ECON 201 1st Edition Lecture 32Outline of Last Lecture I. Unemployment Rate Fallacya. Definition of unemployment rate fallacyII. Article: Fed’s Assessment of the MarketIII. Costs of UnemploymentIV. Economic Fluctuationsa. Three facts of economic fluctuationsV. Model of Aggregate Supply and Aggregate Demand (Short-Run)VI. The Aggregate Demand Curvea. Definition of aggregate demand curveOutline of Current Lecture I. The Slope of the Aggregate Demand Curvea. Definition of wealth effectb. Definition of interest rate effectc. Definition of foreign price effect or exchange-rate effectII. Why the Aggregate Demand Curve Might Shifa. Definition of monetary policyIII. The Aggregate Supply Curvea. Definition of aggregate supply curveIV. The Long Run Aggregate Supply Curve a. Definition of natural rate of outputCurrent LectureI. The Slope of the Aggregate Demand CurveAn increase in production reduces the quantity of goods and services demanded because of three effects: the wealth effect, the interest rate effect, and the foreign price effect. The wealth effect occurs when consumption falls. The interest rate effect occurs when investment falls. Theforeign price effect, or exchange-rate effect, is when net exports fall. You can also use all of this logic in the reverse. In reality, these effects are very small. The aggregate demand curve is very inelastic and steep. These effects are what give us the downward slope. II. Why the Aggregate Demand Curve Might ShifAny event that changes consumption, investment, government spending, or net exports except a change in prices, will shif the aggregate demand curve. An example of this is that a stock 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.market boom makes households feel wealthier; this leads to a crisis and the aggregate demand curve shifs right. There are three main changes that can affect consumption that could shif theaggregate demand curve:i. A stock market boom or crashii. Changes in preferences regarding consuming/saving (the aggregate takes a hit when the latter occurs)iii. Tax hikes or cuts There are three main changes in investment that can shif the aggregate demand curve:i. Firms purchasing new computers, equipment, or factoriesii. People acting on their expectations; these may be optimistic or pessimisticiii. Investment tax credit or other tax incentivesInvestment also ticks up a little before the end of the recession; however, this didn’t happen at the end of the great recession because of interest rates and monetary policy. Monetary policy iswhen the Fed increases the money supply, decreases the price of rates, and increases interest rates. There are two changes in government that can affect the aggregate demand curve.i. Federal spending, e.g. defenseii. State and local spending, e.g. road and schoolsThere are two changes in net exports that can affect the aggregate demand curve.i. Booms or recessions in countries that buy our exports (a recession in one countrycan spread to another; this happened in the recession of 2008-2009)ii. Appreciation and depreciation resulting from international speculation in the foreign exchange marketIII. The Aggregate Supply CurveThe aggregate supply curve shows the total quantity of goods and services produced at any given price level. In the short-run, the aggregate supply curve is upward sloping. In the long run,the aggregate supply curve is vertical. IV. The Long Run Aggregate Supply CurveThe long run aggregate supply curve (LRAS) indicates full production in an economy; this production depends on the factors of production (land, labor, and capital). The natural rate of output, known as Yn, is the amount of output the economy produces when unemployment is at its natural rate. The LRAS is vertical because the natural rate of output depends on labor, capital, natural resources, and the level of technology. Note that an increases in prices does not affect the natural rate of output. The LRAS curve might shif due to changes in L, changes in the natural rate of unemployment, changes in K or H, changes in natural resources or changes in technology. These are all demonstrated below. Changes in L or the natural rate of unemploymenti. Immigration ii. Baby boomers retiringiii. Government policies reducing natural unemployment rateChanges in K or Hi. Investment in factories or equipmentii. More people getting college degreesiii. Factories destroyed by a hurricaneChanges in natural resourcesi. Discovery of new material depositsii. Reduction in supply of imported oil iii. Long run changing weather patterns that affect agriculture productionChanges in technologyi. Productivity improvements from technological