# Essentials of Macroeconomics

Prices and inflationPrices and price levelPrice levelPrice level and timePrice indexConsumer Price Index, CPIProblems with CPIInflationDefinitionInflation in GermanyInflation in SwedenExchange rateDefinitionExchange rate systemsChanges in the exchange rateThe euro against the US dollarEffective exchange rateGross domestic productDefinitionReal GDPGrowthPurchasing powerGDP is a flow!The components of GDPThe circular flow - simple versionThe circular flow - a more detailed versionModeling a firm and the concept value addedFirms in the circular flowCircular flow - circulation of goodsCircular flow - circulation of moneyPrivate sector in the circular flowThe Government, Rest of the World and the financial marketsComponents of GDPFour different measures of GDPCapitalInvestmentComponents of GDP in numbers 200xThe Labor MarketIntroductionUnemployment classificationFull employmentWagesNominal wagesWages and incomeNominal wage levelReal wageMoney and banksMoneyMoney, definitionTwo types of moneyWhat is money and what is not moneyMoney, wealth and incomeEconomic functions of moneyCentral banks IntroductionMonetary baseCommercial banksCurrency inside banks is not moneyHow commercial banks "create money"How much money can banks create?The multiplier effectInterest rateIntroductionMarket interest ratesRelationship between the interest rate and the bond priceCalculating interest rates on a yearly basisThe yield curveOther interest ratesOvernight interest ratesThe market for overnight loansCentral bank overnight interest rateMonetary policyCentral bank and monetary policyMonetary base and the supply of moneyOvernight interest rates targets and money supplyOvernight rates and interest rates with longer maturityOvernight target rates and inflationThe real interest rateInterest rates and inflationNominal and real interest ratesExpected inflationRelation between nominal interest rate, real interest rate and inflationMacroeconomic modelsIntroductionCommon assumptionsUnemployment and hours worked are directly relatedThe central bank has complete control over money supplyMonetary policy = change in money supplyThere is just one interest rateExchange rateCapital FlowsThe macroeconomic variablesSupply and demandAbout the various modelsGrowth theoryIntroductionThe aggregate production functionDefinitionThe marginal product of labor and capitalProduction function and GrowthGrowth TheoriesThe classical growth theoryThe neo-classical growth modelEndogenous growth theorySeparation of growth and fluctuationThe classical modelIntroductionLabor MarketDemand for laborThe supply of laborEquilibrium in the labor marketGDP, and Say’s Law Aggregate supplyAggregate demand and Say’s LawHow not to justify Say’s LawThe price level and the quantity theory of moneyThe quantity theory of moneyThe price levelAggregate demandNominal wagesInterest rate, consumption and investmentThe consumption functionInvestment demandGovernment revenue, government spending and net exportsHousehold savingsTotal savingsInterest rate determinationConsumptionDetermination of all the variables in the classical modelKeynesian cross modelIntroductionThe Keynesian modelSummary of the cross modelAggregate demandThe consumption functionConsumption and GDPThe rest of the world in the cross modelThe government in the cross modelSavingsAggregate demand in the cross modelDetermination of GDP in the cross model Main resultJustificationSay’s LawReversed Say’s LawDetermination of other variablesLabor marketLabor supply and labor demand in the Keynesian modelThe labor in the cross modelAggregate supplyDetermination of L in the cross modelEquilibrium analysisIS-LM-modelIntroductionAggregate demandThe investment function in the IS-LM modelThe consumption function in the IS-LM modelAggregate demandThe money marketDemand for moneyDemand for money and the interest rateDemand for money and GDPSupply of moneyEquilibrium in the money marketMoney market diagramIS-LM diagramIS-curveThe LM curveSimultaneous determination of Y and R in the IS-LM modelThe Labor MarketThe AS-AD-modelIntroductionThe problem with the IS-LM modelHow the AS-AD model solves the problemThe assumptions of the AS-AD modelSummaryThe AS-AD model and inflationThe goods and the money market in the AS-AD modelThe goods market and aggregate demandThe money marketThe money market and price changesThe IS-curve in the AS-AD modelThe LM-curve in the AS-AD modelEquilibrium in both the goods and in the money marketThe AD curveThe AD curve is the aggregate demandAggregate supplyThe Labor MarketAggregate supply and the AS curveDetermination of all the endogenous variables in the AS-AD modelDetermination of P and YDetermination of other variablesThe equations of the AS-AD modelThe complete Keynesian modelIntroductionWage inflationPrice InflationAdjustments to the Keynesian models when wages are no longer constantReal interest rates, nominal interest rate and expected inflationAggregate demand with inflationThe IS curve with inflationThe money market with inflationThe LM curve with inflationThe IS-LM model with inflationThe basic assumptionResultsThe AS-AD model with inflationThe AD-curve at a given point in timeThe AD curve over timeThe Labor MarketThe AS curveThe AS-AD model with inflationThe Phillips curveThe problem with the Keynesian modelThe Phillips curveDetermination of all endogenous variablesThe neo-classical synthesisIntroductionThe various Phillips curvesThe augmented Phillips curveMoney illusionThe long-run Phillips curveSummary of the Phillips curvesThe classical model and the long-term Phillips curveDevelopments around 1960From short to long runThe dynamics from the short to the long runNAIRUSAS-LAS-AD model of the neo-classical synthesisAS-AD in the Keynesian and the classical modelSAS, LAS, and ADThe dynamics from the short to the long runExchange rate determination and the Mundell-Fleming modelIntroductionThe open economyThe rest of the world as one countryExchange rate systemsThe classical model of exchange rate determinationThe law of one pricePPPThe Big Mac IndexExchange rate determinationInflationDifferences in inflation under fixed exchange ratesDifferences in inflation under flexible exchange ratesThe exchange rateTrade and tourismCapital flowsTrade and exchange rateInvestment and the exchange rateSupply and demand for the foreign currencyFactors affecting E*Mundell-Fleming modelInterest rates within in the same currency areaInterest rates between currency areasExpected depreciationInterest rate parityModeling expected depreciationThe IS-LM model under fixed exchange ratesThe IS-LM model with flexible exchange rates