUESTIONS (CHOOSE 2 QUESTIONS)
1. Will a country do better importing or exporting a good for which it has a comparative advantage?
Why?
2. Why does competition among traders affect how much of the gains from trade is given to the
countries involved in trade?
3. Why do smaller countries usually get most of the gains from trade?
4. What are some reasons why small country might not get the gain of trade?
________________________END OF WEEK 15______________________________


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WEEK 16
International Trade Policy
Increasing Nature of World Trade
In 1928, the ratio of world trade to U.S GDP was almost 60 percent. In 1935 that ratio had fallen to less than 30 percent.
1950 it was only 20 percent. There are two reasons why world trade fluctuates: When output rises, International trade
rises, and when output falls, international trade falls; and Countries impose trade restrictions from time to time. These
two reasons enforces each other for example , decreases in world income during the depression of the 1930s caused a
large decrease in trade and that decrease in trade that decrease was exacerbated by a worldwide increase in trade
restrictions.
Differences in the Importance of Trade
The importance of international trade to countries ‘economic differs widely, as we can see in the table below, which
presents the importance of the shares of exports (the value of goods and services sold abroad) and imports (the value of
goods and services purchased abroad ) for various countries
Total Output Export to GDP Ratio Import to GDP Ratio

Netherlands $ 945 96% 87%
Germany 421 46 39
Canada 1,799 31 33
Italy 2,182 30 33
France 2,925 30 33
United Kingdom 2,936 28 31
Japan 5,167 16 16
United States 20, 413 12 15
Numbers in billions
Source world development Indicators, The World Bank and International Monetary Fund.
Among the country listed, the Netherlands has the highest exports compared to total output; the United States
has the lowest. The Netherlands imports are also the highest as a percentage of total output. U.S. Exports are the
lowest. The relationship between a country a country’s imports and exports roughly equal to one another, though in any
particular year that equality can be rough indeed. For the United States in recent years, imports have generally
significantly exceed exports, which means that a trade imbalance can continue for a long time. But that situation can’t
continue forever.
Varieties of Trade Restrictions
Tariffs and Quotas
Tariff- is an excise tax on an imported (internationally traded) good. (Tariffs are also called customs duties.) Tariffs are
the most – used and most familiar type of trade restriction. Tariff operate in the same way a tax does: They make
imported goods relatively more expensive than they otherwise would have been, and thereby encourage the
consumptions of domestically produced goods.
The dismissal failure of the Smooth – Hawley was the main reason the General Agreement on Tariffs and Trade
(GATT), a regular international conference to reduce trade barriers, was established in 1947 immediately
following World War II. In 1995 GATT was replaced by the WORLD TRADE ORGANIZAION (WTO) – an
organization whose functions are generally the same as GATT were- to promote free and fair trade among
countries. Unlike GATT, the WTO is a permanent organization with an enforcement system (albeit weak)
Quota- is a quantity limit placed on imports.

