Homework Chapters 11 12 Key concepts chapters 9
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Homework Chapters 11 -12 Key concepts chapters 9 – 12! u Chapter 11 - Bonus - Friday January 27. u Chapter 12 - Bonus – Wednesday, February 1. u Tentative Test Day Friday, February 3 rd. u Hold on here we go!!!
Homework Chapters 9 -10 -11 -12 u Test Day - Next Friday u Approximate number of questions per chapter. u Chapter 9 – 10 Questions u u Chapter 10 – 10 Questions u u AD, AS, LRAS Chapter 12 – 15 Questions u Key concepts chapters 9 – 12! Simplified, Tax, and Balanced Budget Multipliers Chapter 11 – 25 Questions u u Keynesian Cross, MPC, Savings + Consumption = DI Fiscal Policy: Expansion, Contraction, Automatic, & Discretionary
CHAPTER ELEVEN Aggregate Demand Aggregate Supply Key concepts chapters 9 – 12!
Aggregate Deman. . . the various amounts of goods and services - the amounts of real output that domestic consumers, businesses and foreign buyers collectively desire to purchase at each possible price level Key concepts chapters 9 – 12!
Aggregate Demand. . . is downsloping because of: Key concepts chapters 9 – 12!
Aggregate Demand. . . is downsloping because of: 1 - Wealth Effect (Real Balances) A higher price level reduces the purchasing power of the general public’s financial assets. Remember the arbitrary and capricious nature of inflation? ? ? That one was for you Sean! Key concepts chapters 9 – 12!
Aggregate Demand. . . is downsloping because of: 1 - Wealth Effect (Real Balances) 2 - Interest-Rate Effect When the supply of money is fixed, as price levels rise interest rates increase because as the demand for $ increases the price paid for its use also increases. Key concepts chapters 9 – 12!
Aggregate Demand. . . is downsloping because of: 1 - Wealth Effect (Real Balances) 2 - Interest-Rate Effect 3 - Foreign Purchases Effect As prices go up in the U. S, our goods become more expensive, Thus reducing the amount of exports and increasing imports. Key concepts chapters 9 – 12!
Aggregate expenditures (billions of dollars) Deriving the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 1 Price level 0 P 1 0 GDP 1 1’ GDP 1 Real GDP at price level 1
Aggregate expenditures (billions of dollars) Deriving the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 1 Price level 0 P 1 0 GDP 1 1’ GDP 1 Real GDP at price level 1 What if prices go up?
Aggregate expenditures (billions of dollars) Deriving the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 2 0 Price level (C a + I g + X n + G) 2 at P 2 1 P 2 P 1 0 GDP 2 GDP 1 2’ 1’ GDP 2 GDP 1 A Lower Real GDP Exists at price level 2
Aggregate expenditures (billions of dollars) Deriving the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 2 0 Price level (C a + I g + X n + G) 2 at P 2 1 P 2 P 1 0 GDP 2 GDP 1 2’ 1’ GDP 2 GDP 1 A Lower Real GDP Exists at price level 2 What if prices go up again?
