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Lecture

ECO100 - FEB 11 Macro with fixed prices, AD and AS

6 Pages
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Department
Economics
Course Code
ECO102H1
Professor
James Pesando

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Description
1. Macro Model with Fixed Prices ● Studied: ○ Determinants of AE (planned) ■ How do they impact equilibrium level of national income? ○ Autonomous vs induced expenditure ■ irrespective of the national income vs respective ○ The multiplier ■ direct relationship between autonomous expenditure and the equilibrium ■ Small amount of expenditure changing equilibrium ● Implied: ○ Changes in real GDP were determined by changes in AE ○ Equivalently, changes in in Y are “demand determined” ■ What demand is when prices are fixed ○ How demand is impacting our equilibrium ○ In recession, policy should work to increase demand ■ When Y does not equal to Y* ○ There are supply concerns as well ● What if there are resource constraints? (Supply concerns) ○ Not enough capital to achieve Y* ○ What if it is not physically for Y to increase to AE? ○ Must consider the “supply” side of the economy ■ Allow price level to change as well ○ 2. Micro vs. Macro Economics ● Micro ○ How are equilibrium price and output determined? ○ What causes the DD or SS to shift? ○ If DD or SS shifts, what happens? ● Macro ○ How are equilibrium price level and national output determined? ○ What causes the AD or AS to shift? ○ If AD or AS shifts, what happens? ● AD schedule: ○ Shows how desired aggregate expenditures change as the price level changes ○ Represents every point where AE intersects the 45 degree line ● AS schedule: ○ shows how, in the short run, the supply of output changes as the price level changes ■ Assumptions: change in the price aren’t about input prices but output prices ○ 3.Aggregate Demand (AD) &AE 1) ... & the Price level ● AE and AD curves contain the same information, plotted in different spaces ○ People’s different prices and plans: ■ 1) people who have a plan ■ 2) plan given the price level ■ 3) equilibrium level, Y* ● AE: hold fix the price and plot the plan vs equilibrium ● AD: hold fix the the plan and plot prices vs equilibrium ● Changes in the price level shift the AE schedule ○ AE shifts down as P increases ○ AE shifts up as P decreases ○ Purchasing power ● Changes in the price level are movements along the AD schedule ○ AD goes down as P increases ○ AD goes up as P decreases ● Motivation behind the inverse relationship between AD & P (or AE & P), Two channels ○ 1) Relationship between price level and consumption ■ Price level up => wealth(purchasing power) down => Consumption down ● Inflation ■ Household holdings of money [liquid assets] (cash, bank deposits) decline in real terms as price level rises, making households less wealthy ● Money that isn’t earning interests are greatly impacted by inflation ○ 2) Price up => Exports dow
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