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Chapter 20 Macro Notes

by: Carter Cox

Chapter 20 Macro Notes EC 111

Carter Cox

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Aggregate Demand and Supply
Principles of Macroeconomics
Class Notes
Economics, Macroeconomics
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This 4 page Class Notes was uploaded by Carter Cox on Monday April 25, 2016. The Class Notes belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 23 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.

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Date Created: 04/25/16
Chapter 20 Macro Notes Intro - Over the long run, real GDP grows about 3% per year on average - I the short run, GDP fluctuates around its trend o Recessions: periods of falling real incomes and rising unemployment o Depressions: severe recessions (very rare) - Short Run economic fluctuations are often called business cycles Investment - key to economic growth Intro Continued - explaining these fluctuations is difficult, and the theory of economic fluctuations is controversial - Most economists use the model of aggregate demand and supply to study these fluctuates Aggregate Demand Curve - Shows the quantity of goods and services in the economy at a given time - Economy wide demand/ super sized demand - To understand the slope, you must determine how change in Price affects consumption, investment, and net exports Wealth Effect - P rises o Dollars people hold buy fewer goods and services, so real wealth is lower o People feel poorer o Result= Consumption falls Interest Rate Effect - Suppose P rises o Buying goods and services requires more dollars o To get these dollars, people sell bonds or other assets o This drives up interest rates - Result= Investment falls Exchange Rate Effect - P rises o US interest rates rise o Foreign investors desire more US bonds o Higher demand for $ in foreign exchange market o US exchange rates appreciate o US exports more expensive to people abroad, imports cheaper to US residents - Results= Nets exports falls Slope of the AD Curve - the wealth effect o consumption falls - Interest Rate Effect o Investment falls - Exchange Rate Effect o Net Exports falls Why the AD curve might shift - any even that changes C, I, G, and NX - except a change in P - Changes in C o Stock market boom/ crash o Preferences: Consumption/ saving tradeoff o Tax hikes/ cuts - Changes in I o Firms buy new computers, equipment, factories o Expectations, optimism/ pessimism o Interest Rates, monetary policy o Investment Tax Credit or other tax incentives - Changes in G o Federal spending o State and local spending - Changes in NX o Booms/ recessions in countries that buy our exports o Appreciation/ Depreciation resulting from international speculation in foreign exchange market Aggregate Supply Curve - shows the total quantity of goods and services firms produce and sell at a given price level - Upward slope in long run, vertical in short run Long Run AS - natural rate of output o the amount of output the economy produces when unemployment is at its natural rate o Y is called potential output  Determined by stocks of labor, capital, and natural resources, and on the level of technology o Increase in P doesn’t effect any of these Why LRAS Curve might Shift - any event that changes any of the determinants of Y - Changes in L o Immigration o Baby boomers retire o Government Policies reduce natural U rate - Changes in K or H o Investment in factories or equipment o More people get college degrees o Factories destroyed by a hurricane - Changes in natural resources o Discovery of new mineral deposits o Reduction in supply of imported oil o Changin weather patterns - Changes in Technology o Productivity improvements from technological progress Why the sloep of SRAS - 3 theories o Sticky Wage  Imperfection: Nominal wages are sticky in the short run, they adjust slowly  Due to labor contracts, social norms  Firms and workers set the nominal wage in advance based on expected P  If P > Expected Price  Revenue is higher, but labor cost is not  Production is more profitable, so firms increase output and employment  Hence higher P causes higher Y o Sticky Price  Imperfection: many prices are sticky in the short run  Due to menu costs, the costs of adjusting prices  Firms set sticky prices in advance based on expected price o Misperceptions Theory  Imperfections: firms may confuse changes in P with changes in the relative price of the products they sell  If P rises above expected P, a firm sees it price rise before realizing all prices are rising o Common  Y = Yn + a(P – Pe)  Y = output  Yn = natural rate output  A > 0 measures how much Y responds to unexpected changes in P  P = price level  Pe = expected price level SRAS and LRAS - Imperfections in these theories are temporary o Sticky wages and prices become flexible over time o Misperconception are corrected - In LR o Pe = P o AS curve is vertical Economic Fluctuations - Caused by events that shift AD and/ or AS Curves - Four steps o Determine whether the event shifts AD or AS o Determine whether curve shift left or right o Use AD- AS diagram to see how the shift changes Y and P in the short run o Uses AD- AS diagram to see how the economy moves from new SR equilibrium to new LR equilibrium


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