Aggregate expenditures (billions of dollars) Deriving the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 2 3 0 Price level (C a + I g + X n + G) 2 at P 2 (C a + I g + X n + G) 3 at P 3 1 P 3 P 2 P 1 0 GDP 2 GDP 1 3’ 2’ 1’ GDP 2 GDP 1 A Still Lower Real GDP Level Exists at price level 3
Aggregate expenditures (billions of dollars) Deriving the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 2 3 0 Price level (C a + I g + X n + G) 2 at P 2 (C a + I g + X n + G) 3 at P 3 1 P 3 P 2 P 1 0 GDP 2 GDP 1 3’ The Aggregate Demand Can Be Constructed 2’ 1’ GDP 2 GDP 1
Aggregate expenditures (billions of dollars) Deriving the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 2 3 0 Price level (C a + I g + X n + G) 2 at P 2 (C a + I g + X n + G) 3 at P 3 1 P 3 P 2 P 1 0 GDP 2 GDP 1 3’ The Aggregate Demand Can Be Constructed 2’ 1’ GDP 2 GDP 1
CHANGES IN AGGREGATE DEMAND Price level AD Can increas AD 1 0 Real domestic output, GDP
Price level CHANGES IN AGGREGATE DEMAND AD 2 AD 1 0 Real domestic output, GDP
CHANGES IN AGGREGATE DEMAND Price level AD Can decreas AD 2 AD 1 0 Real domestic output, GDP
Price level CHANGES IN AGGREGATE DEMAND AD 2 AD 3 0 Real domestic output, GDP AD 1
DETERMINANTS OF AGGREGATE DEMAND Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness • Taxes Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness • Taxes Change in Investment Spending Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness • Taxes Change in Investment Spending • Interest rates Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness • Taxes Change in Investment Spending • Interest rates • Profit expectations on investment projects Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness • Taxes Change in Investment Spending • Interest rates • Profit expectations on investment projects • Technology Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness • Taxes Change in Investment Spending • Interest rates • Profit expectations on investment projects • Technology • Degree of excess capacity – Inventory! Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Government Spending Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Government Spending Change in Net Export Spending Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Government Spending Change in Net Export Spending • National income abroad Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND Change in Government Spending Change in Net Export Spending • National income abroad • Exchange rates illustrat Key concepts chapters 9 – 12!
Aggregate expenditures (billions of dollars) Changes in the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 An Increase in Aggregate Expenditures Price level 0 GDP 1 An Increase in Aggregate Demand P 1 AD 1 0 GDP 1
Aggregate expenditures (billions of dollars) Changes in the Aggregate Demand Curve (C a + I g + X n + G) 2 at P 1 (C a + I g + X n + G) 1 at P 1 An Increase in Aggregate Expenditures Price level 0 GDP 1 GDP 2 An Increase in Aggregate Demand AD 2 AD 1 P 1 0 GDP 1 GDP 2
Aggregate Supp. . . the level of real domestic output which will be produced at each price level Key concepts chapters 9 – 12!
Aggregate Supp. . . has three ranges: Key concepts chapters 9 – 12!
Aggregate Supp. . . has three ranges: 1 - Horizontal Range Key concepts chapters 9 – 12!
Aggregate Supp. . . has three ranges: 1 - Horizontal Range 2 - Vertical Range Key concepts chapters 9 – 12!
Aggregate Supp. . . has three ranges: 1 - Horizontal Range 2 - Vertical Range 3 - Intermediate (Upsloping) Range Key concepts chapters 9 – 12!
As developed in cha Price level P Vertical Range Horizontal Range Upsloping or Intermediate Range Q Real domestic output, GDP
An Increase in Aggregate Supply AS 1 Price level P Q Real domestic output, GDP
An Increase in Aggregate Supply AS 1 AS 2 Price level P Q Real domestic output, GDP
A Decrease in Aggregate Supply AS 1 AS 2 Price level P Q Real domestic output, GDP
A Decrease in Aggregate Supply AS 3 AS 1 AS 2 Price level P Q Real domestic output, GDP
DETERMINANTS OF AGGREGATE SUPPLY When per unit production costs change firms will alter the amount they produce at each level. What would cause the per unit production costs to change? Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices • Domestic resource availability Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices • Domestic resource availability • Land Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices • Domestic resource availability • Land • Labor Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices • Domestic resource availability • Land • Labor • Capital – (Expectations) Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices • Domestic resource availability • Land • Labor • Capital • Entrepreneurial ability Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices • Domestic resource availability • Land • Labor • Capital • Entrepreneurial ability Change in Productivity Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices • Domestic resource availability • Land • Labor • Capital • Entrepreneurial ability Change in Productivity = Key concepts chapters 9 – 12! real output input
DETERMINANTS OF AGGREGATE SUPPLY Change in legal-institutional environment Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY Change in legal-institutional environment • Business taxes and subsidies Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY Change in legal-institutional environment • Business taxes and subsidies • Government regulation Key concepts chapters 9 – 12!
