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OSU / Economics / ECON 2002 / aggregate demand curve

aggregate demand curve

aggregate demand curve

Description

School: Ohio State University
Department: Economics
Course: Macroeconomics
Professor: Darcy hartman
Term: Fall 2016
Tags: Economics and Macroeconomics
Cost: 50
Name: Principles of Macroeconomics Final Exam Study Guide
Description: These notes cover the material on the final exam for Principles of Macroeconomics (Econ 2002.01) at OSU. The exam is not cumulative - these 12 pages cover everything needed. I ended up with a 97% on the exam and hope these notes will help you too! Best of luck :)
Uploaded: 01/11/2017
12 Pages 213 Views 1 Unlocks
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Unemployment  Working-age population:​ entire working age pop… (245m) Labor force:​ employed & unemployed portion of working pop (155m) Not in labor force​ (90m) Employed​ : working at least 1hr/wk, or temporarily away from work (144m) Unemployed​: (1) not currently at work, (2) is available for work, (3) looked for jobs in the previous month (11m) Not available for work (homemakers, retirees, full-time students, etc.) (84m) Available for work but currently not working (6m)

Discourag ed workers (.9m) Not currently looking b/c of of other responsibilities/prob lems (5.4m) Unemployment rate  (unemployed pop / labor force pop ) * 100% Labor force participation rate (labor force pop / working age pop) * 100% Employment-population ratio (employed pop / working age pop) * 100%


Why does unemployment rate understate unemployment?



Why does unemployment rate understate unemployment? 1. Discouraged workers not considered “unemployed” 2. Someone who works less than they want to is underemployed but unconsidered Why does unemployment rate overstate unemployment? 3. People who aren’t in the labor force or falsely claim to be actively looking for work (b/c of unemployment benefits) are “unemployed” when they should be “not currently looking” 4. People who are working illegally claim to be “unemployed” a. Evade taxes or hide illegal activity Types of Unemployment: * Full employment (“natural rate of unemployment”) has frictional and structural unemployment, but no cyclical. Aka only involves unemployment that’s not caused by a recession. ~5-6% 1. Frictional Unemployment:​ short-term, resulting from the process of matching workers & jobs a. May result in better job matches b. Sometimes takes the form of seasonal unemployment c. Overall, nbd. 2. Structural Unemployment:​ resulting from a persistent mismatch between skills/attributes of workers & the requirements of a job (ex. Manufacturing gets outsourced, need new skills).a. May have longer unemployment spells b. Retraining may be necessary 3. Cyclical Unemployment:​ ​caused by a business cycle recession a. Caused by external shocks​ to the economy b. Beyond individual control. Bad news :( What might cause unemployment? Basically, anything that raises wages above the equilibrium wage. This results in a surplus of supply (here, labor). 1. Minimum wage:​ can be set above the equilibrium wage (i.e. price floor) 2. Labor unions: ​bargain wages up. 3. Efficiency wages​: firms pay their workers high competitive wages so the opportunity cost of losing the job increases. Workers are incentivized to perform well, as well as compete for the position. 4. Unemployment insurance (govt. policy)​: decreases the opportunity cost of being unemployed. Ex. worker who just lost their job but gets benefits does not look frantically for a new job. What does the govt do to lower unemployment rate? 1. Training programs to decrease structural unemployment (ex. Retrain manufacturing workers to be CS workers) 2. Provide “new hire subsidies” → firms have more incentive to make hires quickly → frictional unemployment decreases Price Level​: a measure of the avg. prices of goods & services in the economy. Measured by: Calculate Inflation Rate (b - a) / b * 100% GDP deflator​: ratio of nominal:real GDP in a given year ( nominal GDP / real GDP ) * 100 % change from base year to current year CPI​: Consumer Price Index: measure of prices a typical urban family of 4 pays for a basket of goods. (Expenditure = $ * quantity) ( exp. in current year / exp. in base year ) * 100 ● Base year CPI is always = 100 ● When calculating, Q stays the same, Price changes between current/base year % change from base year to current year PPI​:​ Producer Price Index: Avg. of the prices received by producers of goods & services at all stages of the production process n/a n/a


Why does unemployment rate overstate unemployment?



If you want to learn more check out ut ib

Why does inflation rate calculated using CPI overstate actual inflation? Because it assumes consumers always buy the same basket of goods. Doesn’t account for... 1. Substitution bias:​ consumers may buy more of cheaper goods 2. New product bias​: new products may be cheaper 3. Quality bias:​ better quality products may be produced in future years, with higher prices 4. Outlet bias: ​Amazon, Costco, Sam’s Club… discounted prices Using CPI to find real value of current $ in past $’s Ex. If $a (nominal value) in Year x is equivalent to $b (real value) in Year y (base yr) , what is the relationship between $a and $b?? ($a / CPIx) = ($b / CPIy) → $b = $a (CPIy/CPIx) Set up the equation, solve for the missing value. CPI(base) will always be 100: ($5/115) = ($b / CPIbase) → ($5/115) = ($b/100) → $b = 4.35. $5 in year x = $4.35 in year y *** After finding the real worth of $ in year (base), you can compare the % change in nominal wages or real wages (by finding the real worth of both year’s wages in year(base), then % change b/w the two)Nominal Interest Rate (from​ Year t to ​Year t+1):​ NIR - The stated interest rate on a loan ● Ex. If nominal interest rate of 10%, If I borrow $100 in year t, I pay back (100 + 10%) * 100 = $110 in year t+1 ○ Borrowers want (nominal) interest rate to be low ○ Lenders want (nominal) interest rate to be high Inflation Rate (from ​Year t to ​Year t+1):​ ​b% = % change in GDP deflator or % change in CPI ● How is it calculated when price level is measured by CPI? ○ b% = (%change in CPI) * 100 → ( CPIt+1 / CPIt) = 1 + b% ■ Don’t need to know specific values^, just the ratio of ( CPIt+1 / CPIt ) ○ $y in YearT+1 = $x in YearT… $y = $x (1+b%) Real Interest Rate (RIR):​ Interest rate after inflation = ​((n - m) / m ) * 100% ​where m = original amount, n = total after interest. Or: Real Interest Rate (RIR) = Nominal Interest Rate (NIR) - Inflation (b%) Problems with Inflation: 1. Inflation affects income distribution, depending on whether or not wages get adjusted to inflation 2. Problems with anticipated inflation: a. Holding cash becomes costly b. Menu cost: cost to firms of changing menu prices c. Increase the tax due: based on nominal values (e.g. nominal income) i. Ex. Tax rate = 0% if wage < $1.50; but 15% if wage > $1.50 Because​: Real Interest Rate (RIR) = Nominal Interest Rate (NIR) - Inflation (b%) Lenders​: want high​ interest rate Borrowers:​ want low​ interest rate Actual inflation rate > expected inflation rate; Real interest rate < expected :( :) Actual inflation rate < expected inflation rate; Real interest rate > expected :) :(


What might cause unemployment?



Don't forget about the age old question of bio 311c

Long-run Economic Growth:​ process by which rising productivity increases the avg. standard of living ● most commonly measured by “real GDP per capita” ○ Long-run economic growth rate = avg. annual growth rate of real GDP per capita Calculating Growth Rate:​ % change in real GDP per capita from YearT to YearT-1 ● If multiple years, divide total % growth by the # of years to find annual average Rule of 70: ​“If the growth rate of real GDP per capita is always g%, then it takes 70/g years for it to double ● Ex. if g% = 2%, it’ll take 70/2 = 35yrs for the real GDP per capita to double. ● Doesn’t work when growth rate (g%) is too high (>10%) What does Long-run Economic Growth depend on? ● Labor productivity!​ (The quantity of goods/services that can be produced by 1 worker in 1hr) ○ Represented by ( Y / L ), where Y=quantity produced and L=hours worked by laborers ○ What does an increase in Labor Productivity depend on? ■ Increases in capital per hour worked: ​manufactured goods that are used to produce other goods/services ■ Technological change​: change in quantity of output a firm can produce using given inputs ● 3 main sources of technological change: 1. Increase in human capital (ex. More talented football players) 2. Better machinery & equipment (ex. Better training facility/gym) 3. Better means of organization / managing production (ex. Better coach) Per-worker production function: ​the relationship b/w Real GDP per hour worked ​and Capital per hour worked Has diminishing returns of capital (flattening slope) Investing in capital​: move along fixed curve (ex. Move along orange curve) ○ If capital per hour worked is low, invest in capital Investing in technology​: shift curve up (ex. From orange curve → blue curve) ○ If capital per hour worked is already high (i.e. diminishing returns setting in) , invest in technology!!New Growth Theory​: the factors that determine productivity growth

Capital (physical/visible capital) Technology (knowledge capital) Example computer Knowledge to produce a medicine Return Diminishing returns Company level: diminishing returns (ex. 1 doctor can’t do much) Economy level: increasing returns (ex. More experts → more knowledge → more exchange of ideas → cure cancer) Rival goods?​ (if I use it, you can’t use it) Yes No. I can make medicine, you can make medicine, everyone can make medicine. Excludable?​ (can I somehow prevent you from using it???) Yes Not without a patent. Private good or public good? Private Public Is free-riding possible? (benefiting from goods/services you didn’t pay for) No Yes

Don't forget about the age old question of If D1 or S1 is the original curve and D2 or S2 is the new curve,, which of the graphs illustrates what may happen in the market for DVDs if the cost of producing DVDs falls?