Quotas have the same effect on equilibrium price and quantity as do the quantity restrictions. Tariffs, like all
taxes on suppliers shift the supply curve up by the amount of tax.
There is however, a however, a difference between tariffs and quotas. In this case of the tariff the government
collects tariff revenue (the tariff, T, the times the quantity imported) represented by the shaded region. In the
case of quota, the government collects no revenue. The benefit of the increase in price goes to importer as
additional corporate revenue.
Voluntary Restraint Agreements
Imposing new tariffs and quotas is specifically ruled out by the WTO, but foreign knows that WTO rules are voluntary
and that, if a domestic industry brought sufficient political pressure on its government, the WTO rules would be
forgotten. To avoid the imposition of new tariffs on their goods , countries often voluntarily restrict their exports, That’s
why Japan has, at times, agreed informally to limit the number of cars it exports to the United States.
Sanctions- sometimes called embargo, is a restriction on the imports or exports of a country’s goods. Sanctions are
usually established for international political reasons rather than for primarily economic reasons. An example was the
U.S. embargo trade with Iran instituted in 2010 to put pressure on Iran to not develop a nuclear bomb; it was not
imposed for economic reasons. That embargo led Iran in 2015 to negotiate limits on its nuclear activity in exchange for
lifting the trade sanctions.
Regulatory Trade Restrictions
Tariffs, quotas, and sanctions are the primarily direct methods to restrict international trade. These are also indirect
methods that restrict trade in not –so- obvious ways. These are called Regulatory Trade Restrictions (government-
imposed procedural rules that limit imports). One type of regulatory trade restriction has to do with protecting the
health and safety of a country’s residents.
A second type of regulatory restriction involves making import and customs procedures so intricate and time consuming
that importers simply give up.
Reasons for and Against Trade Restrictions
1. Unequal distributions of the gains in Trade
The cost to society of relaxing trade restrictions has led to a number of programs to assist those who are hurt. Such
programs are called trade adjustment assistance programs- programs designed to compensate losers for reductions in
trade restrictions.
2. Haggling by Companies over the Gains from Trade.
Many naturally advantageous bargains aren’t consummated because each side is pushing for a larger share of the gains
from trade than the other side thinks should be allotted. The sides that drives the hardest bargain gets the most gains
from the bargain, but it also risk making the deal fall through. Such strategic bargaining goes on all the time, Strategic
bargaining means demanding a larger share of the gains from trade than you can reasonably expect. If you’re successful,
you get the lion’s share; if you’re not successful, the deal falls apart and everyone is worse off.
3. Haggling by Countries over Trade Restrictions
Another type of trade bargaining that are often limits the trade is bargaining between countries. Trade restrictions and
the threat of trade restrictions play an important role in that kind of haggling. Sometimes countries must go through
with the trade restrictions that they really don’t want to impose, just to make their threats credible.
Strategic Trade Policies- threats to implement tariffs to bring about the reduction in tariffs or some concession from the
other country.
4. Specialized Productions
 Learning by Doing
Learning by doing means becoming better at a task the more often you perform it.
 Economies of Scale
In determining whether an inherent comparative advantage exist, a second complications is economic of scale – the
situation in which cost per unit of output fall as output increases
The most common expression of the learning-by-doing and economies –of-scale insights is the infant industry argument,
which is that with initial protection, an industry will be able to become competitive.
5. Macroeconomics Costs of Trade
The comparative advantage arguments for free trade assumes that a country’s resources are fully utilized. When
countries don’t have full employment, imports can decrease domestic aggregate demand and increase unemployment.
Exports can stimulate domestic aggregate demand and decrease unemployment. Thus, when an economy is in a
recession, there is strong macroeconomics reasons to limit imports and encourage exports.
6. National Security
a. Export restrictions on strategic materials and defense-related goods.

b. Imports restrictions on defense-related goods.
For example in war we don’t want to be dependent on oil from abroad.
7. International Politics
International Politics frequently provides another reason for trade restrictions make sense. Essentially, the argument is:
Trade helps you, so well hurt you by stopping trade until you do what we want. So what if it hurt us too? It’ll hurt you
more than it hurt us.
8. Increased Revenue Brought In by Tariffs
Tariffs remain a primary source of revenue for many developing countries. They’re relatively easy to collect and are paid
by people rich enough to afford imports. These countries justify many of their tariffs with the argument that they need
the revenues.
Why Economist Generally Oppose Trade Restrictions
 Free trade increases the total output

 International Trade Provides Competitions
 Restrictions Based on National Security are Often Abused or Evaded
 Trade Restrictions are Addictive
Economist really oppose trade restrictions because of the history of trade restrictions and their understanding of the
advantages of free trade
Institution Supporting Free Trade
 World Trade Organization (WTO)

 General Agreement on Tariffs and Trade (GATT)
Two important Trade Associations
 European Union (EU)

