Slide 1

Slide 2 ADAS 1. Define AD & AS. AD AQD RGDP AD AQD [ RGDP ] desired by the private, public, & foreign inverse sector at various PLs [ inverse ] [Everyones demand for everything] AS AQS RGDP direct AS AQS [ RGDP ] firms will supply at various PLs [ direct ] down-sloping AD 2. Three reasons for the down-sloping AD curve a. interest rate effect b. real-balances effect c. foreign purchase effect three ranges of the AS curve 3. Know the three ranges of the AS curve. 4. Predict effects of an increase in AD in Keynesian, intermediate, & classical Keynesian, intermediate, & classical ranges. increase/decreaseAS 5. Predict effects of an increase/decrease in AS on output and price level. C+Ig+G+Xn 6. Know the four AD shifters [ C+Ig+G+Xn ]. [REP]. 7. Know the three AS shifters [REP]. ratchet effect 8. Explain the ratchet effect of a decrease in AD. Classical/Keynesian 9. Compare the Classical/Keynesian Schools of Economics. Slide 3 [ Demand (AD ) for everything by everyone] or [Amount of goods & services that will be demanded at various price levels by the private, public, and foreign sectors] AQDgreaterlower price levels [ AQD will be greater at lower price levels ] [amount of goods and services that will be produced by firms at various price levels] AQSgreaterhigher price levels [ AQS will be greater at higher price levels ] Aggregation combiningall pricesinto a single Aggregation combining all prices into a single aggregate price level all quantities aggregate price level and combining all quantities intoaggregate quantities AQSreal GDP into aggregate quantities [ AQS or real GDP ] Slide 4 RDO [Real Domestic Output] PriceLevel [Production cost] AD PLe YeYeYeYe SRAS [REP] C I G-X n LRAS [C+Ig+G+Xn] positivelynegativelyAD curve rightleft [C+Ig+G+Xn] When one of these variables change, either positively or negatively, the AD curve will move right or left. Slide 5 AD PL 1 PL 1 AQD 1 Macro Law of Demand Inverse [ Inverse ] AQD 2 PL 2 M acro Law of Supply DIRECT [ DIRECT ] PL 1 PL 2 AS AQS 2 AQS 1 Caused by a Change in PL Caused by a Change in PL AQD AQS point on the AD or AS curve particularPL AQD or AQS is a point on the AD or AS curve [particular PL] ADASwhole curve all price levels AD or AS is the whole curve and represents all price levels. [Bunch of AQDS or AQS strung together on the same curve] Slide 6 AD PL 1 AQD 1 Inverse [Inverse] PL AQD AQD 2 PL 2 Slide 7 AS PL 1 AQS 1 DIRECT [DIRECT] AQS 2 PL 2 There go some of my profits! Slide 8 AS AQS 2 DIRECT [ DIRECT ] AQS 1 PL 1 PL 2 Slide 9 SRAS 1 PL Y*Y*Y*Y* RGDP AD Shifters AD Shifters [C+Ig+G+Xn] [C+Ig+G+Xn] Consumption Investment (gross) G overnment S pending [infrastructure, military spending, health care] Net eXports AS Shifters AS Shifters [ REP ] [ REP ] Resource cost Environment [legal-institutional] [legal-institutional] 1. Subsidies, 1. Subsidies, 2. Business taxes, 2. Business taxes, 3. Business regs. 3. Business regs. Productivity SRAS 2 YIYIYIYI Aggregation we are combining all prices into price level & combining all quantities into Real GDP(Y). Y indicates 3 things: 1. Output [GDP] 1. Output [GDP] 2. Income 2. Income 3. U nemployment 3. U nemployment Y R Recession gap Y R Recession gap Y I Inflation gap Y I Inflation gap Y * Full Employ. Y * Full Employ. FE output D ont confuse FE output economys with the economys maximum output maximum output, which larger output that is the larger output that would be produced if everyone were forced to work as much as possible possible. CIG-XCIG-XCIG-XCIG-X AD 2 YRYRYRYR 103 AD 1 SRAS 2 LRAS Slide 10 RDO [Real Domestic Output] PriceLevel [Production cost] AD PLe YeYeYeYe SRAS [REP] C I G-X n LRAS [C+Ig+G+Xn] positivelynegativelyAD curve rightleft [C+Ig+G+Xn] When one of these variables change, either positively or negatively, the AD curve will move right or left. Slide 11 Long-Run input prices [wages] are completely flexible adjust Period of time where input prices [wages] are completely flexible and adjust to changes in the PL Real GDP supplied is independent of the PL In the long-run, the