Excludable Non-Excludable Rival Food. 1. I eat it, you can’t eat it. 2. Once I buy it, I can keep it to myself. *** Private good (rival, excludable Fish in the sea 1. If I catch this fish, you can’t have this fish 2. But I can’t stop you from catching other fish Non-Rival Cable service 1. I can’t stop you from getting cable 2. But I can exclude you from using my cable Street lighting 1. I can’t stop you from getting light 2. I can’t exclude you from using light *** Public good (non-rival, non-excludable)

If you want to learn more check out if brazil gives up 3 automobiles for each ton of coffee it produces, while peru gives up 7 automobiles for each ton of coffee it produces, then:

How to prevent free-riding? ***Problem with free-riding on knowledge capital: no one’s going to invent anything if other people can just free-ride 1. Protect intellectual property: so firms have incentive to innovate a. Patents b. Copyright protection 2. Subsidize research & development: govt. Helps economy accumulate knowledge (“technological”) capital a. Research grants 3. Subsidize education: also increasing knowledge/technological capitala. Public education system b. Student loan assistance Economic Growth Model:​ Countries with initially low GDP’s will grow faster than countries with initially high GDP’s... Catch-up Theory​: ...Thus, the level of GDP per capital in poor countries will grow faster than in rich countries 1. High-income / Industrialized / developed countries: US, Japan, Netherlands a. Model seems to work 2. Newly Industrialized Countries / low income countries: S. Korea, Taiwan, Singapore a. Model seems to work 3. Developing Countries: Congo, Somalia a. Model doesn’t work for these countries b/c they start w/ low incomes but grow veeery slowly. i. Why? Because… 1. Failure to enforce rule of law (Ex. property rights, contracts) 2. Wars & Revolutions (disrupt the economy or labor force) 3. Poor public education & health (workers aren’t productive. “Brain drain”) a. Brain drain - skilled workers go to developed countries 4. Low rates of saving. (ex. Low national income, low rates of investment, low economic growth, low GDP…..vicious cycle) Needs help from foreign countries.... a. Solution 1: Encourage foreign direct investment (def: the purchase or building by a corporation of a facility in a foreign country) b. Solution 2: Encourage foreign portfolio investment (def: the purchase by an individual or a firm of stocks or bonds issued in another country)Potential GDP​: The level of real GDP attained when all firms are operating at capacity Business Cycle​: Alternating periods of economic expansion (trough to peak) and recession (peak to trough) ● Expansion: total production increases, employment increases, inflation increases ○ Firms get good business ● Recession: total production decreases, employment decreases, inflation decreases ○ Lower sales of durables (last >3yrs), non-durables aren’t affected too much ○ Unemployment rate may continue to increase for a while after recession (delayed) The Three “Greats” ● Great Depression: 1930’s recession ● Great Contraction: 2007-2009 recession ● Great Moderation: (1) mild fluctuations of real GDP and (2) absence of severe recessions after 1950 in US ○ Reasons why? ■ More services included in GDP, so the sale of durable goods/goods in general have such drastic effects. (ex. Economy that only sells cars, if you can’t sell cars, you’re screwed) ■ Unemployment insurance: if you lose your job, you have insurance. So you don’t have to completely stop consuming things. Recession is shortened b/c consumers continue to spend ■ More govt. Regulations & policies to help prevent recessions ■ More stable financial system after 1950s: ● Used to be households $ → banks $ → firms $. In the 1950s, the banks screwed up and lost all the $ for houses & firms. Today it’s just Households and Firms in the market (Think circular flow chart) What is a “Financial System”? *** System of financial markets and financial intermediaries through which firms acquire funds from households ● Financial markets:​ ​(1) Stock market (2) Bond market ● Financial intermediaries​: Usually banks, which facilitate lender-borrower relationship. ○ Lenders $ → Banks $ → Borrowers. ● Services they provide: 1. Risk sharing: many investment options . ex. Risk-accepting people can play stock market, risk-averse people can invest in banks or govt. Bonds 2. Liquidity: ease with which stocks/bonds can be liquidated to cash 3. Information sharing: ex. Banks tell you who to lend $$$ toMarket for Loanable Funds​: Interaction of borrowers (firms) / lenders (households) that determines market interest rate and quantity of loanable funds exchanged. “Other factors” that can change supply/demand of loanable funds​:

Mechanism (example) Effect SUPPLY 1. Tax benefits for saving *** direct relationship *** Ex. tax cuts if you save $$$! I put all my $ in the bank. 1. Supply for loanable funds increases when the tax benefits of saving increases (more people put $ in banks) 2. Supply for LF decreases with tax benefits decrease 2. Level of consumption  Ex. I spend all my money on shoes instead of putting it in the bank 1. Supply for LF decreases when households consume more (spending more money instead of saving it in banks) 2. Supply for LF increases when households consume less 3. Govt. spending  Ex. govt spends all its money on military 1. Supply for LF decreases when govt spending increases 2. Supply for LF increases when govt. Spending decreases DEMAND 1. Firms’ expected future profit ***direct relationship*** Ex. I think my idea will make a ton of $$$, so I want to borrow $ b/c I know I can pay it back. 1. Demand for loanable funds increases when firms’ expected profit increases (more incentive to borrow and invest in a business idea!) 2. Demand for LF will decrease when firms’ expected profits decrease 2. Corporate taxes  Ex. If I’m going to be taxed a ton, I want less taxable $. So no loans. 1. Demand for LF will decrease when corporate taxes increase 2. Demand for LF will increase when corporate taxes decrease

We also discuss several other topics like luis is willing to sell his pool table for no less than $600, but if he gets $840, the producer surplus luis receives is:

Crowding Out​: when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending is called crowding out​ effect. ● Not a big deal in the real world b/c we have foreign investors (???) Saving (S) and Investment (I) in a ​Closed Economy Saving (S); Investment (I); GDP (Y); Consumption (C); Government spending (G); Net Exports (NX); Transfers (TR) Investment (I) Y = C + I + G + NX (NX = 0 in a closed economy) I = Y - C - G Saving (private) Saving for individual person: GDP plus transfers, minus consumption and taxes Spr = Y + TR - C - T Saving (public) Saving for govt: Govt’s source of income is taxes. So, Taxes, minus spending and tax returns Spu = T - G - TR Saving (total) S = Spr + Spu → S = Y - C - G = I → S = I How does investment/saving/loanable funds impact future taxes??? Spu > 0 “Budget surplus” govt has more loanable funds. Future taxes will be low. Spu = 0 “Balanced budget” govt has just enough. Future taxes will be the same Spu < 0 “Budget deficit” govt has less loanable funds than it needs. Future taxes b/c it needs more $

If you want to learn more check out suppose the united states removes the current sugar quotas and the market price of sugar drops. in the candy bar market, we would expect:

Aggregate Demand Curve (AD)​: A curve that shows the relationship b/w price level ​(GDP deflator, indicative of inflation) and the ​quantity of real GDP demanded by households, firms, and the govt. Real GDP demanded decreases when price level increases: ​Price level increases → Nominal Interest Rate (intersection point b/w supply/demand) increases → Real Interest Rate increases → cost of borrowing increases → return to saving is more beneficial → Consumers consume less, firms invest less. → → → The C and I in Y = C + I + G + NX decreases Increase in US CPI only​ (trading partner CPI stays the same over time) ● Import from partner will increase (b/c it’s cheaper to buy from them than produce here) ● Export to trading partner will decrease (b/c it’s too expensive) ● Net export (NX) will decreases: NX = export - import.SRAS (short-run aggregate supply) curve​: Curve that shows the relationship in the short run between the price level​ and Quantity of Real GDP supplied​ by firms. Why is the SRAS curve upward sloping​? When price levels rise, households want to supply more $$ for firms to borrow 1. Wage Contracts or Slow adjustment of wages: Price levels rise, final wage rises, profits rise, production rises a. “Sticky wage model” 2. Menu costs: when price levels rise, menu costs rise. But if product prices are fixed with price levels rise → sales increase, and GDP (Y) increases a. “Sticky price model” LRAS (long run aggregate supply) ​ A curve showing the relationship in the long run b/w price level ​and the quantity of real GDP supplied by firms ***Always a vertical line showing the potential GDP for a given time Determined by: 1. Number of workers 2. Capital stock 3. Technology level 3 conditions: 1. LRAS is left of SRAS and AD intersection: actual GDP (intersection) is greater than potential -- expansion! 2. LRAS is right of SRAS and AD intersection: actual GDP is less than potential -- recession :( 3. LRAS intersects the SRAS and AD intersection point: long-term macroeconomic equilibrium GDP!!! :D
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