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Mizzou ECONOM 1051 - Changes in the Supply Curves
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ECON 1051 1nd Edition Lecture 56 Outline of Last Lecture I. Securitization Comes to BankingII. The Shadow Banking System III. The Financial Crisis of 2007-2009Outline of Current Lecture I. Changes in the Expectations of Households and FirmsII. Changes in Foreign Variables III. The Long-Run Aggregate Supply Curve IV. The Short-Run Aggregate Supply Curve Current LectureI. Changes in the Expectations of Households and Firmsa. If households become more optimistic about their future incomes and firms become more optimistic about the future profitability of investment spending, the aggregate demand curve will shift to the righti. Conversely, if they become more pessimistic, the aggregate demand curve will shift to the left b. Change in Wealth of Consumersi. Stock market boom will increase consumer spending and hence ADii. Stock market crash will decrease consumer spending and hence AD iii. Strong housing market will increase consumer spending and hence ADiv. Weak housing market will decrease consumer spending and hence ADII. Changes in Foreign Variablesa. If firms and households in other countries buy fewer U.S. goods or if firms and households in the United States buy more foreign goods, net exports will fall and the aggregate demand curve will shift to the left i. Economic expansion overseas will increase US net exports and hence ADii. Vice versa, economic recession will decrease US net exports and hence AD1. If dollar becomes stronger or appreciates, net exports will fall because the price in foreign currency of U.S. products sold in other countries will rise, and the dollar price of foreign products sold in the United States will fallThese 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.a. Net exports will increase if the value of the dollar falls against other currencies b. An increase in net exports at every price level will shift the aggregate demand curve to the right b. Examplei. An increase in net exports at every price level will shift the aggregate demand curve to the right1. Suppose Ford Focus costs $18,000. Ford is trying to sell that Focus in France. Currently exchange rate between dollar and euro is 1.4 dollars/euro. How many euros will Ford get for it ford focus? a. 12,800 euros2. Dollar appreciates to 1.2 dollars/euro How much will it cost to a French guy Jean?a. I t will cost 18000/1.2 =$15,000III. The Long-Run Aggregate Supply Curvea. In the long run, the level of real GDP is determined by the number of workers, the capital stock, and the available technology, none of which are affected by changes in the price level i. So in the long-run, changes in the price level do not affect the level of realGDPii. Remember that the level of real GDP in the long run is called potential GDP or full employment GDP IV. The Short-Run Aggregate Supply Curve a. As prices of final goods and services rise, price of inputs, such as wages of workers or the price of natural resources, rise more slowlyb. The reason for this is that some firms and workers fail to accurately predict changes in the price levelc. There are three common explanations for an upward-sloping SRAS curve when worker and firms fail to accurately predict price leveli. Contracts make some wages and prices sticky ii. Firms are often slow to adjust wagesiii. Menu costs make some prices sticky d. Suppose there is an increase in the price level in the economy. Lots of wages are fixed by contracts. So even though everything else is becoming more expensive, firm will still pay the same wages to its employees. Firm is still able to charge higher price for its output (because of inflation) while keeping wages low. The firm will be more profitable (temporarily) and produce or supply. National outputis higher. i. Menu costs:1. Suppose price level increase. Some firms will not increase prices because of high menu costs (cost of a price tag at Target). So they will wait. Meanwhile, their products will be very cheap to


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Mizzou ECONOM 1051 - Changes in the Supply Curves

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