level of Real GDP supplied is independent of the PL Short-Run input prices [wages] are sticky do not adjust Period of time where input prices [wages] are sticky and do not adjust to changes in the PL Real GDP supplied is directly related to the PL In the short-run, the level of Real GDP supplied is directly related to the PL Slide 12 Real Domestic Output, RGDP Price Level AD 1 [caused by C+Ig+G+Xn] SRAS AD 2 YRYRYRYR LRAS YFYFYFYF Increase in AD 1.Increase in Consumption 2.Increase in Investment 3.Increase in Gov. spending A. On military spending A. On military spending B. On the infrastructure B. On the infrastructure C. On health care C. On health care 4. Increase in Net exports [Xn] A. Dollar depreciates A. Dollar depreciates B. Trade partners Ys rise B. Trade partners Ys rise Slide 13 Real Domestic Output, GDP Price Level AD 2 [caused by C+Ig+G+Xn] SRAS AD 1 YRYRYRYR LRAS YFYFYFYF Decrease in AD 1.Decrease in Consumption 2.Decrease in Investment 3.Decrease in Gov. spending A. On military spending A. On military spending B. On the infrastructure B. On the infrastructure C. On health care C. On health care 4. Decrease in N et exports [Xn] A. Dollar appreciates A. Dollar appreciates B. Trade partners Ys fall B. Trade partners Ys fall Slide 14 The amounts of real output that buyers householders, businesses, government, & foreigners [householders, businesses, government, & foreigners] desire to purchase at each possible price level. Or, the demand for everything by everyone. ADdownsloping AD curve is downsloping due to: Real Wealth [Money-balances] EffectReal Wealth [Money-balances] Effect flow stock [monthly flow of money and stock of accumulated savings balances like bonds & CDs really buy more] Interest-Rate EffectInterest-Rate Effect - businesses invest more F oreign P urchases E ffectF oreign P urchases E ffect - foreigners buy more [There is no income or substitution effect.] You cant substitute for the whole economy [You cant substitute for the whole economy] AD PL 1 PL 2 AQD 1 AQD 2 Slide 15 AQD 1 PL AQD Inverse relationshi p AD Reasons For Downsloping AD Curve [if PL decreases, this happens] Interest Rate Effect more Ig 1. Interest Rate Effect more Ig Real Wealth Effect more C 2. Real Wealth Effect more C F oreign P urchase E ffect 3. F oreign P urchase E ffect - foreigners buy more Change in AQD Price Level change 1. Price Level change Movement 2. Movement [up or down the AD curve Pt to pt 3. Pt to pt [along the AD curve] PL 1 PL 2 Macro Law of Demand [cause] [effect] PL decr; AQD incr. PL incr; AQD decr. AD refers to whole curve. AQD is a pt on the curve based on a particular PL. ADwhole curve.all PLs AD refers to the whole curve. [all PLs] AQDpoint on the curve AQD refers to a point on the curve particular price level. based on a particular price level. Slide 16 Non price Level CI g GX n 1. Non price Level change-either C, I g, G, or X n Whole AD curve shifts 2. Whole AD curve shifts [There is a change in AQD but it is not caused by a change in price level.] Consumption Consumption Mariah Carey Concert G IgIgIgIg Chevy Ferrari XNXNXNXN [ Exports-Imports] CPL AQD 1 AD 2 AD 3 AD 1 RDO L et t here be m ore military weapons AQD 2 AQD 3 Slide 17 Change in Consumer Spending C onsumer W ealth increasesdecreases C onsumer W ealth [increases/decreases] [stocks/houses] [stable prices] C onsumer Expectations increases/decreases C onsumer Expectations [about future prices (increases/decreases) C onsumer E xpectations positive/negative C onsumer E xpectations about future income [positive/negative] Change in Investment Spending stable prices increase/decrease] R eal I nterest R ates [stable prices] [increase/decrease] [Positive/Negative] [Positive/Negative] Profit Returns [ Business taxes [increase/decrease] [ Business taxes [increase/decrease] AD 1 AD 2 PL Consumer Indebtednesslowhigh Consumer Indebtedness [low/high] Personal Taxesincreasedecrease Personal Taxes [increase/decrease] R eal I nterest R atestable prices increase/decrease R eal I nterest R ate [stable