FPT UNIVERSITY- CAMPUS QUY NHON

GROUP ASSIGNMENT (ECO121)

TOPIC: MACROECONOMIC

Course: IB17C_SP2023_ECO121

Instructor: Nguyen Bich Thuong

GROUP 1

Name of group members Student ID Completion % Signature

Vo Thi Kim Chung QS170027 100

Truong Thi Quynh Nhu QS170151 100

Nguyen Thi Thi Dan QS170205 100

Trinh My Nhung QS170175 100

Tran My Nhung QS170166 100

Do Phi Hung QS170163 100

 Table of contents

I) Introduction ................................................................................

II) Closed economy ..........................................................................

1. What is Fed? .................................................................................

2. How does Fed influences money supply? ...................................

a. Fed control money supply .......................................................

b. Fed impact on price level .........................................................

c. GDP deflator ...........................................................................

d. CPI............................................................................................

III) Open economy .............................................................................

1. Net export, net capital outflow, real interest rate, real exchange
rate ................................................................................................

a. Budget deficit .........................................................................

b. Budget surplus ........................................................................

2. Aggregate demand .......................................................................

a. AD is downward sloping line ..................................................

b. AD curve shift ..........................................................................

3. Aggregate supply ..........................................................................

a. Long run aggregate supply

(LRAS)……………………………………………
 b. Short run aggregate supply ( SRAS) ......................................

4. The influence of Monetary and Fiscal Policy on aggregate

demand..........................................................................................

a. Monetary policy .......................................................................

b. Fiscal policy .............................................................................

IV) Conclusion ...................................................................................

I. Introduction
The main purpose of studying macroeconomics is to understand the
behavior and performance of the economy as a whole, including factors
such as economic growth, inflation, unemployment, and the role of
government policies, the government here is the Fed.
By studying macroeconomics, we gain a better understanding of how
economic factors interact and how they impact the overall health of the
economy. It is essential to make informed decisions and policies
regarding economic growth, monetary and fiscal policy, and
international trade.
II. Closed economy: The Fed controls the money supply to
impact economic growth and inflation
1. What is Fed?
- is the central banking system of the United States.
- was established in 1913
- responsible for conducting monetary policy, supervising and regulating
banks and other financial institutions, and maintaining the stability of the
financial system.
- plays an important role in the US economy and its policies have a
significant impact on interest rates, inflation and overall economic
growth.
=>> great influence in the regulation and control of the amount of
money in the economy. So the Fed controls the money supply like
money.
2. How does Fed influences money supply?
a. Fed control money supply?
_The Fed controls the money supply by many different methods,
depending on the actual situation, the Fed has timely and effective
methods.
- Open market operations:
- Buy government bonds on the open market from banks or people
+ It will inject cash into the banking system, increasing the amount of
reserves banks hold => increasing the money supply
- Sell government bonds on the open market to banks or people
+ It draws cash from the banking system, reducing the amount of
reserves that banks hold => decreasing the money supply
- The Fed lends to banks through the discount rate:
- By raising or lowering the discount rate, the Fed can encourage or
discourage banks from borrowing reserves and lending to businesses and
consumers
=> affecting the level of money in circulation.
+ The discount rate increases, the money supply will decrease.

+ The discount rate decreases, the money supply will increase.

- Reserve requirement:
Asset Liability + Equity
Reserve: 400 Demand Deposit: 3000

Loans: 2600

+ Banks must always reserve the minimum amount set by the Federal
Reserve.
+ Reserve requirements affect the amount of money the banking system
can create for each dollar of reserves.
+ Reserve requirements increase => banks must hold more reserves =>
can lend less per dollar deposited => an increase in reserve requirements
increases the reserve ratio, making decrease the money multiplier and
decrease the money supply.