 North America Free Trade Associations (NAFTA)
WEEK 16 ACTIVITY
deadline.
TASK 1
1. What are the three reasons countries restrict trade? Explain, are they justified?
2. Name three reasons economist support free trade? Explain,
3. What is the relationship between GATT and the WTO?
4. Frederic Bastiat wrote, ’’When goods do not cross borders, soldiers will.” Discuss
__________________________END OF WEEK 16_________________________


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WEEK 17
MACRO POLICY IN A GLOBAL SETTING
Macroeconomic international goals are less straightforward than domestic goals. There is
general agreement about the domestic goals of macroeconomic policy: We want inflation, low
employment and high growth. There’s are far less agreement on what a country’s international goals
should be.
The Exchange Rate Goal
The U.S. exchange rate fluctuated significantly over the past years. There is a debate over whether a
country should have a high or a low exchange rate. A high exchange rate for the dollar makes foreign
currencies cheaper.
A low exchange rate has a opposite effect. It makes imports more expensive and exports cheaper
and can contribute to inflationary pressure. But, by encouraging exports and discouraging imports, it
can cause a balance of trade surplus and exert an expansionary effect on the economy.
International versus Domestic Goals

In the real world, when there’s debut about the goal is generally less likely to guide policy than goals
about which there’s general agreement. Since there’s general agreement about our country’s
domestic goals (low inflation, low employment and high economic growth), domestic goals generally
dominate the U.S. political agenda.
Even if a country’s international goals weren’t uncertain, domestic goals would likely dominate the
political agenda. The reason is that inflation, unemployment and growth), affect a country’s citizens.
Trade deficits and exchange rates affect them indirectly- and in politics, indirectly effects take a
backseat. However, as countries’ economies become more integrated, international issues intersect
more and more with domestic issues.
Balancing the Exchange Rate Goal with Domestic Goals

We talked about monetary and fiscal policy’s effect on the exchange rate. In it we saw that while fiscal
policy’s effect on exchange rates was ambiguous, monetary policy has a predictable effect:
Expansionary monetary policy tends to push the exchange rate down; contractionary monetary policy
tends to push the exchange rate up. What this means is that in principle, the government can control
the exchange rate with monetary policy. The problem with doing so is that monetary policy also
affects the domestic economy – contractionary monetary policy decreases income and jobs.
Contractionary monetary policy is not a policy that countries generally to follow.
Monetary and Fiscal Policy and the Trade Deficit

Monetary Policy’s Effect on the Trade Balance
When a country’s international trade balance is negative (a trade deficit), the country is importing
more than it is exporting. When a country’s international trade balance is positive (a trade surplus),
the country is exporting more than it is importing.
Monetary policy affects the trade balance primarily through its effect on income. Specifically,
expansionary monetary policy increase income. When income rises, imports rises, while exports are
unaffected. As imports rise, the trade balance shifts in the direction of deficit. So expansionary
monetary policy shifts the trade balance toward a deficit.
Contractionary monetary policy works in the opposite direction. It decreases income When income
falls, imports fall (while exports are unaffected), so the trade balance shifts in the direction of surplus.
Thus, expansionary monetary policy increases the trade deficit; contractionary monetary policy
decreases the trade deficit.
Monetary policy will also affect the trade balance in a variety of other ways – for example, through its
effect on the price level and the exchange rate. These other affects tend to be more long-run effects
and tend to offset one another. So we will not consider them here. While many complications can
enter the trade balance picture, most economist would summarize monetary policy’s short run effect
on the trade balance as follow:
Expansionary monetary policy makes a trade deficit larger.
Contractionary monetary policy makes a trade deficit smaller.
Expansionary Monetary Policy
Fiscal Policy’s Effect on the Trade Balance