prices] [increase/decrease] DepletedExcess [Depleted/Excess] inventory stockpiles in the supply chain High Debt Slide 18 Exchange Rates [Depreciation-increases ADAppreciation-decreases AD] [Depreciation-increases AD; Appreciation-decreases AD] [continued] Government Spending [purchases] increasesdecreases ] [either [increases/decreases ] on [infra- structure, military, health care, etc.] Net Export Spending N ational Income A broad increasesdecrease [either increases or decreases] AD 1 AD 2 PL More Exports [Our products are cheaper] Fewer Exports [Our products are more expensive] Slide 19 producing beyond the economys potentialpotential output does not mean zero unemploymentWhile it may appear contradictory to talk about producing beyond the economys potential, remember that potential output does not mean zero unemployment. actual unemployment rate equals the natural rate of unemployment, approximately 94%-96% of the labor force workingRather, it means that the actual unemployment rate equals the natural rate of unemployment, approximately 94%-96% of the labor force working. SRAS Y* 6 % 103 PL Real GDP LRAS AD Slide 20 potential output That is, even in an economy producing its potential output, there is some unemployed labor & unused production capacity. Potential GDP can be thought of normal capacity. as the economys normal capacity. in the short run Firms and workers are able, in the short run, to push output beyond the economys potential. *LRindependent *I n the LR, the level of RGDP supplied is independent of PL. *SRdependent *In the SR, the level of RGDP supplied is dependent of PL. SRAS AD 1 Y* F Y P 6 % PL 1(103) AD 3 AD 2 PL 3(100) PL 2(106) YRYRYAYA9%9%YRYRYAYA9%9% YiYiYAYA3%3%YiYiYAYA3%3% LRAS Slide 21 Real Domestic Output PriceLevel SRAS AD 1 AD 2 AD 3 Y PL AQD AQD Raise PL Y2Y2Y2Y2 Y3Y3Y3Y3 CIG-X CIG-X Surplus Shortage Slide 22 AQS 2 Reasons For Upsloping AS Curve 1. There is increasing opportunity cost if firms dont produce. 2. Current producers produce more [overtime/more shifts] 3. New producers are attracted to the market. AS refers to the whole AS curve & refers to all price levels AQS refers to a point on the AS curve & refers to a particular price level AQS refers to a point on the AS curve & refers to a particular price level Change in AQS 1. Price Level change updown 2. Move ment (up/down) AS curve) 3. Point to point (along AS curve) AS AQS 1 AQS 1 PL 2 PL 1 Slide 23 Change in AS Environment [Legal-institutional] REP 1. N on price level c hange. Either R, E, or P 2. Whole AS curve shifts. 3. AQS changes but is not caused by a change in PL PL AQS 1 AQS 1 AS 3 AS 1 AS 2 1. Lower business taxes 2. Decrease in regulations 3. Increase in subsidies P Increase in P roductivity You save money. We dont require dental or medical insurance. You dont have to pay us a pension and we dont take sick days. And we can dance. AQS 2 AQS 3 Anything that lowers the cost of production will shift AS right. So AS Shifters are REP AS Shifters(REP ) 1. Resource cost 2. Environment [legal-institutional environment for businesses change, environment for businesses change, affecting production costs affecting production costs [subsidies, bus. taxes, regulations] [subsidies, bus. taxes, regulations] 3. Productivity R Increase in the availability of R esources Slide 24 11 % Y R Y A $ 9 1% Y I Y A $ 11 [Recessionary Gap, Inflationary Gap, or no gap] [5%(real) cyclical unemployment] Recess. GDP Gap 10% (5 x 2%=10%) Recess. GDP Gap 6 % Y* Y P $ 10 SR output [product] prices increase/decrease but input SR output [product] prices increase/decrease but input [wages] prices remain fixed in the presence of [wages] prices remain fixed in the presence of unanticipated inflation/disinflation [sticky] unanticipated inflation/disinflation [sticky] LR both output [product] and input [wages] prices change. 