Class Notes (838,036)
Canada (510,626)
Economics (1,617)
ECON 1BB3 (535)
Lecture

Economics – March 18-28th Lecture Notes.docx

12 Pages
98 Views
Unlock Document

Department
Economics
Course
ECON 1BB3
Professor
Bridget O' Shaughnessy
Semester
Winter

Description
Economics – March 18 , 2013th Is a government budget deficit bad for a small open economy? The Real Equilibrium in an SOE Effects of an Increase in the World Interest Rate  Does not matter value of real exchange rate  NCO is just saving minus investment  Increase in world interest rate  rwshifts up  Higher interest rates mean households want to save more and firms don’t want to borrow as much  NCO = S – I  So I increases and changes NCO Effect of an Increase in the Government Budget Deficit  Public saving will go down  Supply of loanable funds curve shifts in to the left  Excess demand for Canadian dollar  Upward pressure on value of Canadian dollar  When dollar becomes more valuable, goods/services become more expensive  Causes NX to fall Imposing an Import Quota  Import quota: limit on imported goods coming into the country  Only one trade policy that would work to influence trade balance: say no more trade (trade balance is zero)  This would be a bad idea  Work all three examples in reverse for practice th Economics – March 19 , 2013 How do aggregate demand and aggregate supply differ from demand and supply? Aggregate Demand Curve  Y = A*F(K,L,H,N)  AD: Y = C + I + G + NX  The AD curve has a negative slope for three reasons: 1. Wealth effect o If overall price level goes down, people feel wealthier (C increases) o Y increases because C increases in Y = C + I + G + NX P P1 P2 Y 1 Y 2. Interest rate effect o Liquidity preference theory (Ch. 15) o Assume: money has no interest, bonds have interest o Opportunity cost of holding money = interest rate o Price level goes down o People buy same quantity of stuff because need less money d o M decreases o Interest rate goes down o Y goes up because I goes up in Y = C + I + G + NX r Ms r1 r2 M d M 3. Real exchange rate effect o Price level goes down o eP/P* o Canadian goods are cheap relative to foreign goods o Exports go up o Imports go down o Y goes up because NX goes up in Y = C + I + G + NX Shift Factors for the AD Curve  Anything other than P that affects C, I, G or NX will cause the AD curve to shift  Ex: increase in government spending causes to shift out P AD 2 AD Y Aggregate Supply  LRAS: Y = A*F(K,L,H,N)  Slope: A, K, L, H, N do not depend on price (recall the classical dichotomy – the long run separation of real and nominal variables)  LRAS is vertical  Shift: any change in A, K, L, H or N will cause the LRAS curve to shift  natural disasters have much larger impacts in poor countries than in large countries because: buildings are less sturdy so fall down easier, have less ability to clean it up P LRAS Y Y^ Economics – March 21 , 2013 st Readings for Lectures 24-28:  L24 – p. 330-347; 367-373  L25 – p. 325-330; 347-349; 351-356  L26 – p. 349-351; 356-361  L27 – p. 373 – 374; 379-386; 390-399  L28 – p. 374-379; 386-390 Short Run Aggregate Supply:  The slope is positive for three reasons: (1)Sticky wage theory o Real wag: W/P o Labour is expensive when the price of input rises so firms cut production o P goes down resulting in a drop in Y o SRAS has a positive slope (2)Sticky price theory (3)Misperceptions theory  Shift: the SRAS curve will shift when the LRAS curve shifts or when people’s expectations of the price level changes  Y = Y^ + a(P – Pe) What are business cycles and what causes them? Business Cycles:  Economic fluctuations are irregular and unpredictable  Economic variables fluctuate together o GDP (Y) and the unemployment rate tend to move in opposite directions Real GDP Over Time  Over time GDP tends to rise Stylized Business Cycle  Going from peak to trough: recession  Going from trough to peak: expansion (boom)  Recession: (1)Two consecutive quarters of declining real GDP (2)Going from a peak to a trough in a stylized business cycle Review AD: Y = C + I + G + NX LRAS: Y = A*F(K,L,H,N) SRAS: Y = Y^ + a (P – e ) Equilibrium  The model is in equilibrium at the intersection of AD and SRAS  If this point also coincides with the LRAS curve, then the economy is in long run equilibrium Long Run Equilibrium  Changes if there is a shift in the Aggregate Demand (AD) curve  Flow varia
More Less

Related notes for ECON 1BB3

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit