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11-02 Notes - TODAY’S MENU Monday 02 November 2009 l...

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Unformatted text preview: TODAY’S MENU: Monday 02 November 2009 l. BUSINESS A. Practice Problems 1. Chapter25: 3~7,911,13,15,16,18, 19 B. Third exam: One week from today 3rd exam. You know the drill by now. The lab this week [S the hardest' In the series for this exam. Plan on attending. ll. SUBSTANCE A. Economic Growth and GDP a. Chapter 23 deals with Economic growth and GDP b. Economic recession occurs when the economy grows below its normal growth levei. Technical economic recession occurs when there are 2 consecutive quarters of negative economic growth. 0. Beat economic growth: Nominal Economic Growth— rate of inflation d Rate of inflation' IS the change In the aggregate price 1. Neminai growth, Real growth and the Inflation rate if nominal growth > real growth, then inflation rate > 0 (aggregate prices are agoing up) b. If nominal growth < reai growth, then inflation rate < 0 (aggregate prices are going down) c. illustration—Magnitude matters B. Aggregate Demand .. see graph A 1. Expenditure approach, national income accounting Aggregate demand is similar to the demand we learned about in microeconomics, except it is the demand for every good and service in the entire economy. Because you cannot compare apples and oranges, it is not measured in units, but in market vaiues (or dollars per unit). On the graphs y (which represents GDP) replaces Q as the unit of measure. Simiiariy, P on the graphs represent aggregate price (as opposed to the price of a given good or service). 2. On the graph. lf GDP is increasing, unemployment is decreasing (expansion). lf GDP is decreasing, unemployment is increasing (contraction or recession). if Aggregate price is increasing it is inflationary. if Aggregate price is decreasing, it is defiationary. Aggregate Supply (AS) is aggregate selling. Aggregate Demand (AD) is aggregate buying. a. Foundation ? ‘ i. y=C+|+G+X——|My=realGDP ii. C = Consumption .ng iii. i= Investment (”’7‘ 1 iv. G = Government spending v. X = Exports vi. ]M = imports .. wwwfi ”m.“ um? (‘3 £91 {- f/‘f-un 3 #13:», g,» (“m—I new?“ .. _,7 ., a,..,._.,,m “j ifmjlau Demand should be perfectly inelastic as a dollar earned is a dollar spent in the aggregate. Think of it this way, if there was a 50% decrease in prices, that would include the price of labor, so there would be a 50% decrease in income — resulting in no change. But that is not what happens. If the aggregate price goes down, GDP increases. Why? Rea] wealth effect, Interest effect and exchange rate effect. b. Determinants of quantity of real GDP demanded i. Real wealth effect — decrease in aggregate price does not impact the money supply (M5), the number of dollars out there stays constant ~>lV|S / LP but real value increases, you can buy more with the money that you do have. Note it is not real income that is affected but rather real wealth. So if there is a decrease in aggregate prices, there is an increase in real wealth. This increases real C in the equation above. ' ii. interest rate effect — if there is a decrease in aggregate price, there is a decrease in nominal interest rates (lP -> ii) since interest rates go down, borrowing is cheaper, so you can borrow more (called the Fisher effect). This particularly affects big ticket items. This increases real | in the equation above iii. Exchange rate effect — if (P -> ii that adversely affects the US $ (US dollar depreciates). That has 2 effects — each US dollar will purchase less, so the US imports less, and foreign money is worth more, so foreigners buy more US goods and services which increases exports c. Determinants of aggregate demand — Know these 5 things that can cause aggregate demand to change (shift to the right or shift to the left) i. Monetary policy — This is policy controlled by the Fed or Federal Reserve or Central Bank of the US (ail same entity). They control changes in the monetary supply (they can increase or decrease it) and they control changes in interest rates (they can raise or lower them). or. Expansionary (+) - these policies increase aggregate demand (shift right) by either increasing the money supply (TMS) or lowering the interest rates (ii). make more money available, can buy more. Reduce interest rates makes borrowing cheaper, will borrow more and buy more (especially big ticket items) [3. Contractionary (-) -~ these things decrease aggregate demand (shift left) by either decreasing the money supply (ill/l5) or raising interest rates (Ti). Reduce the money supply, can buy fewer things. Raise interest rates, borrowing is more expensive so borrow less and buy less (particularly big ticket items) ii. Fiscal policy — this is policy controlled by any government (federal, state or local). It is independent of the Federal Reserve. a. Government spending (+) - if government spending is increased, aggregate demand increases (raise the G in the equation above). if government spending is decreased, aggregate demand decreases (lower the G in the equation above) (3. Taxes (~) — if governments raise taxes, aggregate demand decreases (less money to buy with — affects C in the equation above). If- governments lower taxes, aggregate demand increases (more money to buy with as your net income increases — also affects C in the equation above). An expansionary fiscal policy would increase spending and lower taxes — result in an increase in aggregate demand. A contractionary fiscai policy would decrease spending and raise taxes ~— resuiting in a decrease in aggregate deman. iii. Expectations a. Consumer confidence — if consumer confidence increases — aggregate demand will increase (buy more) if consumer confidence decreases wili buy less and aggregate demand wili decrease [3. Business confidence — if business confidence increases will be willing to produce more (which means they have to purchase more inputs and aggregate demand wiil increase). if business confidence decreases, aggregate demand will also decrease iv. Foreign economic growth (+) — if foreign income goes up, they have more money to buy US goods and services so we export more and aggregate demand goes up. if foreign income goes down, they have less money to buy US goods and services, so we export less and aggregate demand goes down. v. Exchange rate change (-) C. Aggregate Supply 1. Short run (SRAS) vs. Long run (LRAS) a. Determinant of quantity of real GDP supplied i. Short run ii. Long run b. Determinants of SRAS i. Labor costs (wage push) (-) ii. Other input costs (supply shocks) (-) iii. Productivity (+) iv. Expected future aggregate price level (-) Ill. NEXT TIME A. Finish Chapter 25: "Aggregate Demand...” ...
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11-02 Notes - TODAY’S MENU Monday 02 November 2009 l...

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