103 LRAS SRAS 110 RecessGap I nflat Gap 1 01 AD 2 Inflationary GDP Gap [ 10 %( 5x2 %) Inflationary GDP Gap AD 1 AD 3 Slide 25 RGDP PL SRAS 1 SRAS 3 SRAS 2 [caused by REP] AD Decrease in AS [REP] Resource Cost 1. Increase in resource cost E nvironment [legal-institutional] 2. Decrease in subsidies 3. Increase in bus. regulations 4. Increase in business taxes Productivity 5. Decrease in productivity Real Domestic Output, RGDP I ncrease in AS [REP] R esource Cost 1. Decrease in resource price E nvironment [legal-inst.] 2. Increase in subsidies 3. Decrease in bus. regs. 4. Decrease in bus. taxes P roductivity 5. Increase in productivity Regulationscompliance costs Regulations place compliance costs on businesses and reduce the SRAS. smokestack scrubbers less money to increase output Ex: To reduce sulfur dioxide emissions, factories have to pay for smokestack scrubbers which mean less money to increase output. LRAS Slide 26 AD SRAS 1 PL 1 Y1Y1 PL 2 Y2Y2Y2Y2 SRAS 2 Shortage Real GDP Slide 27 ADSRAS 1 PL 1 Y2Y2 PL 2 Y2Y2Y2Y2 SRAS 2 Surplus Real GDP Increase in Productivity A 1% increase in productivity can eliminate 1.2 million jobs. Slide 28 RGDP PriceLevel SRAS SRAS [Production cost] Y YIYIYIYI What if we have unanticipated inflation unanticipated inflation? What happens in SR to output, employment, and price level? PL 1 [103] PL 2 [106] AD 2 AD LRAS E2E2E2E2 Slide 29 RGDP Price Level SRAS 1 [Production cost] AD Y unanticipated inflation With unanticipated inflation output what happens to output, employmentprice level employment and price level LR in the LR ? PL 2 [106] PL 1 [103] LRAS E3E3E3E3 SRAS 2 There is a Short Run Equilibrium [AD=SRAS] Long Run Equilibrium [AD = LRAS] and a Long Run Equilibrium [AD = LRAS]. AD 2 Slide 30 RGDP PriceLevel SRAS [Production cost] YRYRYRYR Y PL 1 [103] PL3[101] unanticipated With unanticipated disinflation disinflation, what happens output,employment to output, employment, price level SR and price level in the SR ? AD2 LRAS E2E2E2E2 AD 1 Slide 31 RGDP SRAS 1 [Production cost] AD Y unanticipated With unanticipated disinflation disinflation, what happens outputemployment to output, employment, price level LR and price level in the LR ? PL 1 [103] PL 3 [101] SRAS 2 LRAS E3E3E3E3 Slide 32 Quantity of Output SRAS Output at Full Employment Y* 103 PL LRAS AD The LRAS curve is not influenced by PL. The SRAS curve is influenced by PL and slopes upward because of sticky-wages and sticky-prices. Slide 33 Quantity of Output Price Level SRAS AD 1 Ye PLe LRAS AD 2 Surplus YRYRYRYR PL 2 Slide 34 Stagflation [ Stagflation ] RDO Price Level SRAS 1 6% Y F Pl e [103] SRAS 2 110 10 % Y R AD LRAS This created cognitive dissonance among many. Slide 35 AD combining all individual product prices quantities into a single unit AD curve AD curve income & substitution effects 3 explanations for the downsloping AD curve 1. The process of combining all individual product prices and quantities into a single unit is (deduction/conglomeration/aggregation). 2. The AD curve shows the amount of (real/nominal) domestic output which will be purchased at each possible (price/price level). 3. The AD curve is always (up/down) sloping & shows a(an) (direct/inverse) relationship between output & (price/price level). 4. The income & substitution effects (do/do not) apply to the AD curve. The 3 explanations for the downsloping AD curve are the interest rate effect, foreign purchase effect, & (econ/real-balances) effect. PL 1 PL 2 AQD1 Change in AQD Price Level Change PointPoint Point to Point movements PL AQD AQD 2 Slide 36 R eal Wealth [M oney-balances] E ffect R eal Wealth [M oney-balances] E ffect economys monetary wealth. If we buy fixed bundle of goods & services every month a fixed bundle of goods & services every month (food/clothing/ shelter), at lower prices, it now takes less money. money. Our accumulated savings balances [401k, CDs, bonds] will purchase more purchase more. AD Interest Rate Effect Interest Rate Effect lower interest rates increase investment and consumption. Foreign Purchase Effect Foreign Purchase Effect with lower U.S. prices, both Americans & foreigners buy more American goods. Market Basket PL 1 PL 2 QD 1 QD 2 Slide 37 interest rate effectincrease in the PL 5. The interest rate effect suggests