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 Grapho What happens to Market Price and Quantity? Draw a Supply and Demand Grapho What happens to ONE GOOD OR SERVICE? Draw a Supply and Demand Graph Need to know:o How each shift affects all the types of graphs Production Possibilities curve Business Cycle Etc. o A shift in Short Run Aggregate Supply does NOT always change Long Run Aggregate Supplyo A shift in Long Run Aggregate Supply ALWAYS changes Short Run Aggregate Supply- Factors that shift the aggregate demand curve:o 1. Wealth 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 increaseso Aggregate demand shifts to the righto APL increaseso Y potential increaseso GDP increaseso Unemployment decreaseso 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 fallso Wealth decreaseso Aggregate Demand shifts to the lefto Unemployment increaseso The actual rate of unemployment is higher than the natural rate of unemploymento 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 decreaseso Aggregate demand decreaseso It is a bad time to borrowo Investment increaseso 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 pessimisticoutlook on the economyo If outlook is poor, you start saving more and Aggregate Demand will decreaseo Expectations cause things to happenso 4. Changes in the expected rate of Inflation If we expect prices to be higher, it is a good time to buy because the pricesare currently cheap. - If we expect inflation to rise:o APL will riseo We are at our above our potential on the business cycleo We are outside the graph on the production possibilities curveo Unemployment is lowo Employment is higho We are at a short run equilibrium and a long run disequilibriumo 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 recessiono 2. Supply Shock Anything unexpected that affects supply- Ex. Prices change- Ex. Weather causes a disaster- Things that cause changes in Long Run Supply Curveo 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 technologyChapter 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 Debto Used to affect changes in the business cycleo Fiscal policy cannot permanently change employment and is thereforeINEFFECTIVE- Discretionary Fiscal Policy: o Government can change factors whenever they want- Budget Deficit:o G>To What can we do to reduce debt? 1. Increase taxes 2. Decrease spending- Budget Surplus:o G<T- National Debt: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 themoney supply. But this will increase inflation!- Crowding Out:o Will decrease GDP more often than increase ito AD=RGDP=Y=C+I+G+(X-M)o If government decides that the economy is bad and they want to increase spendingto try and stimulate the economy then they will increase the public sector (G) bytaking 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 increaseo Because interest rates tend to move together, if thegovernment increases interest rates, people will flock toinvest and buy bonds from the government and thereforeturn down bonds from corporations like IBM. IBM will inturn raise rates as well to get their customers back However, by corporations attempting to pay highinterest rates, they have less money to invest andtherefore GDP will actually decrease- Quantity demanded increases- When Government borrows money by increasing interest rates inorder to sell more bonds and therefore takes money away from theprivate sector and lowering GDP- The Multiplier:o The government wants to spend money in order to create jobs and thereforstimulate the economy. So they start a new project such as building a new road and pays acontractor to do so. - The contractor takes that money and pays workers and forresources, etc. o The laborers take the money they earned and spend it onvarious things such as food and other products The places the buy the products from use thatto….ETC. This is a crowd sourcing example and will really decrease GDP.Formulas to Know for Macro Economics:Symbol Key:Land=L Labor=N Capital=K Entrepreneurship=eRent=R Wages=W Interest=i Profit= ΠInflation= Π Expected= Π^o Happened= ΠIncome=GDP=Y Consumers=C Suppliers=I Government=G Exports=X Imports=MPrivate Sector=C+I (Consumers and Suppliers) Public Sector= G (Government)Statistical Adjustment=SA Quantity=Q Price=PLabor Force= LF= U+E Unemployed=U Employed=ETax Revenues= T Interest
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