Lecture 13 - ECONOMICS 100B Professor Steven Wood 03/01/11...

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ECONOMICS 100B Professor Steven Wood 03/01/11 Lecture 13 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. LECTURE: Today’s lecture will focus on Chapter 9: The IS curve. ICLICKER QUESTIONS/ANSWERS: 1.) The IS curve shows the combination of output and the real interest rate for which: the goods market is in equilibrium. 2.) Any change that reduces desired saving relative to desired investment (for a given level of output) will: increase the real interest rate and shift the IS curve to the right. 3.) An increase in the labor supply would cause the IS curve to remain unchanged. AGGREGATE DEMAND: So far, the focus has been on how much the economy can produce, which is determined by factor inputs (labor and capital) and total factor productivity. This is the basis for the economy’s aggregate supply. We will now shift our focus to how much demand there is in the economy. This is the basis for the economy’s aggregate demand. The IS curve is one key to understanding aggregate demand in short-run goods market equilibrium. It shows the inverse relationship between planned expenditures and the real interest rate. Differences between actual and planned expenditures explain short term business cycle fluctuations. Actual expenditures, Y, consist of the total amount of spending on domestically produced goods and services that households, businesses, the government, and foreigners actually make, whether planned or not. Planned expenditures, Y pe , consist of the total amount of spending on domestically produced goods and services that households, businesses, the government, and foreigners want to make . This equals aggregate demand. The economy is in goods market equilibrium when actual expenditures equal planned expenditures: Y = Y pe PLANNED EXPENDITURES: Y pe includes: 1. Consumption expenditures: C 2. Planned investment spending: I p 3. Government purchases: G 4. Net exports: NX Planned expenditures are given by the equation: Y pe = C + I p + G + NX CONSUMPTION EXPENDITURE Recall that consumption expenditures include 3 components: durable goods (spending on goods that last 3 years or more), nondurable goods (spending on goods that last less than 3 years), and services (spending on services that are consumed immediately).
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This note was uploaded on 02/06/2012 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at University of California, Berkeley.

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Lecture 13 - ECONOMICS 100B Professor Steven Wood 03/01/11...

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