Fiscal policy, like monetary policy, works on the trade deficit primarily through its effect on income.
(Again, there are other paths by which fiscal policy effects the trade deficit, but this one is the largest
since changes in income are quickly reflected in a change in imports) So if asked for a quick answer,
economist would say that contractionary fiscal policy decreases a trade deficit.
Summarizing the effects of expansionary and contractionary fiscal policy schematically, we have:
International Goals and Policy

The following table provides a summary of how alternative policy actions achieve international goals:
International Goal Policy Alternative
Lower exchange rate  Contractionary foreign monetary policy

 Expansionary domestic monetary policy
Lower trade deficit  Contractionary domestic fiscal policy
 Expansionary foreign fiscal policy
 Contractionary domestic monetary policy
 Expansionary foreign monetary policy
You can see in the table why coordination of monetary and fiscal policies is much in the news, since a
foreign country’s policy can eliminate, or reduce, the need for domestic policies to be undertaken.
International Monetary and Fiscal Coordination
As stated, unless force to do so because of international pressures, most countries don’t let
international goals guide their macroeconomics policy. But for every effect that monetary and fiscal
policies have on country’s exchange rates and trade balance, there’s an equal and opposite effect on
the combination of other countries exchange rates and trade balances. When one country’s exchange
rate goes up, by definition another exchange rate must go down. Similarly, when one country’s
balance of trade is in surplus, another’s must be in deficit. This interconnection means that other
countries’ fiscal and monetary policies affect the United States, while U.S. fiscal and monetary
policies affect other countries, so pressure to coordinate policies id considerable.
Coordination Is a Two-Way Street

Policy Coordination – the integration of a country’s policies to take account of their global effects –
of course, works both ways. If other countries are to take the U.S. economy needs into account. The
United States must take other countries needs into account in determining its goals. Say, for example,
the U.S. economy is going into a recession. This domestic problem calls for expansionary monetary
policy. But expansionary monetary policy will increase U.S. income and U.S. imports and lower the
value of the dollar. Say that, internationally, that the United States has agreed that it must work
toward eliminating the U.S. trade deficit in the short run. Does it forsake its domestic goals? Or does it
forsake its international commitment? If the economy is forced to address the trade deficit, it will have
no choice but to make the structural adjustments necessary to reduce the trade deficit and bring it into
balance.
International Issues and Macro Policy

First point is that the more globally connected a country is, the less flexibility it has with its monetary
and fiscal policy. Global issues restrict the use of monetary and fiscal policy to achieve domestic
goals. How much they do so, and the manner in which they do so, depend on the country’s exchange
rate regime.
Second point how fast a country must respond to international pressure depends on the exchange
rate regime it follows. If an economy sets fixed exchange rates, its monetary policy and fiscal policies
are much more restricted than they are with flexible exchange rate the reason is that is that the
amount of currency stabilization that can be achieved with direct intervention is generally small
country’s foreign reserves are limited.
Third point is that with flexible exchange rates, countries have more freedom with monetary and fiscal
policy, but then they have to accept whatever happens to their exchange rate, and there are often
strong political forces that do not want to do that.
Fourth point is that an alternative to using monetary and fiscal policy to guide the economy toward
meeting its international goals is trade policy designed to affect the level of exports and imports.
Specific use of tariffs and quotas is limited by international conventions, but indirect policies affect
imports and exports are used all the time.
Fifth point is that macro policy is short run policy, which must be conducted within a longer-range
setting of the country’s overall competitiveness – the ability of the country to sell it goods to other
countries.
Conclusion
It’s time to conclude the chapter and our consideration of Global Micro Policy. Both have been just
and introduction. You shouldn’t think of them as any more than that. In no way has the brief chapter
exhausted the international topics relevant to micro policy. But the chapter has, I hope, made you
better aware of the international dimensions of our economic goals- and of the problems that
international issues pose for macro policy and the book has made you aware of the central insights of
economics. That awareness is absolutely necessary if you are to understand the ongoing debates
about economics.
WEEK 17 ACTIVITY
deadline.
TASK 1
1. Is it better have a low or high exchange rate? Defend your answer
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2. Is it better to have a trade deficit or trade surplus? Defend your answer
________________________________________________________________________________
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3. Congratulations! You have been appointed as an adviser to (IMF) International Monetary Fund. A
country that has run trade deficits for many years now has difficulty servicing its accumulated
international debt and wants to borrow from the IMF to meet its obligations. The IMF requires that the
country set a target trade surplus.
a. What monetary and fiscal policies would you suggest the IMF require of that country?
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b. How do you think the country’s government will respond to your proposals? Why?
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END OF WEEK 17

