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by: Mr. Tito Legros


Mr. Tito Legros
Texas A&M
GPA 3.74

Jeffrey Edwardson

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Jeffrey Edwardson
Class Notes
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This 19 page Class Notes was uploaded by Mr. Tito Legros on Wednesday October 21, 2015. The Class Notes belongs to ECON 203 at Texas A&M University taught by Jeffrey Edwardson in Fall. Since its upload, it has received 17 views. For similar materials see /class/225827/econ-203-texas-a-m-university in Economcs at Texas A&M University.

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Date Created: 10/21/15
ECON 203 FINAL review Last Quarter of the Class Chapters 15 7 Aggregate emand gt Potential GDPfu employment output gt Shows total demand for econ s GDP each P P AD amp Y Aggregate Demand gt Wealth Effect 0 AP effects value of so increased P causes wealth to decrease 0 Consumption decreases gt Interest Rate Effect 0 P increases causing MD to increase so the real IR Increases 0 Investment decreases gt Exchange Rate Effect 0 An increases in P causes an increase in real IR 0 This decreases NCO which increases the real exchange rate 0 Increases in real exchange rate causes a decrease in NX gt OVERALL 0 Y decreases when P increases Aggregate emand gt Curve Shifts 0 Monetary policy 0 Fiscal Policy c AconsumerAbusiness optimism o Aspending due to AC I G or NX X Aggregate Supply gt Short run 0 An increase in P will increase the quantity of gs supplied P AS YYNaP Pe amp Y Aggregate Supply gt Sticky Wages 0 Nominal wages adjust more slowly than P o If P increases WP decreases o P increases causing WP to decreases causing businesses to hire more workers causing Y to increase WPreal wages Aggregate Supply gt SRAS Curve shifts o More resources 0 Advantages in technology 0 Input prices Increases in input prices shifts SRAS left 0 Expectations of future prices Increases in expected future prices shifts SRAS left Aggregate Supply gt Long run o Yquotquot Potential GDPnaturaI rate of output P LRAS amp Aggregate Supply gt Curve Shifts Right 0 More resources 0 Advantages in technology amp Long Run Equilibrium gt output natural rate in long run YYN gt unemployment ratenatural rate in long run UUN w Cyclical unemployment0 full employment gt Price eveexpected Price level PzPe P LR AS AS AD YN Short Run Equilibrium 739 N Yquot ltYN L gtJN u gt UN Recession Boom P LR AS P LF AS AS AS AD i AD Y r Yz39c Y J Y Yquot x Adjustment Process V V V V 7 How does the economy leave YN o Positivenegative supply shocks 0 Example 1973 Arab Oil Embargonegative su ply shock bc decreased incoming supply of oil drastical y How does the economy get itself back to YN from a negative shock When YltYN there is usually a decreased pressure on prices People lower P99 SRAS shifts right 9 Y increcaes When YgtYN there is an increased pressure on prices 0 People raise P99 SRAS shifts left 9 Y decreases Natural adjustment can take a long time so the government steps in with Fiscal and Monetary Policies Monetary and Fiscal Policy gt Liquidity Preference Theory 0 IR adjust to balance MS and MD MS controlled by Fed independent from IR IR money MD people use for buying gs IR is opportunity cost of holding bc MD doesn t gather interest my IR money Shifting the Money Curves gt Shifting MS 0 Increase MS Decrease IR 9 increases AD things are cheapen o Decrease MS Increase IR 9 decreases AD things are more expensive gt Shifting MD 0 Increase MD Increase income orY or P 0 quot quotquot MD is dependent on P and Y x Monetary Policy gt Expansionary 0 MS increases causing AD to increase gt Contractionary 0 MS decreases causing AD P and Y to decrease X Fiscal Policy gt AG directly affects AD 0 AADAGEM gt Multiplier Effect 0 A 1 increase in C l G or NX can lead to a MORE THAN 1 increases in AD gt Expenditure Multiplier o The increase in output generated by 1 increases in autonomous spending Example economy gets better and people aren t worried about theirjobs EM11 MPC gt Marginal Propensity to Consume MPC o MPCAconsumptionAdisposable income Fiscal Policy gt Crowding Out 0 Increased G shifts AD right increasing P and Y c As P amp Y increase MD increases resulting in an increase in IR 0 Increased IR reduces or CROWDS OUT AD AD increases then decreases not necessarily back to its original point gt A 1 increase in G will increase AD by MORE than 1 if the multiplier effect is GREATER than the crowding out effect c Kinda common sense Phillips Curve gt Shows tradeoff between u unemployment and TI39 inflation such that a lower rate of u is associated with a higher rate of 1139 H rate We can do things to decrease Tr but u will rise u must return to uN U rate Phillips Curve gt Shifting the curve 0 Shifts right if Tre increases 0 Shifts right if SRAS decreases negative shock gt In the Long run 139r139re gt Natural Rate Hypothesis 0 U will return to its natural rate regardless of 11 s rate 0 Monetary and Fiscal Policy increase Y and decrease u in the short run ONLY These policies will increase 1T in the long run amp


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