ECON 2030 Lecture Notes - Lecture 20: Investment Goods, United States Dollar, Classical Dichotomy
10 May 2018
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4/5/18 ECON-2030 Lecture 20- Chapter 33: Aggregate Demand and Aggregate Supply
Introduction
● Real GDP over the long run
○ Grows about 3% per year on average
● GDP in the short run
○ Fluctuates around its trend
● Recessions:
○ Periods of falling real incomes and rising unemployment
● Depressions:
○ Severe recession (very rare)
● Economic fluctuations are irregular and unpredictable. They are of different duration
and do not occur with regularity
● Investment falls during recessions. This is true for other variables as well: income falls,
consumer spending falls, profits fall, etc.
● When firms cut back production during recession, they don’t need as many workers and
unemployment rises. During expansions production increases, need more workers,
unemployment falls
Classical Economics- A Recap
● Classical economics
○ The classical dichotomy: the separation of variables into two groups:
○ real - quantities, relative prices
○ Nominal - measured in terms of money
● The neutrality of money: changes in money supply affects nominal but do not affect not
real variables
● Classical theory
○ Describes the world in the long run, but not the short run
● In the short run:
○ Changes in nominal variables (like the money supply or ‘P’) can affect real
variables (like ‘Y’ - real GDP or u-rate)
● We can use a new model
○ Aggregate supply-aggregate demand model
The Wealth Effect (P and C)
● Suppose the price level, P, declines
○ Increase in the real value of money
○ Consumers are wealthier
Document Summary
4/5/18 econ-2030 lecture 20- chapter 33: aggregate demand and aggregate supply. Grows about 3% per year on average. Periods of falling real incomes and rising unemployment. They are of different duration and do not occur with regularity. This is true for other variables as well: income falls, consumer spending falls, profits fall, etc. When firms cut back production during recession, they don"t need as many workers and unemployment rises. During expansions production increases, need more workers, unemployment falls. The classical dichotomy: the separation of variables into two groups: Nominal - measured in terms of money. The neutrality of money: changes in money supply affects nominal but do not affect not real variables. Describes the world in the long run, but not the short run. Changes in nominal variables (like the money supply or p") can affect real variables (like y" - real gdp or u-rate) Buying goods and services requires fewer dollars. Suppose the u. s. price level, p, declines.
