Macro Econ Unit 2 Lectures 1-2

X and Y axises of Aggregate graph

X- PL

Y- RGDP

Aggregate demand

relationship between price levels and output (RGDP) demanded by a nation

nation= CIGXM

Downward sloping (inverse relationship between PL and RGDP) PL down RGDP up`

Real wealth effect

AD

IE: the value of a dollar

If inflation, PL increase, so PP decrease, stored value destroyed, changes begavior

leads to overall demand for g/s and RGDP deacreasing

Interest rate effect

AD

IE: need for money

If PL increase, demand for money increases, bc need more money to buy same g/s

= less money in banks, banks raise interest rates to incentivize saving

= loans more expensive = less loans demanded

= overal demand for g/s decreases

Foreign trade effect

AD

In price levels increase for US but constant over seas, US buys more imports and exports less

Overall demand for g/s and RGDP decreases

Position of AD curve

determined by total spending (CIGXM)

shifts left or right

disposable incoe

what household can spend ir save after mandatory buys

Average propensity to consume

normal spending habits

percentage of income spent rather then saved

APC = consumption (consumer spending) / savings

Autonomus consumption

spending your NOT disposable income

“Need” not want

this spending happens even if income is 0

Income depended consumption

Disposable income spending

WANTS

more wants = more YD

measured by marginal propensity to consume

Marginal propensity to consume

how spending changes if income changes

MPC = change in consumption / change in YD

Consumption function

Shows the changes in consumption when disposable income changed

C (consumption) = A (autonomous consumption) + MPC x YD

Consumption - shifts AD

more YD = increased consumption spending

confidence: feeling abt tmrw and belief in YD

Wealth: value of assets (accessible YD)

Interest rates: cheaper loans = more YD

Taxes: less taxes = more YD

Investments - shifts AD

what will affect business capital purchases?
Expected returns (profit): if expected returns low, hold off spending

Interest rates: If high = cost to borrow high = avoid purchases

Tech advances: new inventions= new opportunity = buy

Government - shifts AD

public goods: roads, schools, etch

public threat: tanks, ships etc

economic stability: maintain RGDP

Net Exports - shifts AD

foreign economic conditions: activity, foreign policies effecting nation

exchange rates: demand for currency, if foreign currency is cheaper, then import, decrease domestic product

Aggregate Supply

Relationship between PL and quantity of output

supply = willingness to sell ( profit)

Profit max equation

profit max = price of outputs - cost of inputs

Short run aggregate supply

relationship between PL and RGDP

output prices change but input prices dont

weeks, months, years

positive relationship = upward slope (PL increase RGDP increase)

In SRAS why do output prices change but input prices dont

agreements forced input costs to be fixed (wage contracts, purchase orders)

becomes “sticky”

sticky = input costs WOULD but CANT increase with price level

in SR only if input costs sticky

Profit effect

SRAS

Making money

If PL increases…. firm sets higher price for output, but input prices stay same (sticky) = improves SR profit

= firm makes more output = supply for g/s increase = RGDP increase

Long run Aggregate supply

Relationship between PL and RGDP when output and input prices can change

firm input prices are renegotiated

change in input cost = change in output cost

months to years

LRAS graph

perfectly inelastic vertical curve

PL is irrelevant (use all LLK to make as much g/s possible) = natural rateRL

LRAS change in natural rate

Movement

Growth = positive change in potential, outward shift

Decline = negative change in potential, inward shift

Shifts in SRAS

when will firms willingness change?

Potential docent change, can still make same amount but the price will be dffierenct

Change in input prices - shifts SRAS

biggest effect

a change in “commodity” prices - basic g/s that’s used to create other g/s (ex. steel, oil)

or change in wagesT

Temporary disruptions - shifts SRAS

ex. natural disasters

Shifts in SRAS and LRAS

Firms willingness AND potential changes

Change in resource availability - shifts SRAS and LRAS

access, trade, discovery, etc

change in realized productivity - shifts SRAS and LRAS

IE: now in use

capital machines ( change quality or quantity)

human education

change in size of labor force - shifts SRAS and LRAS

immigration, birth rate, etc

change in government regulation - shifts SRAS and LRAS

ex. minimum wage