that an increase in the PL will (incr/decr) the demand for money, (incr/decr) interest rates and (increase/decrease) consumption and investment which would cause a(an) (increase/decrease) in (AD/AQD). real-balances effecthigher price level 6. The real-balances effect indicates a higher price level will (increase/decrease) the real value of money, (increase/decrease) consumption, and therefore (increase/decrease) (AD/AQD). foreign purchase effectincrease in PL 7. The foreign purchase effect suggests that an increase in PL relative to other countries (increase/decrease) our exports and (incr/decr) our imports which would (incr/decr) (AD/AQD). Lower PL Higher PL AQD 2 AQD 1 PL 2 PL 1 AD Slide 38 11 % Y R Y A $ 9 1% Y I Y A $ 11 [5%(real) cyclical unemployment] 10% (5 x 2%=10%)Recess. GDP Gap 10% (5 x 2%=10%) Recess. GDP Gap 6 % Y* Y P $ 10 103 AD 3 SRAS 110 RecessGap I nflat Gap 1 01 AD 2 Inflationary GDP Gap [ 10 %( 5x2 %) Inflationary GDP Gap AD 1 Input prices have responded to unanticipated changes in output unanticipatedinflationdisinflation prices in LR. [They respond to unanticipated inflation or disinflation. Two sets of prices are changing in LR - output and input. LRAS SRAS 3 SRAS 2 Slide 39 C+Ig+G+Xn [C+Ig+G+Xn] Consumer Spending Increases wealth increases 1. Aggregate wealth increases independent of PL [stocks, bonds, land, houses, etc.] Expectationssurging future inflation 2. Expectations of surging future inflation Consumer indebtedness is fairly low 3. Consumer indebtedness is fairly low Consumer taxes are decreased 4. Consumer taxes are decreased Interest rates are d ecreased 5. Interest rates are d ecreased [independent of PL] Investment Spending Increases Interest rates are decreased 1. Interest rates are decreased [independent of PL] Positive profit expectations 2. Positive profit expectations inventories aredown 3. Factory inventories are down *Business taxes are reduced [*will also shift AS] 4. *Business taxes are reduced [*will also shift AS] Government Spending Increases Government spending increases Government spending increases on health care, military bases, infrastructure, etc. Net Export Spending Increases Foreign incomesincrease 1. Foreign incomes increase [will buy more there and here] Dollardepreciates 2. Dollar depreciates [our exports are cheaper] PL AD 1 AD 2 Y1Y1Y1Y1 AS Health care, infrastruc., military 100 Bases May 100 Bases May Face Closure Face Closure Military base cuts would start in 2010. 100 of the nations 425 bases would be closed, saving over $75 billion annually. Y2Y2Y2Y2 Slide 40 Environment [Legal-Institutional Environment for businesses change] 1. Subsidies are increased. 2. Regulations on businesses are decreased. 3. *Business taxes decrease. Resource Cost Decrease (domestic) 1.Land new raw materials (oil) are found. 2.Labor labor force increases or wages decrease. 3.Capital stock or entrepreneurial ability increases. 4.The number of sellers of resources increase. Productivity Increases Technological breakthrough leads to an increase in productivity [more outputs from same inputs]. *Notice that a decrease in business taxes increases both AD & AS. PL 1 AD AS 1 Y1Y1Y1Y1 Resource Cost Decrease (overseas) Resource Cost Decrease (overseas) 1.Imported resources decrease in price. appreciates 2.Dollar appreciates [foreign inputs are cheaper]. 3.OPEC nations cheat by producing more oil. AS 2 Y2Y2Y2Y2 PL 2 Slide 41 1. N on price level c hange. Either R, E, or P 2. Whole AS curve shifts. 