The Equilibrium Price Level and the Equilibrium Real GDP P Equilibrium in the intermediate range Price level AS AD Q 1 Qe Q 2 Real domestic output, GDP Q
The Equilibrium Price Level and the Equilibrium Real GDP P Price level AS Equilibrium in the horizontal range AD Q 1 Qe Q 2 Real domestic output, GDP Q
The Equilibrium Price Level and the Equilibrium Real GDP Price level P AS AD 1 Equilibrium in the horizontal range Q 1 Real domestic output, GDP Q
The Equilibrium Price Level and the Equilibrium Real GDP Price level P AS AD 1 Equilibrium in the horizontal range AD 2 Q 1 Q 2 Real domestic output, GDP Q
The Equilibrium Price Level and the Equilibrium Real GDP P AS Price level AD 1 Equilibrium in the intermediate range P 1 Q 1 Real domestic output, GDP Q
The Equilibrium Price Level and the Equilibrium Real GDP Price level P AS AD 1 Equilibrium in the intermediate range P 3 P 1 AD 2 Q 1 Q 2 Real domestic output, GDP Q
The Equilibrium Price Level and the Equilibrium Real GDP P AS Equilibrium in the vertical range Price level AD 1 P 5 P 1 Qc Real domestic output, GDP Q
The Equilibrium Price Level and the Equilibrium Real GDP P AS Equilibrium in the vertical range P 6 Price level AD 1 P 5 P 1 AD 2 Qc Real domestic output, GDP Q
The Multiplier with Price Level Changes P AS AD 1 Reduced Multiplier P 3 } Price level Full Multiplier P 1 } GDP 1 AD 2 GDP 3 Real domestic output, GDP Q
AS P Why the ratchet? Price level Illustrates the downward inflexibility of prices. The Ratchet Effect next. P 3 c a b P 1 AD 1 / 3 Q 2 Q 1 AD 2 Q 3 Real domestic output, GDP Q
C a u s e s The Ratchet Effect Key concepts chapters 9 – 12!
The Ratchet Effect C • Wage Contracts a u s e s Key concepts chapters 9 – 12!
The Ratchet Effect C • Wage Contracts a • Morale & Productivity u s e s Key concepts chapters 9 – 12!
The Ratchet Effect C • Wage Contracts a • Morale & Productivity u • Efficiency Wages s e s Key concepts chapters 9 – 12!
The Ratchet Effect C • Wage Contracts a • Morale & Productivity u • Efficiency Wages s • Training Investments e s Key concepts chapters 9 – 12!
C a u s e s The Ratchet Effect • Wage Contracts • Morale & Productivity • Efficiency Wages • Training Investments • Minimum Wage Key concepts chapters 9 – 12!
C a u s e s The Ratchet Effect • Wage Contracts • Morale & Productivity • Efficiency Wages • Training Investments • Minimum Wage • Menu Costs Key concepts chapters 9 – 12!
C a u s e s The Ratchet Effect • Wage Contracts • Morale & Productivity • Efficiency Wages • Training Investments • Minimum Wage • Menu Costs • Fear of Price Wars Key concepts chapters 9 – 12!
Shifting Aggregate Supply Price level P AS 2 AS 1 AS 3 Economic Growth Cost-push inflation b a P 2 c P 1 P 3 AD 1 Q 2 Q 1 Q 3 Real domestic output, GDP Q
Shifting Aggregate Supply Price level P AS 2 AS 1 AS 3 ANY Cost-push inflation QUESTIONS? b a P 2 c P 1 P 3 AD 1 Q 2 Q 1 Q 3 Real domestic output, GDP Q
aggregate demand u wealth effect u interest-rate effect u foreign purchases effect u determinants of aggregate demand u aggregate supply u horizontal range u vertical range u intermediate range u determinants of aggregate supply u productivity u equilibrium price level u equilibrium real domestic output u ratchet effect u efficiency wages u menu costs u
Coming next. . FISCAL POLICY Chapter 12 Key concepts chapters 9 – 12!
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