Agenda, Check Module 17/18 **During notes check, watch video on multiplier effect Go over concepts Practice HW: 19/20

Module 16 – Income and Expenditure Overall point = what happens when money is added into the economy through increased spending Initial spending causes a “ripple effect” (multiplier effect) People don’t spend all of their new money – they will spend most and we just need to know how much (=marginal propensity to consume)

M16 Increase in consumer spending when disposable income increases = marginal propensity to consume Formula: Marginal Propensity to Save (MPS) Formula:

M16 Multiplier effect sees how much economy is impacted over time from the ripple effect Formula for multiplier: Autonomous change in aggregate spending = the initial increase/initial “bump” in money

M16 Consumer Spending Disposable income = post tax, post govt transfer amount of $ you have to spend Autonomous consumer spending = how much they would have to spend if they had no disposable income (constants) Consumption Function = equation that shows consumption versus income Formula:

M16 Graphing Consumption Function: 1) label axis 2) start at “a” 3) draw line (label consumption function) 4) slope is MPC

M16 Aggregate consumption function = same but for the whole economy (so formula is same but big letters) Shifts in Aggregate Consumption Function: 1) increase/decrease in expected future disposable income 2) increase/decrease in expected future wealth Draw shifts on graph (increase = up, decrease = down)

M16 Investment spending: Planned investment Unplanned investment interest rates rise, investment spending cut back expected future sales grow = more investment spending current capacity affects investment (higher current capacity, less investment spending) higher growth in real GDP = higher planned invest. spending, lower = lower

M16 inventory investment = value of change in total inventories - unplanned inventory investment = pos or neg due to decrease (pos unplanned ii) or increase (neg unplanned ii) so actual investment spending is I= Iunplanned + I planned

Agenda, Check HW (*either 21/S OR 19/20) Explain reading schedule changes (Haiku) Finish M16 *Shifts in Aggregate Consumption Investment Spending (Planned/Unplanned) Modules 17/18 – Discuss HW: Reading Assignment Note: Quiz next Monday (M14-20)

Modules 17/18 Aggregate Demand = represents the relationship between price level and output demanded by households/businesses/govt/rest of world Price Level = measure of overall level of prices in the economy (remember: market basket) AD downward slopes – WHY? Negative relationship between price level and output – the higher the price level, the less goods & services demanded, the lower the price level, the more g/s demanded

Modules 17/18 Wealth Effect & Interest Rate Effect are two reasons for a downward slope!

Modules 17/18 Movement on AD curve happens from changes in Price Level Shifts of AD curve (right = AD increases, left = AD decreases) 1. Changes in expectations 2. Changes in wealth 3. Size of existing stock of physical capital Govt policies: 4. Fiscal Policy (spending & taxes) 5. Monetary Policy (changes in quantity of money or the interest rate)

Modules 17/18 Aggregate Supply = relationship between price level and quantity agg. Output supplied in economy SHORT RUN (SRAS) & LONG RUN (LRAS) SRAS curve is upward sloping bc positive relationship between price level and output Profit per unit of outfit = price – prod. Cost WAGES = one big production cost Wages are STICKY Therefore production costs don’t adjust immediately to price level (BUT THEY WILL…) This is why there is a LRAS!

Modules 17/18 Movement on curve = change in price level Shifts can happen for several reasons: 1. Changes in commodity prices (different than overall price levels! Not final goods) 2. Changes in nominal wages (so their production costs change) 3. changes in productivity

Modules 17/18 Long Run AS – in the long run, nothing changes. Price level has no long run effect on Agg. Output because everything adjusts. Price level falls but production costs fall too so no effect LRAS = vertical line, based at potential output (Yp) Potential output = level economy would function if all prices were fully flexible

Modules 17/18 Shifts in LRAS: Changes in quantity of resources Changes in quality of resources Technology Short Run to Long Run: At a specific price level, economy will work towards balance with the LRAS IF SRAS at a certain price level is to the right of LRAS, economy will balance leftward IF SRAS at a certain price level is left of the LRAS, economy will balance right

Missing Modules 19/20

Agenda, 10/17/12 Check article reviews Module 21 Practice Discuss Unit 4 Reading Guide (Haiku) HW: M22/23

Module 21 How much of a shift will a fiscal policy create? Multiplier Effect: Transfers & Taxes versus Govt Spending Economists: lower income will spend more of govt transfer or tax break

Module 21 Taxes & the multiplier When real GDP rises, tax revenues automatically rise Result is that the multiplier is reduced (since govt gets little bit of each transaction) Automatic stabilizers = govt spending & taxation that automatically expand or contract the economy as it moves on cycle Discretionary Fiscal Policy = deliberate actions by policy makers to change course of economy

Practice Questions Pg 214 Practice AP FRQ