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ECON-LEC 4 Macro econ (what he said)

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University of Toronto Mississauga
Sherry Fukuzawa

- expenditure is on the side of demand... - price level determination is the macrovariables that we are interested in Introduction of the price level (chapter 23) - price level and purchasing power of a dollar - price of apple = $1 then $1 is good for 1 apple...if apple is $2 then $1 is worth half - why is it relevant? - if you borrow $100 in 2013 and return $100 in 2014 that means the purchasing power of that $100 drops - with higher price level the borrower returns less value in dollars due to the rise in price level - the borrower will then gain...because they are returning something less valuable - the gain will upset the losses - no net change in the economy - gain of 1 part comes from expense of the loss of the other party - price level - consumption depends on wealth (consumption function) - change in wealth will shift consumption curve - if $100 wealth and $1 each apples meaning that wealth will get you $100 - if $100 wealth and $2 apples each means that you will only get 50 apples - at the higher price level with same wealth means that you won't buy as much - it lowers the purchasing power that people feel poorer then b4 and reduce consumption - in other words at the same income lv the reduction of price will increase consumption - G1 (drop in consumption) - wealth effect - higher domestic level also plays a role - domestic products become more expensive - a drop in export increase in import (increase in Marginal propensity to import) -> net export drops - assumes that this is negligible - because change MPS and changes AE curve - increasing price level will increase net export...similar to impact (can still look at G1) - fall model must have demand and supply - introduces price level into the aggregate expenditure function...make it more realistic by adding price - G2 - as price level changes we can trace out a collection of points and AE=actual out put, AD (demand)curve - higher prices will shift AE curve down - every point on the AD point represent EQ at the output at a given price level - Look at pic on ipod G3 - different level of autonomous expenditure - at p0 it will be - when we change autonomous (A)spending at the eq P0 out put will change by "this" much - multiplier effect - not final eq without considering demand - what will shift Aggregate demand curve? - slope of aggregate demand curve Aggregate supply - SR aggregate supply - tells us how the economy (all firms combined) would respond to the change in the price level regarding the desired output - similar to what we learned in micro, tech and input prices - implies how much a firm wants to produce when there is a change in price - as out put is increase the demand for input is increased too - at aggregate lv the prices of input change differently (G5) - there is not muchcost pressure to cover for higher cost - as you go up...fewer idel resources thus more pressure for input prices to go up, therefore output prices must also rise to cover for the increase cost per unit - higher the output the more pressure for input prices to rise - main changes in Input prices - tech (rarely) because it's a short run and tech is long run - for the shortrun aggregate supply the wages is more important - the % of income in Canada comes from wages and salaries...more then 70% - for each 100% a firm produces, 70% goes towards workers - intense labour output - when desired output (AS)= desired p0 (G6) - what if curve shifts? (G7) - price going up will shift AE1 process of adjusting to the new equilibrium the price will go up to p1 and will settle at new eq point - interms of adjustment at A0 and A0'...the sequence of how eq moves around - if aggregate expenditure at high level of output at which the AD is steeper then there is a large increase in price to cover higher cost per unit - larger increase in price level...larger increase - the same increase depends on the output level we are at... - higher output lv you would have - when we are shifting at the same distance, the change in the output will be smaller and the change in price level will be larger - so the implication on the results of the policy is that shifting aggregate expenditure to the right will have less impact if we are at high output level - due to the constraint of available resources, the higher output the higher level...(listen to recording) Chapter 34 - the adjustment mechanism - short run- fixed tech and input prices - giving enough time everything is variable - what is the LR eq? - it must be a SR eq itself but sustainable period after period (now or 30y later) - in the LR...same eq - LR eq we have LR AE, AS, AD - all have to intersect - when the LR AS= AD - LR AS curve? - full employment (8h a day) - willing to offer 8h a day if each h you get payed 3 cups of coffee - determined by real purchasing power of the wage (the real wage) - if c
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