Econ 2013 Review Session Final Exam 1 The Final The exam covers chapters 1 13 not including chapters 4 and 5 51 multiple choice questions Each question is worth 2 points You can miss 1 and still get all 100 points It is possible to get over 100 points A higher percentage on your final replaces the lowest of your two midterm exam scores Bring a 2 pencil and if you like a calculator 2 How to study 1 Go through your class notes 2 Study the 1 old extra credit quizzes 2 online quizzes 3 practice questions 4 coursebook questions and exams don t just memorize the answers to questions but understand how to answer the question 3 4 Consult your textbook or come see me if there is anything you do not understand 3 Chapter 10 Shifters of aggregate demand 1 CHANGES IN REAL WEALTH 1 wealth up AD up 1 you have more money to spend on goods and services consumption up 2 wealth down AD down 2 CHANGES IN THE REAL INTEREST RATE 1 2 Interest Rates down Consumption up Investment up AD up Interest Rates up Consumption down investment down AD down 1 Higher Interest rates mean you make more money if you keep money in the bank aka spend less 3 CHANGES IN EXPECTATIONS 1 optimism thinking economy will doing great soon AD 3 up You demand more 2 pessimism thinking economy will be doing poorly AD down 4 CHANGES IN EXPECTED RATE OF INFLATION 1 expected inflation up AD up 1 If you are seeing the price level to rise inflating in the near future You might go out and buy that good now increasing the consumption 2 Expected inflation down AD down 1 If you expect the economy to not do so well in the future you should save your money to prepare Decrease consumption increase saving 5 CHANGES IN INCOME ABROAD 1 US Economic output is related to income of its trading partners in the world 2 Foreign income up AD up 1 When foreign income rises U S exports will increase they can buy more from us causing aggregate demand to increase foreign income down AD down 1 When foreign income declines U S exports will decrease they can t buy as much not enough money causing aggregate demand to decrease 6 CHANGES IN THE EXCHANGE RATE 1 Dollar depreciates us goods less expensive compared to foreign currencies Counties find your goods cheaper than their own Exports go up AD up 2 Dollar appreciates american goods more expensive to foreign currencies Counties find your goods more expensive than their own Exports go down AD down 4 Chapter 10 Shifters of short run aggregate supply TEMPORARY 2 more expensive to make price 2 expected inflation goes up 1 CHANGES IN RESOURCE PRICES 1 Increase in Resource Price 1 price of ingredient to make product goes up goes up 3 SRAS goes down SHIFT LEFT 2 Decrease in resources price 1 price of ingredient goes down 2 Less expensive to make price goes down 3 SRAS goes up SHIFT RIGHT 2 CHANGES IN THE EXPECTED RATE OF INFLATION 1 expected inflation goes down 1 producer side sell more now prices will only get lower 2 SRAS up 1 Producer side let s sell when prices higher in future 2 SRAS down 3 SUPPLY SHOCKS 1 any temporary change favorable weather good SRAS up 2 3 natural disaster bad SRAS down 5 Shifters of LONG RUN AGGREGATE SUPPLY long term Think of LRAS as measuring GDP 1 CHANGE IN RESOURCE BASE 1 CHANGE IN INSTITUTIONAL ARRANGEMENTS THAT 1 Increase in resources 1 Discover more resources 1 2 You can produce more with more resources GDP AFFECT PRODUCTIVITY Increase in good things will increase 3 LRAS Increase 2 Decrease in resources GDP decline 2 LRAS Decrease 1 No longer can produce as much as you used to 1 example FREE TRADE INVESTMENT 1 Things good for growth GDP 2 LRAS increase 2 Decrease in good things 1 Bad for economic growth GDP 2 LRAS decrease 2 CHANGE IN LEVEL OF TECHNOLOGY 1 Increase in Technology 1 More efficient production 2 Produce more 3 LRAS increase 2 Decrease technology 1 Less efficient 2 Produce less LRAS decrease 6 SUPER IMPORTANT Be able to actually shift the curves and know what happens to the equilibrium output and the equilibrium price in both the short run and the long run 1 AS AD GRAPHS 2 BASIC HOME RULES IN SHIFTING 1 LRAS 1 When LRAS shifts SRAS shifts with it 1 When LRAS shifts left SRAS will shift left 2 When LRAS shifts right SRAS will shift right 2 AD 3 SRAS 1 When AD shifts SRAS will shift in the opposite direction 1 When AD shifts left SRAS will shift right 2 When AD shifts right SRAS will shift left 1 When SRAS shifts in the long run it will return to original place 1 SRAS is short run everything is temporary 2 Temporary changes mean that eventually things will come back to normal 3 This accounts for why the SRAS returns to it s original place 7 LRAS Increase 1 LRAS Increases 1 Reasons could be 1 Increase in Resource base Increase in Technology 2 3 Decrease trade Barriers SRAS1 2 HOME RULE FOR LRAS 1 When LRAS shifts SRAS shifts with it 1 When LRAS shifts left SRAS will shift left 2 When LRAS shifts right SRAS will shift right LRAS1 E Y Y1 1 End result 1 Output increases Y 2 Prices go down P 7 P P1 LRAS Decrease LRAS1 SRAS1 1 LRAS Decreases 1 Reasons could be 1 Reduction in Resource base 2 Reduction in Technology 3 Increase trade Barriers 2 HOME RULE FOR LRAS 1 When LRAS shifts SRAS shifts with it 1 When LRAS shifts left SRAS will shift left 2 When LRAS shifts right SRAS will shift right 1 End result 1 Output Decreases Y 2 Prices go up P 7 E P1 P Y1 Y SRAS Increase1 SRAS Increases 1 Reasons could be 1 Decrease in Resource Price 2 Decrease in Expected Inflation 3 Positive Economic things 1 example decrease trade Barriers 2 or good weather SRAS2 2 HOME RULE FOR SRAS SRAS1 1 When SRAS shifts in the long run it will return to original place 1 SRAS is short run everything is temporary 2 Temporary changes mean that eventually things will 3 This accounts for why the SRAS returns to it s original come back to normal place 1 End result In the short run 1 2 1 Prices decrease increased output In the long run SRAS 1 Prices and output return to normal 7 P P1 E Y Y1 SRAS Decrease SRAS1 SRAS2 E P1 P Y1 Y 1 SRAS Decrease 1 Reasons could be 1 Increase in Resource Price Increase in Expected Inflation 2 3 Negative Economic things 1 example Increase trade Barriers 2 or Natural disaster 2 HOME RULE FOR SRAS 1 When SRAS shifts in the long run it will return to original place 1 SRAS is short run everything is temporary 2 Temporary changes mean that eventually things will come …
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