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