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 ADIII. Exchange RateIV. LRAS and SRASCurrent LectureI. Net Exports as a Component of ADa. NX= Exports (X) – Imports (M)b. NX are usually affected by the business cyclec. NX is a function of i. Relative growth in price levelsii. Relative growth in RGDPiii. Relative value of the $ versus other currenciesII. 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 cheaperIII. 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 paribus1. US NX will be positive IV. NX and the relative Value of the US dollara. 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 valueV. How do fluctuations in E affect NXa. Yen Price = $ Price X Exchange rateThese 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.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 increasese. During Recession in the US, NX usually increases because ceteris paribusi. US inflation < ROW inflationii. US % change RGDP < ROW % Change RGDPiii. $ weakens VI. Examplea. If there is a strong dollar, and faster GDP growth in the US than ROW:i. Aggregate demand will decrease1. Exports decrease, imports increaseI. Why does AD have a negative slope?a. Wealth Effect b. Interest Rate Effect c. NX Effect II. AD is the level of Real GDP purchased by household ( C ), businesses (I), government (G), and foreigners (NX) III. The wealth effecta. Wealth = Assets – Liabilitiesb. As the price level rises: real value of wealth falls c. C falls (move up along AD)IV. The Interest Rate Effecta. As the price level rises, we need more money to buy goods and servicesi. Households hold more cash and borrow more1. The increase in demand for loans increase the real interest rate onloans, ceteris paribus rate 2. C and I spending increaseV. The NX effect a. As the price level rises faster in the US compared to the ROWi. Exports decrease and imports increaseii. NX goes down VI. Examplea. An increase in consumer confidence and a cut in business taxes will:i. Increase ADVII. LRAS: Long run aggregate supply a. Identifies output at potential where Y = ybar and U = ubar i. Potential output is determined by the:1. Number of workers2. Capital stock3. Available technology b. LRAS is verticali. changes in the price level do not affect the level of real GDP in the LRc. Shifts in LRAS: i. A change in potential outputii. A change in resource base1. Number of works2. Change in the size of the capital stock 3. Technological change/ innovation iii. Each year the LRAS shifts rightwardVIII. SRAS has positive slopea. SRAS: shows the relationship in the SR between the price level and the quantity of real GDP supplied by firmsb. When prices rise in the SR from P = 100 to P =110, firms produce more output because, input prices are sticky or fixedi. It is difficult to predict future inflation when negotiating wages and prices of inputs1. Wages and prices of inputs are often set by contracts for one year or more2. Menu costs: the costs of firms of changing pricesIX. Example:a. You own a coffee shopi. Suppose AD is increasing in US economy 1. This increase the price of your drinksii. Input costs are very slow to adjust1. Profits and revenues increase2. You have incentive to increase output 3. Profits = Revenues – Costs X. Conclusion: A rising price level leads to a larger quantity of goods and services supplied in the short