Chapter 10 What Causes the Aggregate Demand Curve to Shift If asked on the test o What happens to APL and Real Output Draw a Goods and Services Graph o What happens to Market Price and Quantity Draw a Supply and Demand Graph o What happens to ONE GOOD OR SERVICE Draw a Supply and Demand Graph o How each shift affects all the types of graphs Production Possibilities curve Business Cycle Etc Need to know o A shift in Short Run Aggregate Supply does NOT always change Long Run o A shift in Long Run Aggregate Supply ALWAYS changes Short Run Aggregate Aggregate Supply Supply o 1 Wealth Factors that shift the aggregate demand curve Wealth is a stock concept It describes things that you have accumulated with your income Ex Your house car etc In a booming economy o Wealth increases o Aggregate demand shifts to the right o APL increases o Y potential increases o GDP increases o Unemployment decreases o Natural rate of unemployment is higher than the actual rate of unemployment If the stock market crashes and we go into a recession o GDP falls o Wealth decreases o Aggregate Demand shifts to the left o Unemployment increases o The actual rate of unemployment is higher than the natural rate of unemployment o 2 Real Interest Rate Inverse relationship between real interest rates and aggregate demand If interest rates increase aggregate demand decreases If they decrease aggregate demand increases If interest rates increase it is a good time to save If saving more o Consumption decreases o Aggregate demand decreases o It is a bad time to borrow o Investment increases o 3 Expectations about the Economy Consumer Sentiment Index CSI If CSI is near 100 glass is half full meaning there is an optimistic outlook on the economy If CSI is near glass is half empty meaning there is a pessimistic outlook on the economy o If outlook is poor you start saving more and Aggregate Demand will decrease o Expectations cause things to happens o 4 Changes in the expected rate of Inflation If we expect prices to be higher it is a good time to buy because the prices are currently cheap If we expect inflation to rise o APL will rise o We are at our above our potential on the business cycle o We are outside the graph on the production possibilities curve o Unemployment is low o Employment is high o We are at a short run equilibrium and a long run disequilibrium o 5 Changes in Income Abroad Aggregate Demand RGDP Y C I G X M If other countries get wealthier exports will increase and therefore aggregate demand will increase as well If other countries get poorer exports will decrease and so will aggregate demand Things that cause Short Run Aggregate Demand Supply Curve to shift o 1 Cost of Production Cost of Resources Ex Steel is in short supply Price increases APL increases Real GDP decreases High unemployment Low employment In a recession o 2 Supply Shock Anything unexpected that affects supply Ex Prices change Ex Weather causes a disaster Things that cause changes in Long Run Supply Curve o 1 Technology New technology leads to Production increasing Point is outside the production possibilities curve Changes both Long and Sort Run Still is at a Long Run Equilibrium meaning where all three lines intersect Full employment stays the same Natural Rate of Unemployment stays the same Economy is at equilibrium and doing fine not booming nor busting o 2 of Resources Same graph as technology Chapter 11 Fiscal Policy This is only part of this section The rest will be taught in class on Tuesday November 12th 2013 You will have to illustrate and explain crowding out on the test Words to know Fiscal Policy o Changes in G T and Debt o Used to affect changes in the business cycle o Fiscal policy cannot permanently change employment and is therefore INEFFECTIVE Discretionary Fiscal Policy Budget Deficit o Government can change factors whenever they want o G T o What can we do to reduce debt 1 Increase taxes 2 Decrease spending Budget Surplus o G T National Debt Crowding Out o We have huge national debt It is over 17 Trillion dollars o The U S government cannot default on their debt because they will just print more money by taking money out of the back of the FED and putting it in the money supply But this will increase inflation o Will decrease GDP more often than increase it o AD RGDP Y C I G X M o If government decides that the economy is bad and they want to increase spending to try and stimulate the economy then they will increase the public sector G by taking money out of the income of the private sector C I o When C I gets smaller it is considered crowding out Government borrows Demand curve shifts to the right Interest rates increase o Because interest rates tend to move together if the government increases interest rates people will flock to invest and buy bonds from the government and therefore turn down bonds from corporations like IBM IBM will in turn raise rates as well to get their customers back However by corporations attempting to pay high interest rates they have less money to invest and therefore GDP will actually decrease Quantity demanded increases When Government borrows money by increasing interest rates in order to sell more bonds and therefore takes money away from the private sector and lowering GDP The Multiplier o The government wants to spend money in order to create jobs and therefor stimulate the economy contractor to do so resources etc So they start a new project such as building a new road and pays a The contractor takes that money and pays workers and for o The laborers take the money they earned and spend it on various things such as food and other products The places the buy the products from use that to ETC This is a crowd sourcing example and will really decrease GDP Formulas to Know for Macro Economics Capital K Labor N Wages W Interest i Symbol Key Land L Rent R Inflation Expected o Income GDP Y Consumers C Suppliers I Government G Exports X Imports M Private Sector C I Consumers and Suppliers Statistical Adjustment SA Quantity Q Price P Labor Force LF U E Tax Revenues T Entrepreneurship e Profit Public Sector G Government Unemployed U Interest Rate ir Happened Employed E Equations Total Revenue Base x Height on Supply and Demand Curve Producer Surplus Base x Height on Supply and Demand Curve Consumer Surplus Base x Height Market price on Supply and Demand Curve GDP Per Capita GDP Population x 100 Expenditures approach to calculate GDP Y C I G X M If X M Exporting more If X M Importing more Income
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