ECON 2105 1nd Edition Lecture 14 Outline of Last Lecture I. Aggregate Supply of NationII. Shifts on Short-Run Aggregate Supply CurveIII. Long Run Aggregate Supply Curve Outline of Current Lecture Current LectureReview for Exam 2I. Practice- Module 14 - 3 major costso Shoe-leather cost: the increased cost of transactions cause by inflation a. In Israel: inflation rate hit 500% in 1985, people spent a lot of time in line at banks. o Menu Cost: the real cost of changing a listed price o Unit- of-accounts cost: cost arising from the way inflation makes money a less reliable unit of measurement (calculations are hard when inflation is high) o- Unexpected inflation- causes? Practice 1) Borrower borrows money for a year. Bank charges 8% nominal interest rate. Expected inflation rate to be 4% by the end of the year. Actual interest rate was 3% - Whose is worse off who is better off? o 8% nominal interest rate, 4% expected rate, 3% actual interest rate o when actual inflation is bigger than expected rate  borrowers are better off 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.o when actual is less than expected rate  lenders are better off o real interest rate 8%-3% = 5% o so borrowers are worse off and lenders are better off Practice 2) (module 15) Assume CPI is 140 in 2005, 180 in 2006, 200 in 2007, and 100 in 2008, base year is 2008. Cost of market basket in 2008 is 3000.- In 2008 prices what would be the cost of market basket prices in 2006?o CPI= 100 in 2008 and cost of market basket= $3000o CPI= 180 in 2006 cost of market basket=?? o We need to find value of $x in 2006 in terms of 2008 priceso Cost of basket in 2006/cost of basket in 2008 x 100 = CPI 2006 o 180= ($x /3000)x 100o x=(3000x 180)/100= $5400o value of $5400 in 2006 in 2008 prices o (5400/CPI 2006)x CPI 2008 = $3000- Cost of market basket in 2005?o CPI 2005= 140 o Cost of market baskets in 2005/cost of market basket in 2008 x 100= 140 o 100x $x/3000 = 140 o $x = (140x 3000)/100o =4200Practice 3-module 15) family consumes popcorn and coke. Last year (base year) they spent $80 on popcorn and $200 on coke. Prices last year were popcorn $4 and coke $5. This year current prices are $4 popcorn and $10 coke.- CPI for current year? o (Cost of basket goods current year/ cost of basket goods base year) x 100 o last year popcorn= 20 coke= 40 o ((20x4 + 40x10)/280) x 100 =171.4 o CPI= 171.4Module16 Practice 4) MPC= ^C/^YD - 4000/6000=0.666- MPC= 0.666Practice 5) consumption function: - C= A+MPC x YD  C= A +0.666 x YD - 20000= A + 0.666 x 27000- 2.018= A Module 17- 5) Interest rate effect, an increase in the price level cause people to..?- people will carry more money, so money holding will go up. - There will be less money for lending so interest rates will rise- Lower investments - Lower aggregate demand Practice 6) aggregate price level increases, the purchasing power of many assets fall, causing a decrease in consumer spending. This is known as the ____ effect.- Wealth effect Practice 7) suppose that consumer expectations about the future improve. How will this affect the aggregate demand curve?- It will shift to the right. Module 18) practice 8) suppose that in 2013, the us aggregate output level is lower than the potential output. Which of the following can NOT be said for the economy in 2013? - AG supply shifts down. - So the answer is that – workers are abundant in the nation  this is