Macroeconomics – Unit 2: National Income and Price Determination

 Aggregate Demand Aggregate Demand

 Definition =  Or =  Or = ceteris paribus…  Changes in the price level (what’s this???) causes changes in:  ???

Price Level is usually indicated with the letter “P” Real Output/Real GDP is usually indicated with the letter “Y”

 The Buying Power of Money (or…)  A rise in the price level lowers the buying or purchasing power of money ▪ As a result –  A fall in the price level increases the buying or purchasing power of money ▪ As a result -

A rise in the price level decreases the buying power of money and moves consumption from Y2 to Y1 A fall in the price level increases the buying power of money and moves consumption from Y1 to Y2

 The Real Interest Rate (or…)  When the price level rises, the real interest rate rises ▪ Increase in the price level increases… ▪ Demand for money… ▪ In the short run, the inflation rate… ▪ People/businesses hold off… ▪ Decreases the quantity of…

A rise in the price level causes a rise in real interest rates and a movement from Y2 to Y1 A fall in the price level causes a fall in real interest rates and a movement from Y1 to Y2

 The Real Prices of Exports and Imports (or…)  If the price level rises in the US, … ▪ US made goods and services are… ▪ As a result… ▪ Foreign made goods and services are… ▪ As a result… ▪ Effects is on…

A rise in the price level in the US greater than the relative price level in foreign countries will cause a movement from Y2 to Y1 A fall in the price level in the US greater than the relative price level in foreign countries will cause a movement from Y1 to Y2

 Determinants of Aggregate Demand  i.e. “the other things” 1. Consumer Spending a.Consumer wealth = wealth effect i.If consumer wealth increases… ii.Why???

 Determinants of Aggregate Demand  i.e. “the other things” 1. Consumer Spending b.Household borrowing i.Increase in borrowing for… 1.AD curve shifts to… ii.Decrease in borrowing for… 1.AD curve shifts to…

 Determinants of Aggregate Demand  i.e. “the other things” 1. Consumer Spending b.Household borrowing iii.Increase in savings rate 1.AD curve shifts to… iv.Increase in paying off debts 1.AD curve shifts to…

 Determinants of Aggregate Demand  i.e. “the other things” 2. Consumer Expectations a.Increase in expected future income i.AD curve shifts to… b.Increase in expected future inflation i.AD curve shifts to… c.Increase in expected future profit i.AD curve shifts to…

 Determinants of Aggregate Demand  i.e. “the other things” 3. Fiscal and Monetary Policy a.Personal Taxes i.A tax cut = AD curve shifts to… ii.A tax increase = AD curve shifts to… b.Government Spending i.More gov’t spending = AD curve shifts to… ii.Less gov’t spending = AD curve shifts to… iii.More gov’t borrowing = AD curve shifts to… 1.“Crowding out effect” =

 Determinants of Aggregate Demand  i.e. “the other things” 4. The State of the World Economy A.Foreign Exchange Rate = ??? i.Rise in the FOREX… 1.REMEMBER!!! We are measuring… a)Exports more… b)Imports are… B.Foreign Income i.Rise in foreign income = a)AD curve shifts to…

Macroeconomics – Unit 2: National Income and Price Determination

 Aggregate Supply Aggregate Supply

 Definition =  OR…  OR, ceteris paribus,…  3 Different Time Horizons  The relationship varies on…  Wages and prices can be “???” or “???” – Which means what? ▪ ??? =

 3 Different Time Horizons 1. Immediate Short Run = 2. Short Run = 3. Long Run =

 Changes in either  ??? Or  ???  Changes in Productivity  Changes in Potential GDP  Changes in fiscal or monetary policy

 These changes = changes in…  Higher money wage rate/prices of other resources = SRAS curve shifts…  Lower money wage rate/prices of other resources = SRAS curve shifts…

 Productivity = Productivity = Total Output Total Inputs Per-Unit Production Cost = Total Input Cost* Total Output *Total input cost = input cost x total # of inputs  Improvements in productivity…  Shifts the AS curve to…

 Remember Okun’s Law?  Potential GDP = Real GDP at full employment (or “natural rate of unemployment”)  Changes in potential GDP will shift the SRAS curve…  Also shifts the LRAS

 Taxes on Business  Increases…  Decrease…  Shifts SRAS curve to…  Regulation  Can increase… ▪ Dependent on…  Decrease…  Shifts SRAS curve to… ▪ UNLESS!!!!! Regulation that can…

Macroeconomics Unit 2 – National Income and Price Determination

 Definition =  OR…

 Economy at equilibrium might be at:  Full Employment  Above Full Employment  Below Full Employment

 Full Employment  Real GDP = Potential GDP  Above Full Employment  Real GDP > Potential GDP  Increase in AD = firms increase…  Real GDP increases  Results in inflation

 Below Full Employment  Real GDP < Potential GDP  Decrease in AD = firms decrease….  Real GDP decreases  Results in or unemployment

 Can be caused by:  Potential GDP grows at an uneven pace  Change in the money price of a major resource ▪ Rise in prices = decrease in AS ▪ Firms raise prices and decrease production ▪ Real GDP decreases but price level increases ▪ Results in Inflation  STAGFLATION =