Econ 104 1st Edition Lecture 20 Outline of Last Lecture I Antioxidant and redox regulation of gene transcription Outline of Current Lecture II Net Exports as a Component of AD III Exchange Rate IV LRAS and SRAS Current Lecture I II III IV V Net Exports as a Component of AD a NX Exports X Imports M b NX are usually affected by the business cycle c NX is a function of i Relative growth in price levels ii Relative growth in RGDP iii Relative value of the versus other currencies NX and relative growth in Price Levels a Suppose US inflation ROW inflation and US goes into recession i Typically this implies 1 US inflation will be less than ROW inflation with ceteris paribus 2 US NX increase exports decrease in imports a Because US goods will be relatively cheaper NX and relative growth in RGDP a Suppose US change RGDP ROW change RGDP and US goes into recession i US change RGDP ROW change RGDP with ceteris paribus 1 US NX will be positive NX and the relative Value of the US dollar a Suppose the yen dollar exchange rate is E yen 100 yen i Means that 100 yen buys 1 or 1 buys 100 yen 1 If the dollar depreciates weakens and the exchange rate is now E yen 60 yen then Yen appreciates strengthens a Dollar has lost value How do fluctuations in E affect NX a Yen Price Price X Exchange rate 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 VI I II III IV V VI VII b If the depreciates against the Yen US exports increase US goods become cheaper c If the depreciates against the Yen US imports decrease imports become more expensive d If the depreciates against the Yen US NX increases e During Recession in the US NX usually increases because ceteris paribus i US inflation ROW inflation ii US change RGDP ROW Change RGDP iii weakens Example a If there is a strong dollar and faster GDP growth in the US than ROW i Aggregate demand will decrease 1 Exports decrease imports increase Why does AD have a negative slope a Wealth Effect b Interest Rate Effect c NX Effect AD is the level of Real GDP purchased by household C businesses I government G and foreigners NX The wealth effect a Wealth Assets Liabilities b As the price level rises real value of wealth falls c C falls move up along AD The Interest Rate Effect a As the price level rises we need more money to buy goods and services i Households hold more cash and borrow more 1 The increase in demand for loans increase the real interest rate on loans ceteris paribus rate 2 C and I spending increase The NX effect a As the price level rises faster in the US compared to the ROW i Exports decrease and imports increase ii NX goes down Example a An increase in consumer confidence and a cut in business taxes will i Increase AD LRAS Long run aggregate supply a Identifies output at potential where Y ybar and U ubar i Potential output is determined by the VIII IX X 1 Number of workers 2 Capital stock 3 Available technology b LRAS is vertical i changes in the price level do not affect the level of real GDP in the LR c Shifts in LRAS i A change in potential output ii A change in resource base 1 Number of works 2 Change in the size of the capital stock 3 Technological change innovation iii Each year the LRAS shifts rightward SRAS has positive slope a SRAS shows the relationship in the SR between the price level and the quantity of real GDP supplied by firms b When prices rise in the SR from P 100 to P 110 firms produce more output because input prices are sticky or fixed i It is difficult to predict future inflation when negotiating wages and prices of inputs 1 Wages and prices of inputs are often set by contracts for one year or more 2 Menu costs the costs of firms of changing prices Example a You own a coffee shop i Suppose AD is increasing in US economy 1 This increase the price of your drinks ii Input costs are very slow to adjust 1 Profits and revenues increase 2 You have incentive to increase output 3 Profits Revenues Costs Conclusion A rising price level leads to a larger quantity of goods and services supplied in the short run