11-04 Notes

11-04 Notes - TODAY’S MENU: Wednesday 04 November 2009 l....

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: TODAY’S MENU: Wednesday 04 November 2009 l. BUSINESS A. Practice Problems 1. Chapter 25: 3—7, 9-11, 13,15, 16, 18, 19 B. Third exam: Next time — on chapters 22, 23 and 25. 25 muitiple choice questions, 50 minutes. Bring pencil, eraser, highlighter, small scantron, LSU picture id. Friday is the last day to drop. ll. SUBSTANCE A. Aggregate Demand — covered this iast time. We are iooking for a model to expiain changes in real GDP, changes in unemployment rates (move countercylically) and changes in the inflation rate (% change in aggregate price level). The nice thing is that this is very similar to demand that we have already iearned in chapter 4. 1. Expenditure approach, national income accounting a. Determinants of aggregate demand — What causes aggregate demand to change? A shift to the right is an increase in aggregate demand and a shift to the left is a decrease in aggregate demand i. Monetary policy — Feds took at Monday’s notes ii. Fiscal poiicy — any government -~ look at Monday's notes iii. Expectations ~— consumers and businesses (expectations or confidence) — look at Monday’s notes iv. Foreign economic growth (+) —~ directly related, so if foreign economic growth increases, they have more money to spend and they wili buy more US goods and services, so our exports will increase and aggregate demand will increase. if foreign economic growth declines, they wili have less money to spend and they wiii buy fewer US goods and services, so our exports will decrease and our aggregate demand wili decrease v. Exchange rate change (-) — indirectly related. if our exchange rate increases, it means that the value of the US dollar increases and our goods and services are more expensive and our money buys more, so our exports will decrease, and our imports will increase. The resuit wiii be a decrease in aggregate demand. If our exchange rate decreases, the value of the US dollar decreases, our goods and services are more expensive and our money buys less, so our exports wiil increase and our imports will decrease. The result is an increase in aggregate demand. B. Aggregate Supply 1. Short run (SRAS) vs. Long run (LRAS) — in the short run, aggregate supply behaves very much like supply that we learned about in chapter 4. The key here is also profitability. lf profitability increases, suppiiers wili want to suppiy more and aggregate short term supply wili increase. If profitability decreases, suppliers wili want to supply tees, and aggregate shortterm supply will decrease. in the tong run, aggregate supply is totally ineiastic (a dollar earned is a dollar spent) so it is a straight line (more about that later) a. Determinant of quantity of real GDP supplied E. Short run ii. Long run — in the long run, a $ spent is a $ earned so in the long run, there is no incentive to change and the Long run Aggregate Supply is perfectly inelastic, which is a straight vertical line. The y intercept for LRAS is labeled yF which is the GDP at full-employment. What does that mean? At futl~employment, there is no cyclical unemployment — for every person looking for a job, there is an employer that wants to hire. At full-employment, the labor market is in equilibrium. b. Determinants of SRAS — goes up or increases means shift right, goes down or decreases means shift ieft. i. Labor costs (wage push) (-) — if labor costs go up, profitability goes down, seilers want to sell less, SRAS goes down. If labor costs go down, profitability goes up, setters want to sell more, SRAS goes up. ii. Other input costs (supply shocks) (-) — these are the same with other input costs to supply (cost of goods, transportation, etc). They have the same effect as labor costs. 80 if other input costs (or suppiy shocks) increase, profitability decreases, seilers want to sail less, SRAS goes down. if other inputs costs to supply decrease, profitability increases, sellers want to sell more, SRAS goes up. iii. Productivity (+) — productivity is output per worker per hour. if productivity goes up, profitability goes up (make more for the same price), sellers want to sell more, SRAS goes up. if productivity goes down, profitability goes down, sellers want to sell less, SRAS goes down. iv. Expected future aggregate price level (~) — if sellers expect the future aggregate price ievels to go up, that means that they can sell for a higher profit in the future, so they will want to sell less in the short run, and SRAS goes down. if sellers expect the future aggregate price levels to go down, that means that they can sell for a higher profit now (tower profit in the future), so