+ Conversely, a decrease in the reserve requirement reduces the required

reserve ratio, increases the money multiplier, and increases the money
supply.
- Paying interest on reserves:
-The Fed will pay interest on the reserves.
=> When a bank holds deposit reserves at the Fed => Fed pays bank
interest on those deposits.
+ The higher the reserve interest rate => banks will choose to keep more
reserves.
+ The increase in reserve interest rate will tend to increase the reserve
requirement ratio, decrease the money multiplier => decrease the money
supply.
b. Fed impact on price level
The Fed has a significant impact on the price level through its control of
the money supply.
- By raising or lowering interest rates, the Fed can affect the demand for
goods and services => which in turn can affect the inflation rate.
+ The economy grows too fast, the Fed reduces the money supply by
raising interest rates.
=> causes consumers to borrow money to buy more expensive goods
and services.
=> Decreased demand for goods and services
=> Leads to lower prices and lower inflation.
When the economy is in recession, the Fed increases the money supply
by lowering interest rates.
=> Make consumers borrow money to buy cheaper goods and services.
=> The demand for goods and services increases => leading to an
increase in prices and an increase in inflation.
In addition, the Fed can pump money into the economy by buying some
government bonds from the public in open market operations.
=> increases the money supply.
+ When the money supply increases => increases the price level, reduces
the value of money
=> Increase inflation and vice versa.
c. GDP deflator
- A measure of the price level of all goods and services included in gross
domestic product (GDP).
- The inflation rate, which measures the rate at which the prices of
goods and services increase, can affect the GDP deflator.
- When there is inflation, the GDP deflator will increase because the
same quantity of goods and services will cost more as their prices
increase.
- When there is deflation, the GDP deflator will decrease because the
same quantity of goods and services will have lower prices. => The
inflation rate has an impact on the GDP deflator
=> Is an important economic indicator used to measure changes in the
general price level of an economy.
d. CPI
- Inflation rate has a significant impact on CPI.
CPI is a measure of the average change over time in the prices paid by
urban consumers for a basket of goods and services.
- When the inflation rate increases, the prices of goods and services
included in the CPI also increase => increase the overall CPI.
When the inflation rate decreases, the prices of goods and services
included in the CPI also decrease => decrease the overall CPI.
=>>The Fed's control of the money supply and interest rates can affect
the inflation rate, which in turn can affect CPI and consumer purchasing
power.
From there, make informed decisions and policies related to economic
growth, monetary and fiscal policy as well as international trade.
Foreign trade will make countries more profitable for the economy.

III. Open economy

1. The mutual influence of net export, net capital outflow, real

interest rate, real exchange rate
a. Budget decifit

When budget decifit -> saving decrease -> Supply curve shift left
(loanable funds) -> interest rate increase -> Net capital outflow
decrease -> supply curve shift left (foreign-current exchange
market) -> real exchange rate increase -> Net exports decrease.
b. Budget surplus

When budget surplus -> saving increase -> Supply curve shift right
(loanable funds) -> real interest rate decrease -> Net capital
outflow increase -> supply curve shift right (foreign-current
exchange market) -> real exchange rate increase -> Net exports
increase.

 Policy affects net exports and the exchange rate

- Investment incentives -> the demand curve of the capital
market shifts to the right -> the real interest rate will increase ->
the NCO will decrease and shift to the left -> causing the
Exchange rate to increase -> leading to a decrease in Net
exports.
 - Import quota: Does not affect saving and investment, so the
NCO remains unchanged. When importing quota, imorts will
decrease, net exports will increase causing demand to shift to
the right and exchange rate will increase
 Real interest rate ( in the market for loanable fund )
- When interest rate rise -> Saving will increase -> Investment and
Net capital outflow will decrease
- When interest rate fall -> Saving will decrease -> Investment and
Net capital outflow will increase
 Real exchange rate ( in the foreign curency exchange
market )
In the open economy: net exports equal net capital outflow
(NX=NCO)
- When real exchange rate rise -> net exports will decrease
- When real exchange rate fall -> net exports will increase
- Real exchange rate not effect to Net capital outflow
  Connection: NCO is part of the demand for loanable funds.
It provides the supply of dollar for foreign-curency exchange.
( real interest rate increase, NCO decrease, Real exchange
rate increase ). NX and I also have demand of loandable
fund.
 NX and I also influence aggregate demand

2. Aggregate Demand
- The AD curve shows the quantity of all g&s demanded in the
economy at any given price level.
a. AD is a downward sloping line

Because it is influenced by the factors:

We have: Y = C + I + G + NX
 Wealth effect ( P and C ): When the price level falls, the value of
money will increase, leading to people getting wealthier,
increasing consumption, leading to an increase in quantity
demanded of goods and services.
 Interest rate effect ( P and I ): When prices fall, the value of
money will increase, people will save more by buying stocks and
bonds. An increase in saving will decrease the interest rate and
increase investment, leading to an increase in quantity demanded
of goods and services.
  The exchange rate effect ( P and NX ): when prices level fall,
interest rates will decrease, leading to an increase in Net capital
outflow and exchange rate will decrease, leading to an increase in
net exports và increasing Y.

b. The AD curve shifts as factors such as consumption,

investment, government, net exports change.
Using AD & AS to depict long-run growth & inflation
In the long run, technological progress shifts LRAS to the right
and money supply growth shifts AD to the right.
 The result: persistent inflation and output growth.

