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UW-Madison ECON 102 - The Real Business Cycles Theory

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Econ 102 1st Edition Lecture 8- Outline of Last Lecture I. 7.3 Wages and the Demand and Supply of laborII. Graph One: Production FunctionIII.Graph Two: Real WagesIV.Graph Three: Wr x LaborV. Graph Four: Labor Supply and Labor DemandVI.Graph Six: Real GDP x Labor, leads up to Graph Five: Real GDP x LaborOutline of Current LectureI. Exam InformationII. 7.5 Using the Full Employment ModelIII. Application 3IV. Important to understand- but not until second examV. Chapter 8Current LectureI. Exam Informationa. Through Chapter 8.3 b. 50% of exam is from MyEconLabc. Yes you can bring your calculatori. do not use store or email functionsii. No cellphone calculatorsd. Office hours Tuesday 12:30-2:30pme. Bring colored pens to exams to help with graphing 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.f. Will get an email with more information on how to studyg. Recommends practicing examples- as she demonstrated (increasing) and the opposite (decreasing)i. EX: increase in population- also practice decrease in population!! (black plague in textbook)ii. Workers do not just work as much as they physically canII. 7.5 Using the Full Employment Model a. Taxes and Potential outputb. Real Business Cycles Theoryi. understand both of these graphs!!1. positive and negative casesIII.Application 3a. The great Depressioni. Real business cycles does not explain this1. real wages actually ROSE as employment FELL, contrary to the classical model2. unionization was rising3. Otherwise real business model explains well, but doesn't always mean it is right.IV.What the baseline classical model implies about government policya. If more is being allocated to government, less is going to householdsb. Crowding out in a closed economyi. Crowding out1. The reduction in investment (or other component of GDP) caused by an increase in government spendingii. Principle of opportunity cost1. the opportunity cost of something is what you sacrifice to get itiii. Closed economy1. An economy without international trade.iv. output = consumption + investment + government purchases1. Y = C + I + Gv. Increased government spending crowds out consumption by consumers. 1. “unpatriotic” to spend money during the warvi.Increased government spending also crowds out private investment spending.c. Crowding out in an Open economyi. Open economy1. An economy with international trade.2. Increased government spending need not crowd out either consumption or investment. It could lead to reduced exports and increased imports.d. Crowding Ini. crowding in1. The increase of investment (or other component of GDP) caused by a decrease in government spending.2. Zero sum gain because of limited resources in the economyV. Important to understand- but not until second exama. Neo-classical economists are not necessarily libertarians b. Role for government is after the first midterm!VI.Chapter 8- First three sectionsa. Economic growth= more stuff per personi. Economic growth seems to benefit some more than othersii. Per capita growth1. increasing about 2% is normala. “2% more stuff on average”iii.Small Numbers Add Up1. Rule of 70a. A rule of thumb that says a number will double in 70/x yearsb. where x is the percentage rate of growth.c. EX: if annual per capita GDP growth is 2%i. it takes 35 years to double standards of living1. “double”: 2x as many cars, 2x quality car,d. EX2: If annual per capita GDP growth is 2.5%,i. It takes 28 years to double standards of livingii. After 10 years standards of living are already about 25% higher2. Terminologya. capital deepeningi. Increases in the stock or quality of capitalper worker.b. technological progressi. More efficient ways of organizing economic affairs that allow an economy to increase output without increasing capital or labor inputs.ii. In the “balanced growth” model1. technological progress equally affects the productivity of both capital and labor (in the aggregate).c. human capitali. The knowledge and skills acquired by a worker through education and experience and used to produce goods and services.ii. quality of our workersd. Outside the top 0.5% of wage-earners, returns to labor seem well-predicted by schooling, major field of study, and experience i. (i.e. by economic theory that w/p = mpl)ii. Wages are predictable based on your field and experience3. Growth Accountinga. A method to determine the contribution to economic growth from increased capital, labor, and technological progress.b. The government measures Y, K, and L and then backs out the contribution from K assuming a certain production function for GDPc. Sources of GDP Growthi. tries to measure “A”1. measured imperfectly2. Super important!!ii. GDP is measured badly in the data subtract off the two things we observe (kapital and


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UW-Madison ECON 102 - The Real Business Cycles Theory

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