3. AQS changes but is not caused by a change in PL Change in AS E nvironment [Legal-institutional] PL AQS 1 AQS 1 AS 3 AS 1 AS 2 1. Lower business taxes 2. Decrease in regulations 3. Increase in subsidies P roductivity increase You save money. We dont require dental or medical insurance. You dont have to pay us a pension and we dont take sick days. And we can dance. AQS 2 AQS 3 lowers Anything that lowers the cost of production will shift AS right. So AS Shifters are REP AS Shifters( REP ) 1. Resource cost 2. Environment [legal-institutional environment for businesses change, environment for businesses change, affecting production costs. affecting production costs. [subsidies, bus. taxes, regulations] [subsidies, bus. taxes, regulations] 3. P roductivity Increase in the availability of R esources Slide 42 Real Domestic Output, GDP Price Level AD 1 [caused by C+Ig+G+Xn] SRAS AD 2 Increase in AD YRYRYRYR LRAS YFYFYFYF 1. Increase in Consumption a. aggregate wealth increases b. expected increase in inflation c. positive future income d. low consumer debt e. decrease in consumer taxes f. decrease in interest rates 2. Increase in Investment a. decrease in interest rates b. positive profit expectations c. inventories are low d. *business taxes are reduced 3. Increase in G overnment spending a. on the military a. on the military b. on the infrastructure b. on the infrastructure c. on health care c. on health care 4. Increase in Net exports [Xn] A. Dollar depreciates A. Dollar depreciates B. Trade partners incomes rise B. Trade partners incomes rise Slide 43 Real Domestic Output, GDP Price Level AD 2 [caused by C+Ig+G+Xn] SRAS AD 1 Decrease in AD YRYRYRYR LRAS YFYFYFYF Decrease in Consumption 1. Decrease in Consumption a. aggregate wealth decreases b. expected decrease in inflation c. negative future income d. large consumer debt e. increase in consumer taxes f. increase in interest rates Decrease in Investment 2. Decrease in Investment a. increase in interest rates b. negative profit expectations c. excess inventories d. *business taxes are increased Decrease in G overnment spending 3. Decrease in G overnment spending a. on the military b. on the infrastructure c. on health care Decrease in Net exports [Xn] 4. Decrease in Net exports [Xn] appreciates A. Dollar appreciates incomes fall B. Trade partners incomes fall Slide 44 RGDP PL AS 1 Increase in AS AS 2 [caused by REP] AD Increase in AS [REP] Resource Cost [domestic] a. More land, labor, a. More land, labor, capital & entrepreneurs capital & entrepreneurs b. # of sellers increase b. # of sellers increase c. Hiring fewer union workers c. Hiring fewer union workers Resource Cost [overseas] Resource Cost [overseas] c. Imported input prices decrease c. Imported input prices decrease d. Dollar appreciates d. Dollar appreciates Environment [legal-institutional] a. Increase in subsidies a. Increase in subsidies b. Decrease in bus. regulations b. Decrease in bus. regulations c. *Decrease in business taxes c. *Decrease in business taxes Productivity Increase in productivity Increase in productivity Slide 45 RGDP PL AS 1 Decrease in AS AS 3 [caused by REP] AD Decrease in AS [REP] Resource Cost [domestic] a. Land, labor, & capital a. Land, labor, & capital become more scarce become more scarce b. Hiring more union workers b. Hiring more union workers c. N umber of sellers decrease c. N umber of sellers decrease Resource Cost [overseas] c. Imported input prices increase c. Imported input prices increase d. Dollar depreciates d. Dollar depreciates E nvironment [legal-institutional] a. Decrease in subsidies a. Decrease in subsidies b. I ncrease in bus. regulations b. I ncrease in bus. regulations c. *I ncrease in business taxes c. *I ncrease in business taxes Productivity Decrease in productivity Decrease in productivity Slide 46 availability of key natural resources ___33. Decrease in the availability of key natural resources (R)? productivity ___34. Increase in resource productivity (P)? foreign spending ___35. Increase in foreign spending on our products (Xn)? government spending ___36. Substantial reduction in government spending (G)? prices ofimported resources ___37. Declines in the prices of imported resources (R)? incomes of our trading partners ___38. Declines in the incomes of our trading partners (Xn)? business profit expectations ___39. Improvement in business profit expectations (Ig)? Stock market plunge consumer wealth ___40. Stock market plunge affects consumer wealth (C)? increase in interest rates ___41. There is an increase in interest rates [stable prices] (C & Ig)? Consumer indebtednesslow ___42. Consumer indebtedness is very low (C)?Extra: Increased governmentregulations ___43. Increased government regulations are forced on businesses (E)? government increases subsidies ___44. The government increases subsidies to all farmers (E)? D C A B C B A B B A D C [REP] 2 2 2 2 Slide 47 Points of Emphasis for AD/AS Questions Points of Emphasis for AD/AS Questions 1. Wages (labor), this is resource cost, so AS shifter. 