3. Aggregate Supply
- The AS curve shows the total quantity of goods and services firms
produce and sell at any given price level.
a. Long run aggregate suplly: the AS curve is not affected by
the price level, it is only affected by the following factors:
labor, capital, Human knowledge, Natural resources,
Technology.
 b. Short run aggregate supply:
In the short run, the AS curve slopes up. As the general price
level rises, so does the level of output supplied by firms. And
it will be influenced by theories like:
1. Sticky wage theory: if P > PE ( nominal wage ), revenue will
be higher, from there, they want to produce more for higher
profit. ( P increase, Y increase )
2. Sticky price theory: When business A without menu cost, then
they will not increase the price of products, but if business B
with menu cost, their product price will be higher. Customers
will buy the products of business A, from which business A will
want to produce more to serve customers.
3. Misperceptions theory: Firms may confuse changes in P with
changes in the relative prices of the products they sell. If P
increases above PE, they will see the relative prices of products
rising and possibly increase output and employment. Therefore,
as an increase in P leads to an increase in Y, the SRAS curve
slopes upward.
 - The short-run AS curve shifts when the factors: labor capital,
human knowledge, natural resource, technology, price (PE) change

 Connection:
When the economy is in equilibrium Y no tendency for price of output
to change.
AD increase, AS unchange, leading to increase output. AD decrease, AS
unchange, leading to decrease output.
AS increase, AD unchange, leading to increase Y, decrease P. AS
decrease, AD unchange, leading to decrease Y, increase P.
Example : Increase oil price
1.Increases costs, shifts SRAS
2.SRAS shifts left
3.SR equilibrium at point B. P higher, Y lower, unemployment
higher
From A to B, stagflation, period of falling output and rising prices.
4. Low employment causes wages to fall, SRAS shifts right, until
LR equilibrium at A.
Or, policymakers could use fiscal or monetary policy to increase AD
and accommodate the AS shift:
Y back to YN, but P permanently higher.

4. The influence of Monetary and Fiscal Policy on aggregate

demand
a. Monetary Policy
- When the Feds increase the money supply, the real interest rate
will decrease, causing the money demand to increase.
- When the Feds decrease the money supply, the real interest rate
will increase, reducing the money demand.
Example: oil price increases
AS will shift left, output will decrease ( YN to Y2 )
 To stabilize production, the Fed will use a monetary supply
adjustment policy. Fed will increase money supply, interest rate
will decrease, money demand will increase and AD shift right.

Result: Y back to YN, but P permanently higher.

b. Fiscal Policy impact Government purchase and tax

- Government purchase ( $2 increase in G initially shifts AD to

the right by $2b.)
+ The mutiplier effect
When the government increases purchases of goods and services,
increasing income stimulates additional spending by consumers causing
a multiplier effect
The increase in Y causes C to rise, which shifts AD further to the right.
 + The crowding-out effect

G increases by 2 billion, then AD1 –AD2, making Y increase Y2

As the government increases purchases of goods and services, the
resulting increase in income increases the demand for money from MD1
to MD2, and this causes the equilibrium interest rate to rise from r1 to
r2.
Since interest rates are rising, an increase in interest rates tends to
decrease the quantity of goods and services demanded, especially for
investment goods. (I decrease), Y decrease AD2 –AD3
- Tax
+ When the government cuts personal income such as taxes, it increases
the take-home wages of households. Households will save part of this
additional income, but they will also spend some on consumables.
Because it increases consumer spending, a tax cut shifts the aggregate
demand curve to the right.
+ An increase in taxes reduces consumer demand and shifts the
aggregate demand curve to the left.
+ As the government cuts taxes and stimulates consumer spending,
incomes and profits increase, which further stimulates consumer
spending. This is the multiplier effect.
+ At the same time, higher income leads to a higher demand for money,
which tends to increase interest rates. Higher interest rates make
borrowing more expensive, reducing investment spending. This is the
crowding-out effect.
IV. Conclusion
With the real economic situation, the government will make
appropriate policies and the central bank will make appropriate
decisions to help the economy develop and reduce inflation.