Textbook Notes Chapter 6- Macroeconomics
Textbook Notes Chapter 6- Macroeconomics ECON 200
Popular in Macroeconomics
Popular in Economcs
This 3 page Class Notes was uploaded by Lauren Maddox on Saturday March 12, 2016. The Class Notes belongs to ECON 200 at James Madison University taught by Dr. Philip Heap in Fall 2014. Since its upload, it has received 12 views. For similar materials see Macroeconomics in Economcs at James Madison University.
Reviews for Textbook Notes Chapter 6- Macroeconomics
Report this Material
What is Karma?
Karma is the currency of StudySoup.
Date Created: 03/12/16
Chapter 6 Fluctuations in real GDP are because of the business cycle, they lead the employment. The price level in this model are determined in the short run by the intersection of the aggregate demand curve, and the aggregate supply curve. Fluctuations in real gdp and the price level are caused by shift in the aggregate curve or in the aggregate supply curve. Aggregate demand curve shows the relationship between the price level and the quantity of the real gdp demanded by households, firms, and the government. ‘ The short run aggregate supply curve shows the relationship in the short run between the price level and the quantity of real gdp supplied by firms. Why the Aggregate Demand Curve Downward Sloping? Gdp has four components: consumption, investment, government spending, and net exports. The aggregate demand curve is downward sloping because a fall in price level increases the quantity of real gdp demanded. The Wealth Effect: How a Change in the Price Level Affects Consumption What are nominal assets Some household wealth is held in cash or other nominal assets that lose value as the price level rises and gain value as the price level falls. When the price level rises, the real value of household wealth declines and so will consumption. The effect of the price level on consumption is called the wealth effect and it is one reason the aggregate demand curve is downward sloping. The Interest-Rate Effect: How a change in the price level affects investment When prices rise, people will need more money, so they will start withdrawing money from banks, which causes the banks to up their interest rates. Higher interest rates will cause people to stop borrowing from the banks, so less businesses or factories will be built. A lower price level will decrease the interest rate and increase investment spending. The International-Trade Effect: how a change in the price level affects net exports Net exports equal spending by foreign households and firms on goods and services produced in the united states minus spending by us households and firms on goods and services produced in other countries. If prices in us rises, exports will become more expensive, imports will be less expensive. Exports will fall and imports will rise, causing net exports to fall, thereby reducing the quantity of goods and services demanded. If prices in the US fall, exports would rise, which would increase the quantity of goods and services demanded. Shifts of the aggregate demand curve versus movements along it If the price level changes but other variables the affect the willingness of households, firms, and the government to spend are unchanged, there is a movement. If any variable other than the price level changes, there is a shift. The Variables That Shift the Aggregate Demand Curve: changes in government policies, changes in the expectations of households and firms, and changes in foreign variables. The government uses monetary policy (involves actions the federal reserve takes to manage the money supply and interest rates and to ensure the flow of funds from lenders to borrowers) and fiscal policy (involves changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives) to shift the aggregate demand curve. Changes in the expectations of households and firms- if households are optimistic about their future incomes, they will increase their consumption, shifting the aggregate demand curve to the right. Changes in foreign variables- if firms or households in other countries buy fewer us goods, or if firms in the us buy more foreign goods, net exports will fall, shifting the curve to the left. Net exports will also fall if the exchange rate between the dollar and foreign currencies because the price in foreign currency of us products sold in other countries will rise, and the dollar price of foreign goods in the us will fall. Aggregate Supply THE LONG RUN AGGREGATE SUPPLY CURVE In the long run, the number of workers, the capital stock, and available technology determines the level of real gdp. At potential gdp, firms will operate at their normal level of capacity and everyone who wants a job will have one. The long run aggregate supply curve shows the relationship in the long run between the price level and the quantity of real gdp supplied. Change in price level will not affect the level of aggregate supply in the long run, therefore it is a vertical line. THE SHORT RUN AGGREGATE SUPPLY CURVE It is upward sloping because over the short run, as the price level increases, the quantity of goods and services are willing to supply will increase. The main reason it is upward sloping is because as prices of final goods and services rise, prices of inputs rise more slowly. A secondary reason is that as the price level rises or falls, some firms are slow to adjust their prices. Some reasons workers and firms fail to predict the price level accurately result in an upward sloping sras slope? Contracts make some wages and prices sticky, firms are often slow to adjust wages, and menu costs make some prices sticky. Contracts make some wages and prices sticky: prices or wages are said to be sticky they do not respond quickly to changes in demand or supply. Firms are often slow to adjust wages: if firms are slow to adjust wages, a rise in the price level will increase the profitability of hiring more workers and producing more output. Menu Costs Make Some Prices Sticky: Shifts of the Short-Run Aggregate Supply Curve versus Movements along it- same as demand Variables that shift the short run aggregate supply curve- increases in the labor force and in the capital stock- as the labor supply and the capital stock grow, firms will supply more output at every price level, and the short run aggregate supply curve will shift to the right. Technological change-as changes in workers and machinery improves, firms can produce more goods and services with the same amount of labor and machinery- it reduces the firms’ cost of production and allow them to produce more output at every price level- shifts to the right Expected Changes in the Future Price Level- if workers and firms expect the price level to increase by a certain percentage, the sras curve will shift by an equivalent amount. Adjustments of Workers and Firms to Errors in Past Expectations about the price level- if workers and firms are adjusting to the price level being higher than expected, the sras curve will shift to the left. Unexpected Changes in the price of an important natural resource-supply shock- an unexpected event that causes the short-run aggregate supply curve to shift.