Chapter10Summary

Chapter10Summary - Chapter 10 Summary Tucker Macroeconomics...

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Chapter 10 Summary Tucker , Macroeconomics for Today , 5th Edn 1. The Keynesian aggregate expenditures model presented in Chapters 8 and 9 permits an analysis of unemployment (with no inflation) or of inflation (with no unemployment). The former is represented by the concept of the recessionary gap, and the latter is represented by the concept of the inflationary gap. As noted previously (instructor commentary, chapter 9), the AE model is not capable of analyzing the occurrence of both unemployment and inflation when they occur at the same time. This short-coming of the traditional Keynesian model is explored in more detail in Chapter 10, with an emphasis on aggregate demand (AD) and aggregate supply (AS) schedules. 2. In Chapter 10 the framework of analysis is modified to explicitly permit consideration of the price level as well as the level of real GDP. In fact, in this model the price level and the level of real GDP are determined simultaneously by the intersection of the AD (aggregate demand) and AS (aggregate supply) schedules. 3. The AD schedule indicates the amount of total expenditures on real GDP that would occur at different overall domestic price levels, all other things equal. I presented three reasons in class why the total of expenditures by households, business, government and the rest-of-the-world would increase as the price level falls (that is, why the AD schedule is a downward sloping function with respect to the overall price level). These three reasons are: (a) the real balances (wealth) effect; (b) the interest rate effect; and (c) the foreign trade effect. 4. An increase (decrease) in the price level, all other things equal, will cause the real value of that part of household wealth dominated in nominal terms (e.g., checking accounts, savings accounts) to decline (increase). This decline (increase) would be expected to reduce (increase) consumption expenditures (the consumption line shifts down (up) and the savings line shifts up (down) by an equal amount). Hence, household consumption expenditures would be expected to decline (increase) as the price level increases (decreases). 5. An increase in the price level, all other things equal, will cause financial institutions to increase interest rates to protect them from the reduced purchasing power of the interest payments actual made on loans over time. If banks expect a "real" rate of interest of 5%, and the price level rises by 3%, then the nominal
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This note was uploaded on 04/02/2008 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

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Chapter10Summary - Chapter 10 Summary Tucker Macroeconomics...

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