Class Notes (838,384)
United States (325,381)
LGS 200 (42)
Tripp (12)
Lecture 20

LGS 200 Lecture 20: Macroeconomics Chapter 20* Notes

7 Pages
Unlock Document

Legal Studies
LGS 200

Macroeconomics Chapter 20 Notes Introduction Questions • What are economic fluctuations? What are their characteristics? • How does the model of aggregate demand and aggregate supply explain economic fluctuations? • Why does the Aggregate-Demand curve slope downward? What shifts the AD curve? • What is the slope of the Aggregate-Supply curve in the short run? In the long run? What shifts the AS curve(s)? Introduction • Over the long run, real GDP grows about 3% per year on average. • In the short run, GDP fluctuates around its trend. ➢ Recessions: periods of falling real incomes and rising unemployment. ➢ Depressions: severe recessions (very rare) • Short-run economic fluctuations are often called business cycles. • Explaining these fluctuations is difficult, and the theory of economic fluctuations is controversial. • Most economists use the model of aggregate demand and aggregate supply to study fluctuations. • This model differs from the classical economic theories economists use to explain the long run. Classical Economics – A Recap • The previous chapters are based on the ideas of classical economics, especially: • 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 the money supply affect nominal but not real variables. • Most economists believe 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 or the u-rate). • To study the short run,, we use a new model. The Model of Aggregate Demand and Aggregate Supply • The model determines the equilibrium price level and equilibrium output (real GDP) P SRAS P = the price level Y= Real GDP (the quantity of output) SRAS = “short-run aggregate supply” AD = “Aggregate Demand” AD Y The Aggregate-Demand (AD) Curve • The AD Curve shows the quantity of all goods and services demanded in the economy at any given price level. P AD Y Why the AD Curve Slopes Downward • Y = C + I + G + NX • Assume G fixed by government policy. • To understand the slope of AD, must determine how a change in P affects C, I, and NX. The Wealthy Effect (P and C) • Suppose P rises. ➢ The dollars people hold buy fewer goods and services, so real wealth is lower ➢ People feel poorer. • Result: C falls. The Interest-Rate Effect (P and I) • Suppose P rises. ➢ Buying goods and services requires more dollars. ➢ To get these dollars, people sell bonds or other assets. ➢ This drives up interest rates. • Result: I falls. • Recall, I depends negatively on interest rates The Exchange-Rate Effect (P and NX) • Suppose P rises. ➢ U.S. interest rates rise (the interest-rate effect) ➢ Foreign investors desire more U.S. bonds ➢ Higher demand for $ in the foreign exchange market ➢ U.S. exchange rate appreciates. ➢ U.S. exports more expensive to people abroad, imports cheaper to U.S. residents. • Result: NX falls. The Slope of the AD Curve: Summary • An increase in P reduces the quantity of goods and services demanded because: ➢ The wealth effect: C falls ➢ The interest-rate effect: I falls ➢ The exchange-rate effect (NX falls) Why the AD Curve Might Shift • Any event that changes C, I, G, or NX – except a change in P – will shift the AD curve. • Example: A stock market boom makes households feel wealthier, C rises, the AD curve shifts right. • Changes in C ➢ Stock market boom/crash ➢ Preferences: consumption/saving tradeoff ➢ Tax hikes/cuts • Changes in I ➢ Firms buy new computers, equipment, factories ➢ Expectations, optimism/pessimism ➢ Interest rates, monetary policy ➢ Investment Tax Credit or other tax incentives • Changes in G ➢ Federal spending, e.g. defense ➢ State & local spending, e.g. roads, schools • Changes in NX ➢ Booms/recessions in countries that buy our exports ➢ Appreciation/depreciation resulting from international speculation in foreign exchange market The Aggregate-Supply (AS) Curves • The AS Curve shows the total quantity of goods and services firms produce and sell at any given price level. • AS is: ➢ Upward-sloping in the short run ➢ Vertical in the long run LRAS P SRAS Y The Long-Run Aggregate-Supply Curve (LRAS) • The natural rate of output (Yn) is the amount of output the economy produces when unemployment is at its natural rate. • Yn is also called potential output or full-employment output. Why LRAS Is Vertical • Yn is determined by the economy’s stocks of labor, capital, and natural resources, and on the level of technology. • An increase in P does not affect any of these, so it does not affect Yn. (Classical dichotomy) Why
More Less

Related notes for LGS 200

Log In


Join OneClass

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

Sign up

Join to view


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.