1. Wages (labor), this is resource cost, so AS shifter. 2. Increase/decrease in union workers hired 2. Increase/decrease in union workers hired they get paid more so labor, so AS shifter. they get paid more so labor, so AS shifter. 3. Appreciation/depreciation of a currency [either AD or AS ] 3. Appreciation/depreciation of a currency [either AD or AS ] a. Resource cost is part of REP, so it is AS shifter. a. Resource cost is part of REP, so it is AS shifter. b. Exports are part of C+Ig+G+Xn, so it is AD shifter. b. Exports are part of C+Ig+G+Xn, so it is AD shifter. 4. Regulations and subsidies [legal-institutional 4. Regulations and subsidies [legal-institutional Environment], part of REP, so they are AS shifters. Environment], part of REP, so they are AS shifters. 5. For all C+Ig+G+Xn, does the situation result in 5. For all C+Ig+G+Xn, does the situation result in an increase or decrease in AD & therefore GDP? an increase or decrease in AD & therefore GDP? 6. For REP, think of production costs 6. For REP, think of production costs if producers make more money, there is an increase in AS, if producers make more money, there is an increase in AS, if producers make less money there is a decrease in AS. if producers make less money there is a decrease in AS. Slide 48 Consumerswidespread depression __1. Consumers fear a widespread depression. increase their purchases __2. Britain and Japan increase their purchases of U.S. agricultural products. exportsdepreciation of the dollar __3. Our exports are affected by a depreciation of the dollar. government spending __4. There is a huge increase in government spending for health care. Interest rates increaseprices are stable __5. Interest rates increase although prices are stable. increasepersonal income tax __6. 20% increase in the personal income tax. increaseproductivity __7. An increase in labor productivity. 15% decreasenominalwages __8. A 15% decrease in nominal wages. Appreciation of the dollar imported resources __9. Appreciation of the dollar affects imported resources. Canada, Mexico, & Japanrecession __10. Canada, Mexico, & Japan come out of recession buy more American cars and buy more American cars. B A A A B B C C C A [REP] Slide 49 fear of depression on the part of consumers ___1. A widespread fear of depression on the part of consumers. large purchase of wheat by Russia trade partners ___2. A large purchase of wheat by Russia, one of our trade partners. exportsappreciation of the dollar ___3. Our exports are affected by an appreciation of the dollar. reduction in interest rates ___4. A reduction in interest rates although price level remains constant. cut ingovernment expenditures ___5. A huge cut in government expenditures for health care. Consumer expectationsrapid rise in the price level ___6. Consumer expectations of a rapid rise in the price level. oil prices ___7. The complete disintegration of OPEC, causing oil prices to fall by . 10% reduction inpersonal income tax rates ___8. A 10% reduction in personal income tax rates. increase in laborproductivity ___9. An increase in labor productivity. 12% increase in nominalwages ___10. A 12% increase in nominal wages. I mported r esources depreciation of the dollar ___11. I mported r esources are affected by a depreciation of the dollar. national incomes of our trading p artners ___12. A sharp decline in the national incomes of our trading p artners. labor force which is unionized ___13. A decline in the % of the U.S. labor force which is unionized. B A B A B A C A C D D B C [REP] Slide 50 A. Incr in AD B. Decr in AD C. Incr in AS D. Decr in AS [C + Ig + G +Xn] [REP] [C + Ig + G +Xn] [REP] new regulations 1. Car producers have new regulations imposed on them that require pollution devices on the tailpipes to cut pollution. Positive business profit expectations 2. Positive business profit expectations affect investment. 