7. Consumer Prices 1800 - 2000 price level 1800 1860 1910 1940 1970 2000

10. Value Added = Sales - Cost of Purchased Materials Cotton $5 5-0 = 5 Shirt-Wholesale 15 15-5 = 10 Shirt-Retail 30 30-15 = 15 30 Sales Value Added

11. Nominal GDP, Real GDP & the GDP Deflator Nominal (Y) = ( P 2005 x Q 2005 ) - (P 2005 x Q 2005 ) [sales] [materials] Real (y) = (P 1997 x Q 2005 ) - (P 1997 x Q 2005 ) GDP Deflator = Nominal GDP/Real GDP Base Year? Chain-Weighted Real GDP

26. MPN N Rule: Proceed as long as MR > MC Here: MR = P x MPN MC = W N VMP = P x MPN W 0 N D STOP View of Employment (N)

27. What if W Changes? W, VMP N W 0 W 0 ’ N D N D ’ VMP

30. Labor Market Equilibrium W N N S N D (P x MPN) W E N E Full Employment?

31. Overall Equilibrium for y, N y N W N y N S N D y E N E

35. Consumer Prices 1800 - 2000 price level 1800 1860 1910 1940 1970 2000

36. Classical View of y d P y y d Monetary vs. Nonmonetary Factors

37. The Classical Theory of Interest Rates R NPS, I E R E NPS Key Factors: 1) Net Private Saving 2) Gross Investment I

39. The Impact of the Government’s Budget R R B R A A B S (NPS) D (I + PSBR) I LF I A I B

40. Budget Surplus NPS S (NPS + SURPLUS ) R I R A R B A B LF I A I B

45. Simple Keynesian Multipliers: No Crowding Out k E = 1/1-b k T = -b/1-b k BB = 1 Closing the GDP Gap

46. Housing Bubble 1975 1995 2005 HOUSING CONSUMER GOODS

47. Keynesian y s Curve P y y d y d’ y s A B y A y B =y p P

49. Classical, but with W = W P y y s P 0 P 1 y 0 y 1

50. The Liquidity Preference Theory of Interest Rates R M M S M D = L(R,Y) R E E Note Bond Market and LF

51. The Federal Reserve: June 2004 R M M D M S M S’ E E’ 1.00% 1.25%

54. Keynesian y s Curve P y y d y d’ y s A B y A y B =y p P

55. Classical, but with W = W P y y s P 0 P 1 y 0 y 1

57. Restrictive Monetary Policy y D y D’ y S SR y S’ SR y S LR P y A B C

58. Stimulative Monetary Policy P y y D y D’ y S SR y S’ SR y S LR A B C

61. The Phillips Curve

62. Phillips Meets Friedman PC SR U P The Natural Rate of Unemployment PC LR Why Increased Inflation Can Only Temporarily Reduce Unemployment . A B C

63. Phillips Curve Movements

67. Austrian Business Cycle Theory R NPS, I NPS NPS +  M S I I 0 I 1 Natural Market PV & Duration; Misdirection E E’

68. A Metaphor: Pour in Honey P K P C

69. Share Prices: Japan vs. US CPI-Japan

71. Housing Price Bubble? 1975 1995 2005 HOUSING CONSUMER GOODS

76. Flexible ER, Trade Deficit , BP = 0 foreign currency/$ $ Q (Q + CO ) (S) E ER E X (X + CI ) (D) (X-Q)<0 ER (X-Q=0)

77. Flexible ER, Trade Surplus, BP=0 X (X + CI) (D) foreign currency/¥ E ER E Q (Q + CO ) (S) ER (X-Q)=0 ¥