week 11 notes
Popular in Introductory Macroeconomic Analysis and Policy
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This 3 page Class Notes was uploaded by Julia Staltari on Sunday April 12, 2015. The Class Notes belongs to ECON 104 at Pennsylvania State University taught by Adrienne Kearny in Spring2015. Since its upload, it has received 50 views.
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Date Created: 04/12/15
OOOIIOOOOOO O O 00 O OIIOOOOOO 00 0 Exam 3 government expenditures autonomous as a component of AD usually not related to the economy except in recession when G increases AD increases Net exports as a component of AD NX exports X Imports M gt typically negative bc we import more than we export NX are usually affected by the business cycle bc spending is affected by the cycle today NX are falling bc of the strong dollar In a US disinflation deflation goods are relatively cheaper increase in exports decrease in imports gt O NX and relative growth in RGDP national income o change RGDPus lt o change RGDProw NXUS increase in exports decrease in imports recession in US our income is rising slower than our trading partners ROW was doing great until recession spread Usually dollar depreciates during recession bc of a decrease in investment and demand for the dollar NX and the relative value of the US dollar ex If the dollar depreciates the yen appreciatesstrengthens bc one US dollar is now worth less yen s so they have more purchasing power US exports increase gt NX increases US imports decrease and foreign goods become more expensive to americans recession of 20072009 the dollar got stronger for some reason Japan is our third largest trading partner Yen Price dollar price x Eyendollar Recession of US NX usually increase decrease in NX left shift if the federal reserve starts increasing interest rates later this year the dollar will appreciate and NX will fall ceteris paribus demand for goes up investors think you ll get a better return and put their into US assets exports decrease and imports increase attract people as rates go up ADCIGNX is the level of RGDP purchased by householdsC businessesl governmentG and foreignersNX for our goods produced total demand Why does AD have a negative slope price increases NX effect wealth effect lrate effect decline in AD along the curve the wealth effect wealth assetsliabilities as the price level rises real value of wealth falls gt C fallsmove up on curve price level moves along the curve bc it s an axis the interest rate effect as the price level rises we need more money to buy goods and services HH need more cash for their purchases and borrow more increase in demand for loanable funds increases the real interest rate on loans C and spending decline The NX effect as the price level rises fast in the US compared to the ROW exports decrease imports increase NX decrease as price level rises we are less competitive OIOOIO IOOOIOO O OO IIIOOOOOIIOIIIIOIIIIO Factors that SHIFT AD to the right consumptionC HH change wealth gt 0 change in taxesT lt 0 change in expected income gt 0 change in rates lt O investmentl firms change in EFP gt 0 change in technology gt 0 change in business taxes t lt 0 change in r lt 0 change Net exports o change RGDPus lt occhange RGDProw the dollar depreciates against other currencies change in gov expenditures G gt O LRAS identifies output at potential where Y Ybar and UUbar potential output is determined by number of workers capital stock available technology LRAS is vertical changes in the price level do not affect the level of RGDP in the LR SHIFTS in LRAS a change in potential output change in resource base change number of workers as pop goes up change in the size of capital stock change in tech innovation have to be on the cutting edge each year the LRAS shifts rightward not always by the same distance SRAS has a positive slope shows the relationship in the SR between the price level and the quantity of RGDP supplied by firms increase in price increase in RGDP bc your input is steady and your output goes up increase in price firms produce more output bc input usually set by contract prices are sticky or xed conclusion rising price level leads to a larger quantity of goods and services supplied in the short run sticky prices rise less quickly bc input costs tend to be fixed ex yearly salary annual wages and prices of inputs don t change with the rate of inflation menu cost the cost of a firm changing prices hesitate bc it may cost more to change prices and you don t know how long prices will rise for if the prices are really sticky the curve is horizontal shifts in SRAS needed to return to market equilibrium 1 unexpected change in the price of an important natural resource ex increase in the price of oi gt increase the cost of production gt less is produced at every price level 2 increase in the labor force andor the capital stock SRAS shift right firms can supply more at every price 3 technology change increase productivity and SRAS shifts right 4 an increase in the expected future price left SRAS shifts left workers will ask for higher wages and firms will increase output prices 5 workers and firms adjust to errors in past expectations about the price level I00 000 CO 00000 if the prices that are higher than expected SRAS shifts left if prices are lower than expected SRAS shifts rioht whatever shifts LRAS to the right shifts SRAS to the right example an increase in AD no policy intervention output moves faster than input bc input is sticky increase ADshortage increase output increase prices SRAS shifts left gt the economy moves up along AD as prices increase until SRASZLRASAD2 an increase in G or decrease in r gt AD shifts right from SR to LR workers and rms will adjust gt workers will ask for high wages and rms will increase their prices example 2 recessionary graph a decrease in AD no policy intervention surplus decrease prices decrease output inside ppf SRAS shifts to the right and moves along demand curve from SR to LR SR equilibrium is E2 unemployment increases workers accept lower wages firm lower output prices decrease in G or increase in r gt AD shifts left surplus firms cut production and lay off workers inventories build up and firms have to cut their prices output prices fall
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