EconFinalNotes

If δ wealth 0 ad shifts to the right if δ taxes 0

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If ______, then AD shifts to the right. If Δ Wealth > 0, AD shifts to the right If Δ Taxes < 0, AD shifts to the right ΔConsumption ( C ) ΔWealth > 0

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ΔTaxes (T) < 0 ΔYe > 0 Δr < 0 ΔInvestment ( I ) ΔEFP > 0 ΔTechnology > 0 ΔBusiness Taxes (t) < 0 Δr < 0 ΔNet Exports (NX) %ΔRGDP(US) < %ΔRGDP(ROW) ΔE /\$ < 0 (the \$ depreciates against other currencies) LRAS Potential output is determined by the Number of workers Capital stock Available technology LRAS is vertical Changes in the price level and do not affect the level of real GDP in the LR Ex: As the price level rises LRAS remains unchanged Shifts in LRAS: a Δ in potential output Δresource base Δ number of workers Δ in the size of the capital stock Technological Δ and innovation SRAS Define: SRAS shows the relationship in the SR between the price level and the quantity of real GDP supplied by firms When prices rise in the SR from P = 100 to P = 110, firms produce more output because input prices are sticky or fixed Why are they sticky or fixed? It is difficult to preduct future inflation when negotiating wages and prices of inputs Wages and prices of inputs are often set by contracts for one year or more Some firms adjust their prices more slowly than others (ex menu costs) Example: You own a Coffee Shop Suppose AD is increasing in US economy This increases the price of lattes, mochas, espressos, ect
Input costs are very slow to adjust Profits and revenues increase You have an incentive to increase output Profits (increase) = Revenues (increase) - Costs (unchanged) Conclusion A rising price level leads to a larger quantity of goods and services supplied in the short run If firms and workers had perfect foresight Shifts in SRAS An unexpected change in the price of an important natural resource Ex: an increase in the price of oil (supply shock) increases the cost of production As a result, less is produced at every price level Increase in the labor force and/or the capital stock (SRAS shifts right) Technological changes that increase productivity (SRAS shifts right) An increase in the expected future price level (SRAS shifts left) Workers will ask for higher wages and firms will increase their output prices Workers and firms adjust to errors in past expectations about the price level (due to incorrect predictions) If prices are higher than expected, SRAS shifts left Workers will ask for higher wages and firms will increase their output prices If prices are lower than expected, SRAS shifts right Workers will be willing to work for lower wages and firms will lower their output prices Summary Factors that shift LRAS to the right: Increase in size of resource base: Increase in the number of workers Increase in the size of the capital stock Technological Δ/Innovation (increases worker productivity)

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Factors that shift SRAS to the right Factors that LRAS to the right Unexpected decrease in the price of an important natural resource Adjustments of workers and firms to errors in past expectations about the price level

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