MACROECONOMICS

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MACROECONOMICS

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SOUTH EAST ASIAN INSTITUTE OF TECHNOLOGY, INC.

COLLEGE OF TEACHER EDUCATION

COURSE CODE : SSE 202 TITLE : MACROECONOMICS

a. Demonstrate knowledge and understanding of the cause and effects of inflation,

The following are the topics to be discussed

Week 1 VISION, MISSION, CORE VALUES, CLASSROOM POLICIES, AND

Instruction to the Learners

A premier institution thatprovides quality education and globally

To produce competent, community-oriented and globally competitive

• Study of the behavior of large collections of economic agents.

WHAT MACROECONOMICS IS ABOUT?

1. LONG-RUN ECONOMIC GROWTH

2. BUSINESS CYCLES (Economic cycle or Boom-bust cycle)

• A concerted cycling upswings and downswings in the broad measures of economic

The number of unemployed

Unemployed rate= ___%

5. THE INTERNATIONAL ECONOMY

• The process of summing individual economic variables to obtain economy-wide totals.

THREE MAJOR CONCEPTS OF MACROECONOMICS

1. GROSS DOMESTIC PRODUCT

2. THE UNEMPLOYMENT RATE

WHAT ARE THE ISSUES ADDRESSED TO MACROECONOMICS?

1. What determines a nation’s long-run economic growth?

2. What causes a nation’s economic activity to fluctuate?

3. What causes unemployment?

4. What cause prices to rise?

5. How does being part of a global economic system affect nation’s

6. Can government policies be used to improve a nation’s economic

THE DIFFERENCE OF MACROECONOMICS TO MICROECONOMICS

1. Microeconomics versus Macroeconomics on Aggregation

• Macroeconomics seeks to find a general perspective, at a national level, while

MACROECONOMICS VERSUS MICROECONOMICS: THE OVERLAP

If the government raises the tax on a certain product (macroeconomics), an individual

2. A key distinction between micro- and macroeconomics is that macroeconomic

HOW MACROECONOMICS AND MICROECONOMICS AFFECT EACH OTHER?

• Macro’s effects on micro

• Micro’s effect on macro18

HOW MICRO-AND MACROECONOMICS AFFECT BUSINESS?

• The cost of goods and services

Fill out the Chart (30 points)

Questions Probable Answers

(15 points to accurate answer)

COLLEGE OF TEACHER EDUCATION

THE LAW OF DEMAND

THE DEMAND CURVE

In figure 1, the demand curve slopes downward. That’s

demanded goes down, other things constant. In other words,

Quantity demanded (per unit of time)

SHIFTS IN DEMAND VERSUS MOVEMENTS ALONG A DEMAND CURVE

(a) Movement along a Demand Curve (b) Shift in Demand

THE SUPPLY CURVE

In figure 3, the supply curve demonstrates graphically the law

Quantity supplied (per unit of time)

SHIFTSIN SUPPLY VERSUS MOVEMENTS ALONG A SUPPLY CURVE

A terminology allows us to distinguish changes in prices cause changes in quantity supplied:

• Changes represented by a movement along a supply curve (the graphical

55.70 In figure4-Shifts in Supply versus

SHIFT FACTORS OF SUPPLY