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Econ 121 Notes

by: Lael Wynne

Econ 121 Notes 36926

Lael Wynne
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About this Document

These notes cover part 3, first week of notes.
Principles of Macroeconomics
Class Notes
Econ, Economics, Econ 121, business




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This 4 page Class Notes was uploaded by Lael Wynne on Thursday April 7, 2016. The Class Notes belongs to 36926 at University of Illinois at Chicago taught by Officer in Spring 2016. Since its upload, it has received 20 views. For similar materials see Principles of Macroeconomics in Business at University of Illinois at Chicago.


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Date Created: 04/07/16
Econ Notes (Part 3) All income GDP goes to households Flow-of-Funds equilibrium: o Expenditures on GDP= resource purchases/payments o Sv + T + M = I + G + X LRAS (Long Run Aggregate Supply): 1) Resources ↑ o Labor, physical capital o Human capital 2) Technological change o ↑ productivity of labor o Invention o Innovation- entrepreneur; puts invention to practical use 3) Improvement in institution 4) Work more, less leisure P LRAS1 LRAS2 SRAS1 SRAS2 P1 1 P2 2 Y P1 Yp2 Economic Growth: o LRAS ↑ SRAS ↑ o YP↑ P↓ o Government doesn’t change policies o US & China Economic Growth W/O Cycle: o Slow, steady, outward shift in LRAS o Anticipated/Expected; permanent o Because this economic growth is anticipated, LR equilibrium is never disturbed o Natural rate of unemployment is the same Economic Decline: o LRAS shifts to the left gradually o Everything in reverse Causing the business cycle: 1) Unanticipated shifts in the AD curve & SRAS o Shifts in SRAS: i. Shocks in SRAS- unanticipated and temporary increase in output for any price ii. Negative shock (unfavorable) = decrease in output iii. Positive shock (favorable) = increase; expansion If anticipated (PRES ratio is unchanged and Y remains at YPeven though P varies Expansion (Boom) P AD1 LRAS SRAS AD0 P1 1 YP Y1 Y o Can’t stay at P0 because there’s an excess demand o P↑ = Y↑ ( Point 0 to Point 1) o (P/P ) ↑ Profit ↑ RES o Profitability ↑ LRAS P SRAS0 SRAS1 P1 Y P Y1 Y o At P0, there’s an excess supply o P ↓ = Y↑ o (P/PRES ↑ o Profitability ↑ Contraction (Recession) LRAS AD0 SRAS0 AD1 Y1 YP Y o Inward shift in AD o At P0: excess supply of goods/services o P↓ = Y↓ o (P/PRES ↓ o Profitability ↓ o At Y1: unemployment < natural rate SRAS1 LRAS SRAS0 AD0 Y1 YP Y o Inward shift in SRAS o At P0: excess demand of goods & services o P↑= Y↓ o ↓ in production of resources is greater than ↑ in price o Increase in P is a consequence, not a cause o Profitability ↓ Shifts in AD is caused by change in optimism or pessimism o Business invest a lot ( I↑) (C↑) = AD↑ = Expansion o Pessimism replaces optimism (I↓) (C↓) = AD↓ = Recession Excess supply of labor = unemployment Excess demand of labor = overflow of unemployment Expansion: o W↑ P RES o Pressure in resource labor market o Wages much more flexible upward than downward Recession: o W↓ P ↓ RES o Can take a long time (years) for wages to decrease and get back to full employment. Why? o Contracts- set resource prices o Resource suppliers, especially workers, resist reduction of resource price wage Recession is associated with pessimism


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