50% increase in the value of stocks 3. A 50% increase in the value of stocks affect consumer spending. government health care 4. The government will start paying health care for the nations 35 million poor. price level is constantFed raises interest rates 5. Although the price level is constant, the Fed raises interest rates. Government spending 6. Government spending is affected by the closing of 50 military bases and decreasing Armed Forces personnel by 250,000 men. dollar appreciatesby 20%price of 7. The dollar appreciates by 20% which affect the price of imported resources imported resources. Congress cuts personal income taxes by 10% 8. Congress cuts personal income taxes by 10% which affect consumer spending consumer spending. Investmentis affected 9. Investment is affected after factory inventories are being hot economy depleted. [hot economy] Productivitytriples 10. Productivity (over a 6 month period) triples in the economy. 1. D 2. A 3. A 4. A 5. B 6. B 7. C 8. A 9. A 10. C Slide 51 A.Incr in AD B. Decr in AD C. Incr in AS D. Decr in AS [C + Ig + G + Xn][REP] [C + Ig + G + Xn][REP] egulationson car producers are suspended that required 1. Regulations on car producers are suspended that required pollution devices on all auto tailpipes. Negative business profit expectations 2. Negative business profit expectations affect investment. 12% increase in wages impact business profits. 3. A 12% increase in wages impact business profits. government will spend $1 billion on the High 10 4. The government will spend $1 billion on the High 10 at Hwy 190 and Central Expressway. price level is constantFed drops interest rates 5. Although the price level is constant, the Fed drops interest rates. Government spending 6. Government spending is affected by the construction of a 10-lane highway 10-lane highway between Washington D. C. and Crawford, Texas. dollar depreciatesaffect U.S. resource cost 7. T he dollar depreciates by 10 % which affect U.S. resource cost. Congress raises personal income taxesby 10% 8. Congress raises personal income taxes by 10% which affect consumer spending. Investment 9. Investment is affected after the economy goes into a very badrecession bad recession. Canada, Mexico, and Japan buy50 million more tons of 10. Canada, Mexico, and Japan buy 50 million more tons of corn corn. 1. C 2. B 3. D 4. A 5. A 6. A 7. D 8. B 9. B 10. A Slide 52 A. Incr in AD B. Decr in AD C. Incr in AS D. Decr in AS [C+Ig+G+Xn] [REP] [C+Ig+G+Xn] [REP] Which diagram above portrays: decrease in consumer spending ___1. A decrease in consumer spending? net exportsincreases in the ___2. The impact on net exports caused by increases in the national incomes of our major trading partners national incomes of our major trading partners? large increase in the price of imported oil ___3. A large increase in the price of imported oil which resource cost impact the resource cost of businesses? large increase in government spending ___4. A large increase in government spending on our highways. substantial increase in wages ___5. A substantial increase in wages that businesses pay their workers? investmentnegative business ___6. The effect on investment if there are negative business profit expectationsrecession profit expectations? [We are heading into a recession.] decrease in interest rates ___7. A decrease in interest rates even though there is no change in price level? government picking up the tuition tab ___8. The government picking up the tuition tab for all of the nations private school students who have made a 90 or above in high school economics? increase in productivity ___9. A major increase in productivity? 25% stock market increase ___10. 25% stock market increase over a two month period? 1. B 2. A 3. D 4. A 5. D 6. B 7. A 8. A 9. C 10. A