Copyright © 2004 South-Western Mods 17-21, 30 Macro Analysis Part III

Copyright © 2004 South-Western Slate Scenario Practice Get Partner Get Slates, markers, erasers Wait for scenarios on screen

Copyright © 2004 South-Western Slate Scenario Practice For each scenario, draw the Macro AD/AS graph, label all parts, including Equil PL and GDP …and then show the shift, label the new curve, show and label the new Equil Price Level and GDP

Copyright © 2004 South-Western Slate Scenario Practice 1. Economic booms in both Japan and Europe result in massive increases in orders for exported goods from the U.S.

Copyright © 2004 South-Western Slate Scenario Practice 2. The government reduces taxes and increases transfer payments

Copyright © 2004 South-Western Slate Scenario Practice 3. Fine weather results in the highest corn and wheat yields in 40 years

Copyright © 2004 South-Western Slate Scenario Practice 4. While the U.S. was in the midst of the Great Depression, a foreign power attacked, Congress declared war, and more than a 1 million soldiers were drafted in the first year while defense spending was increased several times over.

Copyright © 2004 South-Western Slate Scenario Practice 5. To balance the budget, the federal government cuts Social Security payments by 10% and federal aid to education by 20%.

Copyright © 2004 South-Western Slate Scenario Practice 6. During a long, slow recovery from a recession, consumers postponed major purchases. Suddenly they begin to buy cars, refrigerators, televisions, and furnaces to replace their failing models.

Copyright © 2004 South-Western Slate Scenario Practice 7. In response to other dramatic changes, the government raises taxes and reduces transfer payments in the hope of balancing the federal budget.

Copyright © 2004 South-Western Slate Scenario Practice 8. News of possible future layoffs frightens the public into reducing spending and increasing saving for the feared “rainy day.”

Copyright © 2004 South-Western Slate Scenario Practice 9. Net exports decrease

Copyright © 2004 South-Western Slate Scenario Practice 10. The government engages in a new highway building program.

Copyright © 2004 South-Western THE LONG-RUN AGGREGATE- SUPPLY CURVE In the long run, an economy’s amount of production of goods and services depends on its supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services, plus the gov’t policies that promote productivity The price level does not affect these variables in the long run.

Copyright © 2004 South-Western The Long-Run Aggregate-Supply Curve Quantity of Output Natural rate of output Price Level 0 Long-run aggregate supply P2P2 1. A change in the price level does not affect the quantity of goods and services supplied in the long run. P Copyright © 2004 South-Western

THE LRAS CURVE So…In the long run, the aggregate-supply curve is vertical at what we call the natural rate of output This is also called its potential output or full-employment output

Copyright © 2004 South-Western Comparing PPC to LRAS These are just 2 ways to show the same thing: The ultimate potential—the full capability— of your economy overall.

Copyright © 2004 South-Western Why the Long-Run Aggregate-Supply Curve Might Shift Any change in the economy that alters the natural rate of output shifts the long-run aggregate-supply curve. The shifts may be categorized according to the various factors of production that affect output.

Copyright © 2004 South-Western Why the Long-Run Aggregate-Supply Curve Might Shift Shifts arising Labor Capital Natural Resources Technological Knowledge AND Gov’t Policies

Copyright © 2004 South-Western AGAIN…Long-run Economic Growth can be represented by 2 different models in Macroeconomics Macroeconomic Growth = PPC shift = LRAS shift

Copyright © 2004 South-Western Long run analysis … Explains our business cycle over long periods of time growing in GDP output…and our slow, steady price rises

Copyright © 2004 South-Western Long-Run Growth and Inflation Quantity of Output Y 1980 AD 1980 AD 1990 Aggregate Demand,AD 2000 Price Level 0 Long-run aggregate supply, LRAS 1980 Y 1990 LRAS 1990 Y 2000 LRAS 2000 P In the long run, technological progress shifts long-run aggregate supply and ongoing inflation leading to growth in output... P 1990 P and growth in the money supply shifts aggregate demand... Copyright © 2004 South-Western

NOW---let’s put the graphs together: The Long-Run Equilibrium—LRAS, AS, AD Natural rate of output GDP--Quantity of Output Price Level 0 SRAS--Short-run aggregate supply LRAS--Long-run aggregate supply Aggregate demand A Equilibrium price Copyright © 2004 South-Western

Long-Run Macroeconomic Equilibrium Recessionary Gap Self-Correction Inflationary Gap Self-Correction Output Gap: % diff between Ye from Yp 100 x (Ye-Yp)/Yp

Copyright © 2004 South-Western LRAS Slate Scenario Practice This time, draw the macro graph including the LRAS as it would be BEFORE the scenario occurs. Then, draw the shift and label whether this is an inflationary or recessionary gap.

Copyright © 2004 South-Western LRAS Slate Scenario Practice 11. A series of natural disasters disrupt production and delivery of goods.

Copyright © 2004 South-Western LRAS Slate Scenario Practice 12. New immigration laws have led to labor shortages.

Copyright © 2004 South-Western LRAS Slate Scenario Practice 13. Interest rates fall.

Copyright © 2004 South-Western LRAS Slate Scenario Practice 14. Labor strikes cause an interruption in shipment of parts.

Copyright © 2004 South-Western LRAS Slate Scenario Practice 15. Stock and bond markets soar.

Copyright © 2004 South-Western LRAS Slate Scenario Practice 16. After a long period of rising housing prices and values, the incidence of foreclosures increases and housing values begin to plummet. Consumers react with concern due to shrinking estimates of housing-based wealth.