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Econ 201 Week 14 (Aggregated Demand and Supply)

by: Ekene Tharpe

Econ 201 Week 14 (Aggregated Demand and Supply) ECON 201

Marketplace > University of Tennessee - Knoxville > Economcs > ECON 201 > Econ 201 Week 14 Aggregated Demand and Supply
Ekene Tharpe

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About this Document

Covers all aspects of aggregated demand and supply and how they interact with each other.
Intro Economics: Survey Course
Donna Bueckman
Class Notes
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This 4 page Class Notes was uploaded by Ekene Tharpe on Saturday April 23, 2016. The Class Notes belongs to ECON 201 at University of Tennessee - Knoxville taught by Donna Bueckman in Fall 2015. Since its upload, it has received 20 views. For similar materials see Intro Economics: Survey Course in Economcs at University of Tennessee - Knoxville.


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Date Created: 04/23/16
Econ  201:  Week  14     Yellen  “Dashboard”   • Top  3:   1. U-­‐6:   2. Long-­‐term  Unemployed:   3. Labor  Force  Participation  Rate:   • Others:  4.)  Quitting  and  Hiring,  5.)Wage  and  Growth       Cost  of  Unemployment   • Economic  costs:   o Present  output:  less  workers,  less  capital  (buildings)   o Future  output:  future  stream  of  output  compromised     • Social  costs:   o Magnified  effect  on  person/family,  increasingly  negative  affects       Economic  Fluctuations:  Facts   1. Economic  fluctuations  are  irregular  and  unpredictable   2.  Most  macroeconomic  quantities  fluctuate  together     3. As  output  falls,  unemployment  rises         Aggregate  Demand  and  Aggregate  Supply:  The  Model  (short-­‐run)                      P:                                 The  rice                                Short-­‐run  Ag.  Supply   level  (think   This  model  determines   CPI)   equilibrium  price  level     and  equilibrium  level  of       1     P                           Ag.  Demand                                                                                                                                                           Y:   Real  GDP,  quantity       oincrease,  so  does                       1          price  and  inflation)                  Y                                                                                 • AS/AD  models  both  incorporate  growth,  inflation,  and  unemployment     • Inflation  pressure:   o Can  be  because  of  right  shift  in  AD  or  left  shift  in  AS           Classical  vs.  Keyetians   • Supply  Rules:  Say’s  Law  (Classicals)   o If  the  supply  is  there,  the  demand  will  follow   • Neoclassical  Zone:   o Eqm  level  of  real  GDP  around  potential  GDP   § Decrease  in  cyclical  unemployment  in  this  economy   • Demand  Rules:  Keyne’s  Law  (Keyetians)   o People’s  willingness  to  pay  first,  then  supply  follows   • Keynesian  Zone:   o Eqm  level  of  real  GDP  around  far  below  potential  GDP   o Economy  in  recession   § Increase  in  cyclical  unemployment         Aggregate  Demand  (AD)  Curve   • AD  curve  shows  the  quantity  of  all  G&S  demanded  in  the  economy  at  any  given  price   level   • Components  of  AD:   o C,  I,  G,  and  NX  (added  together  equals  GDP)   o Assume  G  is  fixed  policy   • Slope  of  AD,  how  P  affects  C,  I,  and  NX   o Increase  in  P  decreases  the  quantity  of  G&S  demanded  because  of:   § The  wealth  effect  (decrease  C)   § The  interest  rate  effect  (decrease  I)   § The  foreign  policy/exchange  rate  effect  (decrease  NX)           Decrease  C,  I,  and  NX   P 2             P 1             Y 2      Y 1                             • Shifts  in  AD   o Shift  outward  as  GDP  components  increase     o Shifts  back  to  the  left  when  the  components  decrease   § Taxes  increase,  disposable  income  decreases     Aggregated  Supply   • Relationship  b/w  the  real  GDP  and  the  price  level  for  output.  The  price  of  inputs  is   fixed               Long-­‐Run  AS  (Classical)                   Short-­‐Run  AS                 • Potential  GDP  =  LRAS   • Factors  shifting  SRAS  curve:   o Worker  Productivity   o Changes  in  price  of  key  inputs   § Technology   o Discovery  of  a  natural  recourse:   § Discover  new  mineral  deposits   § Decrease  supply  of  importer  oil   § Long  run  changing  weather  patterns  that  affect  production   • Shift  Left:   o Combination  of  lower  growth  and  higher  inflation  and  unemployment   • Shift  Right:   o Combination  of  higher  growth  and  lower  inflation  and  unemployment          Using  AD  and  AS   Showing  Long-­‐run  growth  and  inflation:     LRAS   LRAS   LRAS   But  doesn’t       P 3   explain  the       business  cycle   P 2       AD  2000     P 1     AD  1990   AD  1980       Y 1-­‐-­‐-­‐-­Y-2-­‐-­‐-­‐-­Y-3  -­‐-­‐-­‐                                                                                         SRAS                                                                                                                                                                                                                         Short-­‐run  Ag  Supply  (SRAS)   • Upward  sloping  curve   P 2   • 1  to  2  year  period     • Increase  in  P  causes  increase  in  quantity     P 1   of  G&S  supplied     Y 2      Y 1                   • Why  SRAS  curve  may  shift:  Any  shift  in  LRAS  shifts  SRAS  too   o Changes  in  productivity     o Prices  of  widely  used  inputs  (energy/labor)         LRAS   Why  SRAS  Slope  Matters   SRAS   • Because  it  slopes  up:     o Shifts  in  AD  affect  output  and  employment     • Long-­‐run  AS  eqm   P   o Wages,  prices,  and  expectations  adjust     AD   o At  potential  GDP   o Unemployment  is  at  its  natural  rate       Economic  Fluctuations   Y N   • Caused  by  events  that  shift  AS  and/or  AD  curves   • 4  steps  to  evaluate  economic  fluctuations     1) Determine  whether  event  shifts  AD  or  AS   2) Determine  whether  curve  shifts  left  or  right   3) Use  AD-­‐AS  model  to  see  how  the  shift  Y  and  P  in  the  short  run   4) Use  AD-­‐AS  model  to  see  how  economy  moves  from  new  SR  eqm  to  new  LR   eqm    


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