ECO 105 Goel Week 10 Notes: 10/19-10/23
ECO 105 Goel Week 10 Notes: 10/19-10/23 ECO 105
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This 6 page Class Notes was uploaded by Daniel Hemenway on Sunday October 25, 2015. The Class Notes belongs to ECO 105 at Illinois State University taught by Rajeev Goel in Fall 2015. Since its upload, it has received 36 views. For similar materials see Principles Economics in Economcs at Illinois State University.
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Date Created: 10/25/15
ECO 105 Goel 10191023 Chapter 25 Economic Growth Growth Rate or Real GDP Shows the extent to which the total output of the economy is increasing Growth Rate or Real GDP per Capita Shows the extent to which the economic wellbeing of the average person is increasing Paul Romer Productivity Labor Productivity output per unit of labor average product of labor Capital Productivity output per unit of capital average product of capital Total Factor Productivity TFP output per unit of combined labor and capital input The growth rate of TFP is approximately the growth rate of real output minus the growth rate of combine factor inputs Theories of Economic Growth QL Real GDP Neoclassical Growth Model Solow 19505 explains economic growth by virtue of capital accumulation population growth and unexplained technical progress Per Capita Production Function Shows the relationship between Real GDP per Capita and the capital stock per capita KC The LR EQ KGDP ratio is increased by a higher saving rate and decreased by a higher output growth rate If output growth and saving rate are stable so will be LR capital output ratio The percapita Growth curve shows the negative relationship between per capita GDP growth rate and the KQ ratio holding other factors constant ECO 105 Goel 10191023 Theories of Economic Growth cont Endogenous Growth TheoryNeoSchumpeterian Romer Base explanation of technological progress on the desire for profit Innovations may be product innovations or process innovations Current innovations make future innovations easier 0 Factors Generating Economic Growth Human Knowledge Saving and Investing Political Stability Government Consumption International Trade Chapter 28 0 Aggregate Supply AS and Aggregate Demand AD RGDP SR Production Function Shows the output produced with a given amount of employment when capital and technology are fixed Real wages are money wages divided by the Price level WP Natural Level of Output Real GDP That level corresponding to equality in the Demand and Supply of Labor Natural Rate of Unemployment The rate at which the labor force is in balance number ofjobs available number ofjob seekers Production Function Labor Market WP SL DL L L L 0 Aggregate Supply AS AS curve shows the amount of Real GDP Firms in the economy are prepared to supply at different Price levels ECO 105 Goel 10191023 Classical Model an increase in prices should have no effect on the real output supplied in an economy if Prices wages and other costs are all rising at the same rate when wages and prices are flexible AS is vertical at the natural level of output Price AS level RGDP Keynesian Model When wages are sticky inflexible falling prices raise real wages and firms reduce their employment and output AS therefore has a positive slope Price level As Wages Inflexible Prices Flexible RGDP Aggregate Demand AD AD Curve shows the Real GDP that households businesses government and foreigners are prepared to buy at different prices Three major factors cause AD to be negatively sloped The real balance effect that interest rate and the foreign trade effect Real Balance Effect Occurs when desired consumption falls as increases in the price level reduce the purchasing power of money 0 Interest Rate Effect Occurs when increases in the price level push up interest rates in credit markets which lowers real investment 0 Foreign Trade Effect Occurs when a rise in the Domestic Price level lowers the Aggregate Quantity Demanded by pushing down net exports X IVI Price level An ECO 105 Goel 10191023 The Classical Model The Classical Model Flexible Wages and Prices Demand Shock Supply Shock AS PL A5 A51 RGDP RGDP With flexible wages and prices demand shocks affect on the price level They do NOT affect real variables such as output employment or unemployment With Flexible wages and prices adverse supply shocks raise the price level and reduce output Keynesian Model Keynesian Model Inflexible wages Demand Shocks In the SR increases in AD will raise output employment and the price level Fluctuations in AD can cause business cycles Supply Shocks Supply shocks can also cause business cycles An adverse supply shock raises the price level but lowers output and employment Demand Shock A51 A5 A5 ECO 105 Goel 10191023 Selfcorrection Mechanism Selfcorrection Mechanism in the Keynesian Achieves the same result as flexible wages and prices A reduction in AD does NOT affect output or employment in the LR Only affects the PL Comparing Classical and Keynesian models CM uses supply shocks to explain the business cycle 1 reason for business cycle According to Keynesian 2 reasons for business cycle Neither Model quotIdealquot Classical economics explains many of the basic correlations but it has a difficult time explaining deep depressions Keynesian Economics explains deep depressions but it has a difficult time explaining key facts of the business cycle Question Why are wages and prices more inflexible in the SR than the LR Wages and prices may be constrained by contracts in the SR In the LR all contracts can be renegotiated ECO 105 Goel 10191023
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