These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Lecture!20!!Outline(of(Last(Lecture(((I. Aggregate!Demand:!AD!=!C!+!G!+!I!+!(X5M)!a. What!Impacts!C?!b. What!Impacts!G?!c. What!Impacts!I?!!d. What!Impacts!(X5M)?!II. Aggregate!Supply!a. What!Impacts!AS?!!Outline(of(Current(Lecture((I. Fiscal!Policy!Effects(II. Monetary!Policy!Effects(III. Cost!Shocks!(Stagflation)((Current(Lecture(1. Fiscal!Pol icy!Eff ects!a. The!level!of!net!taxes!is!an!important!fiscal!policy!variable!along!with!government!spending.!b. In!reference!to!the!Aggregate!Supply!(AS)!Curve,!an!expansionary!fiscal!policy!–!increase!in!G!or!decrease!in!T!–!shifts!the!Aggregate!Demand!(AD)!Curve!to!the!right;!assuming!the!economy!is!on!the!nearly!flat!portion!of!the!AS!Curve.!i. When!the!economy!is!producing!on!the!nearly!flat!portion!of!the!AS!Curve,!firms!are!producing!well!below!capacity,!and!they!will!respond!to!an!increase!in!demand!by!increasing!output!much!more!than!they!increase!prices.!!ii. Out!put!expands!to!meet!the!increased!demand;!b/c!the!price!level!increases!a!little,!the!Fed!does!not!raise!interest!rates!by!much,!and!so!there!is!little!change!in!planned!investment.!!!!!!!!((((((ECON(104(((11th(Edition(! !A"Shift"of"the"AD"Curve"When"the"Economy"is"on"the"Nearly"Flat"Part"of"the"AS"Curve"!2. Monetary!Policy!Effects!a. The!Fed!controls!Monetary!Policies.!b. The!interest!rate!value!that!the!Fed!chooses!(r)!depends!on!output!(Y),!the!price!level!(P),!and!other!factors!(Z);!the!Fed!achieves!the!interest!rate!value!that!it!wants!through!open!market!operations.!c. The!issue!of!how!much!weight!the!Fed!puts!on!the!price!level!relative!to!output!is!related!to!the!issue!of!inflation!targeting.!If!a!monetary!authority!is!engaged!in!inflation!targeting,!then!it!behaves!as!if!inflation!is!the!only!variable!in!its!interest!rate!rule.!However,!the!doesn’t!operate!like!this!–!it!does!care!about!output.!!3. Cost!Sho cks!(Stagfl ation )!a. When!analyzing!the!effects!of!Cost!Shocks,!it!is!the!shape!of!the!AD!Curve!that!matters.!!i. When!the!AD!Curve!is!fairly!flat,!this!is!where!the!Fed!puts!a!large!weight!on!price!stability!relative!to!output.!In!this!case,!a!leftward!shift!of!the!AS!Curve!results!in!a!large!decrease!in!output!relative!to!the!increase!in!the!price!level.!Behind!the!scenes!the!Fed!is!raising!the!interest!rate!a!lot,!thus!lowering!planned!investment!and!thus!output!a!lot,!to!offset!much!of!the!price!effect!of!the!Cost!Shock.!b. When!the!price!level!rises!b/c!the!AS!Curve!shifts!to!the!left,!this!is!called!Cost5Push,!which!is!accompanied!by!lower!output.!There!is!thus!higher!inflation!and!lower!output!–!Stagflation.!!!!!!!!