11.17.08 - ECONOMICS 1 Professor Kenneth Train 11/17/08...

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ECONOMICS 1 Professor Kenneth Train 11/17/08 Lecture 23 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS 2 nd Midterm is this Wednesday, November 19 in Wheeler Auditorium during class time. Today’s lecture will not be on the midterm. When you come in for the midterm on Wednesday, fill in all the seats, don’t leave any empty. Any questions about the midterm? LECTURE Prices Okay, first a disclaimer. This is called aggregate demand and supply, and it’s the worst case of language use that Economics has. It has nothing to do with demand and supply. If you think about it as demand and supply it can mess you up in certain ways. Unfortunately, the name has stuck, but I’ll explain to you why it’s not involved in this system. Dynamics: Two Levels of Price Causation What happens is we have causation going in two different directions for different reasons. Equilibrium occurs when countervailing forces balance each other. Causation 1: Price Changes Price changes cause aggregate output level to change. Sometimes a change in price changes how much output there is. That’s one level of causation. Causation 2: Aggregate Output Changes When output changes, it affect prices. Both of those have to be in equilibrium with another. The aggregate demand curve represents the first force. The supply curve represents the second force. They have nothing to do with demand and supply, but here’s a curve associated with the two forces. When they intersect, there’s equilibrium. UNDERSTANDING CAUSATION 1 How does a price change lower output? Let’s look at the first causation. Higher prices lead to lower output. inflation matters because it causes the economy to contract. It has an impact on the economy. Let’s explain how this happens. The Graphs for Price Change You’ve seen these graphs before:
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ECONOMICS 1 ASUC Lecture Notes Online: Approved by the UC Board of Regents 11/17/08 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2 When price is introduced, output levels change. The left graph is aggregate output; the right is the demand and supply graph of money. This is done under the assumption that prices are fixed. There’s a particular level of prices, so let’s write that in right now. This demand for money is based on prices at P1. At that price, with that demand, we have our interest level, r1.That gives us planned investment and output Y1. The Process
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11.17.08 - ECONOMICS 1 Professor Kenneth Train 11/17/08...

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