Econ 1202 1st Edition Lecture 18 Outline of Lecture 17 (Framework of Aggregate Demand and Supply (continued)) I. What about the Short Run?II. Why does Short Run AS “look” the way is does?III. The short run the Aggregate Supply is Driven ByIV. Focus of AttentionV. Sticky-Wage TheoryVI. Long Term Labor ContractVII. Long Term Requirements ContractVIII. Misperceptions TheoryIX. Sticky-Price Theory X. Why aren’t we doe yet?XI. “Things” that Cause the SRAS to shift/changeXII. Big IdeaXIII. Cliff Notes: AD-AS ModelXIV. Natural Rate of UnemploymentXV. QuestionsXVI. Macroeconomics “starts” with KeynesOutline of Lecture 18 (Framework of Aggregate Demand and Supply (continued)/Money and Banking)I. Why Inflation?II. Other Macroeconomic TheoriesIII. MoneyIV. A World Without Money: The Barter EconomyV. The Functions of MoneyVI. Types of MoneyVII. Money in the U.S. Economy: The Terms Used Framework of Aggregate Demand and Supply (continued)I. Why Inflation?a. Generally inflation is a reflection of total spending increasing faster than production i. AD moves further right than the LRASii. SRAS moves to the right, but the anticipated rise in the price level causes it to move less far than the LRASb. Supply Shock (Stagflation)i. An adverse shift in the short-run aggregate supply curve causes output to fall and the price level to risec. How can you determine whether aggregate demand expansion or aggregate supply contraction is driving the inflation rate?i. Prices are rising, but output is contracting and unemployment is rising II. Other Macroeconomic Theoriesa. Monetarists (Milton Friedman)i. The money supply (and changes in the money supply) drives AD and the economy (an have caused significant “bouts” of economic instability)b. New Classical Model (Robert Lucas)i. SRAS looks like LRAS because workers and firms are rational in formulating price expectations and thus correctly anticipates inflation 1. Sticky wages and prices aren’t so stickyc. Real Business Cycle (Edward Prescott)i. Issue is not ADii. SRAS=LRAS, but SRAS subject to “real shocks”d. Austrian School (Friedrich von Hayek)i. Instability in AD caused by government policies (often reflected in artificially low interest rates causing booms leading to busts). ii. Markets are generally stableiii. In the AD=C+I+G+NX, the balance and types of the components matterMoney and BankingIII. Moneya. Money-an asset that people are generally willing to accept in exchange for goods and services, or for payments of debtsb. One of the most important inventions of mankindc. The existence of money allows for trading and thus specializationd. Critical to market development and the development of an entire economy which is tied to Smithian Growthe. No moneyless marketsless specializationless productivityreduced standard of livingi. Example: fall of Rome1. Demonetization of Economy2. Collapse or Markets3. Collapse of EconomyIV. A World Without Money: The Barter Economya. If you wanted to trade, you would have to barteri. Barter-trading goods and services directly for other goods and servicesb. Trades would require a double coincidence of wantsi. What I have or can offer as the buyer, the seller must want to part with her wares or services (and vice versa)V. The Functions of Moneya. Medium of Exchangei. Money is anything that is generally accepted for the payment for goods and servicesb. Unit of Accounti. Money allows a way of measuring value in a standard manner (a yardstick if you will)c. Store of Valuei. Money allows people to defer consumption until a later date by storing value (an asset)ii. Other assets can do this too, but money does it particularly well because it is liquid (easily exchanged for goods)1. As such, with money, people transfer purchasing power fromd. Standard of Deferred Paymenti. Money facilitates exchanges across time when we anticipate that its value in the future will be predictableVI. Types of Moneya. Commodity Money-money that takes the form of a commodity with intrinsic valuei. Example: gold, cigarettes, beaver pelts1. Historically, societies generally started using commodity money like animal skins or precious metals as their economies evolved and developed2. Today, individuals and companies are specializing and receiving something called money so you can use that money to pay for goods and services being offered by others specializingb. Intrinsic Value-item would have value even if it were not used as moneyc. Gold Standard-gold as money or paper money that is convertible into goldon demandd. Fiat Money-money without intrinsic value; used as money because of governmental decreei. Any money, such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money1. Federal Reserve-the central bank of the United Statesa. Money issued by the Federal Reserve is not exchangeable for goldii. Basically whatever the government says is moneyVII. Money in the U.S. Economy: The Terms Useda. Money Stock-quantity of money circulating in the economya. Currency-paper bills and coins in the hands of the publicb. Demand Deposits (Checking Accounts)-balances in bank accounts; depositors can access on demand by writing a