Econ 102 1st Edition Lecture 12Outline of Last Lecture I. Hollowing Out of the Income DistributionII. Skills, Wages and unemployment are all relatedIII. Chapter 9: Aggregate Demand and Aggregate SupplyOutline of Current LectureI. 9.3 Understanding the Aggregate Supply (cont.)II. Chapter 10 Fiscal PolicyCurrent LectureI. 9.3 Understanding the Aggregate Supply (AS) (cont.)a. Keynesian Viewi. we get out of equilibrium frequentlyii. Autonomous component: system breaks, people are not doing smart things with their incomeiii. Short Run Aggregate Supply1. A shift (increased, right) in aggregate demanda. not in equilibrium, move along AD curve be-cause of 3 reasons AD is downward sloping2. Application 2a. controversialb. which recession was caused by a shift in AD vs AS?iv. Supply ShiftsThese 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.1. external events that shift the AS curvea. Upward shift is BADi. means higher prices at any level of out-put- less efficient1. chokes off consumption through real wealth effect and internationaltrade effect. ii. can lead to stagflation:1. a decrease in real output with in-creasing prices2. result is a lower level of output with higher prices2. Sources of Business Cycles:a. Neo-Keynesians believe AD shifts cause most business cycles and that the economy is out of equilibrium during those periodsi. The “circular flow” is violated and there is a potential for Government spending to stimulate the economy, hiring workerswho, because of coordination failures, have been laid off rather than given pay cutsb. Neo-Classical economists believe SRAS and LRAS shifts cause most business cycles and that Government spending will just crowd out the private sector, making the recession worse for the private sectorc. Now using Keynesian AD and AS graph to un-derstand the classical model and determine pricesII. Chapter 10 Fiscal Policya. 2 groupsi. Discretional Spending 1. stuff you can change at a moments noticea. EX: stop road construction, pull troops out of warii. Non-discretionary Spending 1. things govt has contractual commitments to it2. obligated EX: entitlement programs a. people have been promised something, so they are entitled to itb. must renegotiate contracts to get out of this spendingc. Distribution of probability of collectioni. but still all pay into the same systemii. EX: 1. disability insurance 2. social securitya. money you pay into while you're working, forced sav-ings, you get it back with in-terest a set amount, promised return.i. the promised return makes it an entitle-ment return3. Medicare a. subsidized health insurance for elderly (not retired, just must be over 50) cheap, kind of lousy insurance4. Medicaida. insurance for people in povertyb. Now through Affordable CareAct- also some people just above poverty are qualified for it.b. Government Spending: Entitlementsi. Social Security 1. paid for itself for years, and even accumulated moneya. has a ton of money! a lot of savings!b. the baby boomers are the reason it has accu-mulated moneyi. more babies than average for 14 yearsii. all had been working, more of them thanthose retirediii. NOW (starting 2 years ago)- those are the people retiring1. taking money out of the system faster than the current generation is putting money in2. Within the decade the social secu-rity system will either default on itsobligations or have to increase taxesa. Eudey will most likely have the same system, but it will change by the time we retire.b. SOLVABLE problemiv. The Affordable Care Act (ObamaCare)1. is expected to be federal budget-neutral (still a terrible impact on the budget- didn't fix anything in that sense) or better, but possibly to negatively impact state budgets in the medium run2. Now everyone is required to have insurance, and the government subsidizes some of ita. people are living longerb. we have a huge number of people in povertyi. 25% of kids born into poverty- expensivec. Medical care is getting betteri. very expensive!3. When do we cut people off? a. Not obvious what to do, everycountry in the world is deal-ing with thisc. Government Long Term Goalsi. Correction of (mis?) perceived market failures1. Subsidize educationa. the wealthy keep getting wealthier because they can afford educationb. opposite is also true, trying to get lower end of the income distribution to get educated to make more money2. Mandating Auto and Health Insurancea. by requiring everyone have it it brings the costs down i. EX: car insurance, if only bad drivers use car insurance SUPER EXPENSIVE1. If good drivers are brought in brings the cost down overall be-cause insurance companies are lesslikely to get hit with huge claims2. hoping the same for health insur-anceii. Goals of Transfers1. Create opportunities for advancement2. Provision of a Safety
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