sellers wiil want to seil more now, which means that SRAS goes up. C. Equilibrium 1. Short run: AD = SRAS —~ where these two curves intersect. Note that all 3 of these cases can exist in the short run, but case 1 and case 2 are not sustainable. Case 3 is the same as the long run. a. Case 1: Recession — see graph A. Point A (where AD = SRAS) is the equilibrium point in the short run. You can see that y* is lower than yF That means there is a gap between A and LRAS — called a recessionary gap in this case (it is to the left of LRAS). This means we are not at full employment, we have cyclical unemployment, and there is a surplus in the labor market in the short run. b. Case 2: Expansion —— see graph B. Here Point A (where AD = SRAS) is the equilibrium point in the short run. You can see that y* is greater than yF That means that there is a gap between A and LRAS — called an expansionary or inflationary gap in this case (it is to the right of LRAS). This means that there is no cyclical unemployment, very little structural and very little frictional unemployment. There is a shortage in the tabor market in the short run. c. Case 3: Fuil employment — this is at equilibrium where AD=SRAS=LRAS. There is no incentive to move in any direction. 2. Long run: AD = SRAS = LRAS 3. From short run to long run a. Self-Correcting Mechanism (SClVi): A iabor market story — this is the way that the macroeconomy moves from Case 1 or Case 2 to the equilibrium point (Case 3). It means that the macro economy will change on its own with no outside interference. The macro economy wiii eventually self-correct, but it may take a very long time. How does it work? See graph C. At point A, there is a recessionary gap. There is a labor surplus that means that there is a driving force to decrease wages and decrease labor costs. This decrease in wages and labor costs, creates an increase in profitability which makes sellers want to self more. So the SRAS curve moves to the right to compensate until it reaches full- employment. Notice that while the GDP returns to where it started (fuil~ employment level), the aggregate price is permanently lower. See graph D for the opposite case, the expansionary gap here there is a shortage in the labor market as the macro economy is operating at higher than fun-employment leveis. The result is that there is increased pressure to drive wages and the costs of iabor up, profitability goes down, sellers want to sell less, until the macro economy returns to the fuil empioyment level. Notice that while GDP returns to where it started (full— empioyment level), the aggregate price is permanently higher. D. Aggregate Suppiy and Demand: Examples 1. Six questions to answer in each scenario — you want to create a 2x3 matrix and answer ali 6 questions. The matrix should look at what happens to GDP (so what is the change in y), what happens to unemployment (so what is the change in u - note this is always opposite to GDP), and what happens to the aggregate price. You need to answer these 3 questions in both the short run and in the iong run. 2. Examples - we will review this in lab, but he did one example in class. Start at full—employment. Now imagine Government Spending decreases. — who does it affect? (buyers). How does it affect them? (shifts aggregate demand to the left). What is the impact on the 3 in the short run? This is fiscal policy. So GDP (y) will decrease, unemployment will increase, aggregate price will decrease in the short run. in the long run, GDP will not change (go back to full empioyment), unemployment will not change. If unempioyment increases that creates a labor surplus. in the long run the self-correcting mechanism responds to a labor surplus by shifting SRAS to the right, and the aggregate price will also decrease in the long run. “Shadinmh. '7 and run r J with _ W at) J at f 'w 4. t III. NEXT TIME A. Third Exam over Chapters 22, 23, and 25 -‘ (NW C (’5 5 ‘ (Man (i: i F: I‘m BMW‘!‘ M ‘1 it L J l - ‘ LW 6?V,ll-}9/H/I41 . sgm ‘5 5th g {.1 c 130!“ Lea/‘00:” Wake," My)le Slaw; (Mn gr “Jibm‘wm Ora?“ C, M Wing”; kappa” “A LWES 0M Mah‘kkezrtls 0; (‘C 02,35 {mar/m1 5C9? V‘; F Asked (w ‘7' 7 ‘ Gnu/Jugs xtrl/ Lou-£34; 4‘? (49439: 03 Lt?va Imr/IcL-‘r surf)ng d LcJav-r cos 5&5 M) m .m Sfdfls a Mafia 1 AD \3cm:m\’6 N'O Ghana; N0 bin a”? Via ,0... |lrx Ly) “HA to“ M w wMA/‘L h an efipfimbfi’wa Whg C: Lfv‘bmr She/(leg? — M Lochgu & LCvificVCOS‘s‘f ¥ 6 F 4,9; Sam (cbmfgx L44) \V\ saw-£2 LMS a A!) W ‘ ‘ 54/3 B V Lam MA I A,» W M NO an N73 in M Lumfaml’) bus T)? (aégwjfeltfnltfil‘) ...
View Full Document

Page1 / 5

11-04 Notes - TODAY’S MENU: Wednesday 04 November 2009 l....

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online