Macroeconomics Notes midterm 2

Shoe leather costs cost of resources devoted to

This preview shows page 5 - 7 out of 7 pages.

Shoe leather costs- cost of resources devoted to staying ahead of change in prices More Uncertainty- uncertainty about future costs/profits Harms savers, lenders, fixed income and payees of fixed contracts 2. Unanticipated Inflation- more serious, cases more trouble Benefits spenders, borrowers, people who own resources, payers of fixed price contracts=> unanticipated inflation redistributes wealth from wealthy to the poor, some inflation if good, minimum unanticipated inflation Deflation- prices are falling overtime, only unanticipated. Harms spenders, borrowers, owned resources, payers of fixed price contracts Nominal Interest rate (i), stated interest rate; Real Interest rate (r) interest rate that includes the effect of inflation in the purchasing power of money; Inflation Rate (), % change in prices over time. Fisher Equation (approximation): or Chapter 8 Classical Model Dominant before great depression, resurgence in 1980’s “Supply Side Economics” and “Regeanomics”, relies on microeconomics, self-adjusting economy, markets always clear, limited role of gov. Assumptions: 1. Rational Self-Interest- firms maximize profits, households maximize utility 2. Prices, wages, rents & interest rates are flexible so that markets always clear 3. No money illusion- economic decisions are based on real variables, not nominal variables 4. Law of Diminishing Returns- marginal products of input decline as it is added to other fixed inputs Pieces of the Classical Model: 1) Production Function- Y= Real GDP, K= Capital, L=Labor=> 2) Labor Market- w= real wage rate, P= price level, W=nominal wage rate/price level
Image of page 5

Subscribe to view the full document.

3) Product Market- Aggregate Supply (AS)= desired output, Aggregate Demand (AD)= desired spending Labor Market Deriving Labor Demand : firms maximize profits by hiring labor up to the point where W=MP L , MP L = Anytime the Production function changes, the demand for labor will also change and vice versa. Deriving Labor Supply : households face a tradeoff between income & leisure, opportunity cost of leisure is the real wage rate (w). As w↑, the opportunity cost of leisure↑=> households consume less leisure and supply more labor Product Model Aggregate supply (AS) (desired output): the quantity of Real GDP that firms and workers are willing and able to produce at different price levels. Aggregate Demand (AD) (desired spending): the quantity of Real GDP that spenders in the economy are willing and able to purchase at different price levels *In the classical model prices adjust so that there is just enough spending in the economy to purchase the amount of output produced Deriving Aggregate Supply:
Image of page 6
Deriving Aggregate Demand :
Image of page 7
You've reached the end of this preview.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern