ECN 150: Week 13 Notes
ECN 150: Week 13 Notes ECN 150
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This 3 page Class Notes was uploaded by Alexis Ibarra on Saturday April 23, 2016. The Class Notes belongs to ECN 150 at La Salle University taught by Francis Thomas Mallon in Summer 2015. Since its upload, it has received 11 views. For similar materials see Macroeconomics in Economcs at La Salle University.
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Date Created: 04/23/16
WEEK 13 NOTES 4/20/16 Aggregate Approach The spending line (C+I+G+ X n ) was always an upsloping curved line. This represented all of the spending in the economy (without considering price levels). Now instead of spending, we will look at price levels and how they affect the overall spending of the economy. Real balance effect (Wealth effect) Interest rate effect (Consumer link) Foreign purchases effect Aggregate demand: Collectively all of the spending within the economy at different price X levels (C+I+G+ n ) X C+I+G+ n line becomes Aggregate Demand (AD) line. This line is now a downward sloping line! Aggregate supply: Collectively all of the output generated within the economy at different price levels. Why is the AD line downward sloping? Real balance effect (Wealth effect) Interest rate effect (Consumer link) Foreign purchases effect Real Balance Effect (Wealth effect) Income vs Wealth Income is what you earn. Wealth is what you have retained of that income to allow for an accumulation of value. Example: If someone was old and ready to retire and trying to save up, if price levels are going up, this causes financial security to decrease. People will purchase less things because they need to save more in order to be secure in retirement. As price levels increase, lower security in wealth, spending decreases. 1 As price levels decrease, higher security in wealth, spending increases. Interest Rate Effect (Consumer link) If price levels increase, inflation increases, lenders will increase interest rates, and therefore spending decreases. If price levels decrease, inflation decreases, lenders will decrease interest rates, and therefore spending increases. 4/22/16 Foreign Purchases Effect As the price levels increase, the price of domestic goods rises, so purchases of those domestic goods will decrease as buyers shift to purchase foreign goods. Example: If you want a new sweater, and you see two different ones for sale (one made in US and one made in Ireland) same quality, same style. Both are $45. You leave, then come back with $75. But now the domestic price (one made in US) is $55. The one made in Ireland is still $45. You will buy the cheaper one from Ireland! As the price levels decrease, the price of domestic goods decreases, so purchases of domestic goods will expand as buyers shift away from purchases of foreign goods. Example: If you went back to the store and the US sweater was $45 but the Ireland sweater was now $55. You would buy the US one! The line is always down sloping but it can shift left to right. Example: If government wanted to expand fiscal policy (higher spending) ED curve shifts to the right. The CrowdingOut Effect (pg.234235) At least part of the growth in economic expansion stimulated by policy will end up being compromised in the long run. Example: If you established a maintainable GDP (planned investment=actual investment) but this maintainable level is not satisfactory (GDP isn’t growing enough, unemployment is too high)….. The Federal Government could increase government spending or decrease taxes This causes our spending to grow, increasing GDP. (incomesY increases) G↑Y↑ Transaction Demand increases because of increase in income. You may also have money to save now so Asset demand increases as well. Demand for money has increased! Interest rates (r) also increase! G↑ Y↑ D mr↑ 2 Example 2: If you established a maintainable GDP but this maintainable level is not satisfactory… The Federal Open Market Committee could decrease interest rates (r) This causes our spending to grow, increasing GDP. (incomeyincreases) S ↑r↓Y ↑r↑ m If incomes increase, interest rates could go up, lowering GDP. This would cause this policy to be compromised in the long run. Keynesians vs Classicals Keynesians believe price levels don’t have a dramatic effect on aggregate supply. It would take a long time for price levels to cause changes in Aggregate Supply. Classicals believe that Aggregate Supply changes are very responsive to price level changes within the economy. Keynesian Methodology The aggregate supply demonstrates the value of output the economy will generate and how that will influence price levels within the economy. At low levels of output, there can be expansions without influencing price levels at all (Keynesian Range=horizontal line) Once they get this, price levels will rise. (intermediate range= up slope) When they reach maximum output, full employment, the line will turn vertical (classical range= vertical line) 3