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Ch. 12 and Intro to Ch. 15 Notes

by: Lauren Pike

Ch. 12 and Intro to Ch. 15 Notes Econ 1051

Marketplace > University of Missouri - Columbia > Economcs > Econ 1051 > Ch 12 and Intro to Ch 15 Notes
Lauren Pike
General Economics
George Chikhladze,Martha Steffens

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About this Document

These notes review the concepts of aggregate demand and supply and introduce interest rates and monetary policy.
General Economics
George Chikhladze,Martha Steffens
Class Notes
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This 4 page Class Notes was uploaded by Lauren Pike on Friday November 20, 2015. The Class Notes belongs to Econ 1051 at University of Missouri - Columbia taught by George Chikhladze,Martha Steffens in Fall 2015. Since its upload, it has received 30 views. For similar materials see General Economics in Economcs at University of Missouri - Columbia.


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Date Created: 11/20/15
Ch 12 Aggregate Demand and Supply Aggregate Demand 0 def schedulecurve that shows qtys of nation s output real GDP that buyers want to collectively purchase at each possible price level 0 buyers include I nation s household I businesses I gov I consumers located abroad 0 relationship between price level GDP price index and amount of real output demanded is inverse I when price level increases qty of real GDP demanded decreases I higher US price level discourages foreign buyers from purchasing US real GDP lower price levels encourages them to buy more US real output Changes in Aggregate Demand 0 change in price levels changes total spending and amount of real GDP demanded by econ o inverse relationship between price levels and real domestic output 0 determinants of AG 0 consumer spending C I consumer wealth total dollar value of all assets owned by consumers less the dollar value of their liabilities debts o wealth effect shifts AD curve right 0 reverse wealth effect shifts AD curve left I household borrowing o shifts AD curve right 0 decrease in borrowing shifts AD curve left I consumer expectations 0 expectations of higherlower income shift AD curve rightleft I personal taxes 0 tax cuts shift AD curve right 0 tax increases shift AD curve left 0 investment spending l I expected return on investment r I real interest rate i I business compares real interest rate MC w expected return on investment MB to determine if should be undertaken o profitmax firms will invest up until ri I real interest rates increase in real interest rates increases borrowing costs lower investment spending and AD decline in real interest rate causes reverse effect I expected returns higher expected returns increase demand for capital goods and shift AD curve right 0 influenced by several factors 0 future business conditions 0 tech 0 degree of excess capacity 0 bus taxes 0 gov spending G I increase in gov purchases shift AD curve right I decrease in gov purchases shift AD curve left 0 net export spending NX I higher US exports higher foreign demand for US goods I possible reasons for change in net exports 0 national income abroad 0 causes foreigners to buy more products made in the US 0 causes AD curve to shift to the right 0 exchange rates price of foreign currencies in terms of one s own currency 0 when US dollar depreciates against foreign currencies it takes more dollars to buy foreign goods 0 foreign goods become more expensive 0 Americans lower imports 0 other currencies appreciate relative to US dollar Dollar depreciation increases net exports and increases AD Dollar appreciation increases imports and decreases AD Aggregate Supply AS 0 schedulecurve showing relationship between a nation s price level and amount of real domestic outputs firm in econ produce varies depending on time horizons 0 short run I short run AS curve output prices flexible input prices sticky slopes upward bc w inputs fixed changes in price level raiselower profits I pos relationship between price level and real output bc increase in price level increases output produced 0 long run I inputs and outputs flexible vertical line bc in long run econ will produce the full employment output level no matter what the price level is I output not determined by price level I changes in price level doesn t affect productive capabilities o determinants of AS 0 changeininputpnces I domestic resources 0 wagessalaries make up most of bus costs 0 decrease in wages reduce perunit costs and increase AS 0 also changes when prices of land and capital inputs change I imported resource prices 0 added supply of resources typically decreases perunit costs 0 decrease in price of imported resource increases US AS increase in price decreases US AS 0 exchange rate fluctuations if US dollar appreciates gets stronger domestic producers face lower dollar price of imported resources decrease perunit costs and AS increases 0 if US dollar depreciates gets weaker domestic producers face higher dollar price of imported goods increase perunit costs and AS decreases 0 change in productivity I w no change in resource prices increase in productivity lower perunit costs and increase in AS 0 change in legal institutional environment I bus taxes increase in bus taxes increase perunit costs and lowers AS I gov regulation typically more costly to follow gov guidelines increase in regulation leads to higher perunit costs and decreased AS Equilibrium Price Level and Real GDP 0 occurs price level that equalizes amounts of real output demanded and supplied where AS and AD intersect 0 changes in price level and real GDP 0 if AS and AD increase proportionally over time real GDP will expand and neither demand pull inflation or cyclical unemployment will occur 0 increase in AD beyond full employment causes demandpull inflation bc price level is being pulled up by increase in AD 0 decrease in AS can be caused by a supply shock and lead to costpush inflation o downward price inflexibility o deflation rare in US econ 0 prices sticky on the downside because I fear or price wars I menu costs I wage contracts I morale effort and productivity I minimum wage o the multiplier effect 0 def of multiplier ration of change in GDP to an initial change in spending 0 Multiplier M also stated as initial A in spending A real GDP multiplier gtlt initial Aspending Ch 15 Interest Rates and Monetary Policy Interest Rates 0 price paid for use of money 0 represents 0 cost of borrowing o reward for lending 0 many different interest rates 0 we speak as though there is only one o The Demand for Money 0 public wants to hold some wealth in form of money to make purchases w it and hold some as asset o transaction demand Dt demand for money as a med of exchange I level of nominal GDP as determinant I the larger total money value of gs exchanged in econ larger amount of money needed to negotiate those transactions 0 assets demand Da amount of money ppl want to hold as a store of value I holding money doesn t present risk of capital loss from change in interest rates I disadvantage earns littleno interest I varies inversely w rate of interest 0 total demand Dm sum of the transactions demand and asset demand for money result in downsloping line 0 The Equilibrium Interest Rate 0 determined by supply and demand in the money market 0 occurs equil interest rate ie


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