ECON 20B Lecture Notes - Lecture 8: Aggregate Supply, Aggregate Demand, Root Mean Square

147 views8 pages

ochreeel210

5 Jun 2017

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

nicholascsci and 34 others unlocked

ECON 20B Full Course Notes

Verified Note

54 documents

Document Summary

Aggregate demand(ad): a curve that shows the quantity of goods and services that households, rms, the government, and foreigners buy at each price-level. Note: this is not the same idea as the demand for a single good, e. g. bell peppers: if the price of bell peppers , then consumers substitute other goods for bell peppers and the quantity demanded goes down. With aggregate-demand: when the price-level of everything then consumers spends less on everything. Why does ad curve slope down: price-level and consumption: wealth effect. As p , then purchasing power of money , making consumers wealthier and so they spend more. Y = c +i + g + nx . 2: price-level and investment: interest rate effect. As p , then quantity of money demanded decreases, which decreases interest rates (more on this later), leading rms to invest more: y = c + i +g + nx : price-level and net exports: skip. G , t ad shifts right.

Related Questions

1. If the price level doubles and the real output doesn't change, then nominal output also doubles.
2. Inflation makes it less difficult to interpret the information conveyed by prices.

3. Laissez-faire economists oppose government intervention in the market process.

4. Active demand management policies are based on the work of JohnMaynard Keynes.

5. In the AS/AD model, as the price level rises, the real value of assets increases, causing consumption to increase. This is one reason why the aggregate demand curve slopes down.

6. The short-run aggregate supply curve is upward sloping in part because increases in aggregate demand cause some firms to increase their price markups.

7. If productivity and wages both raises by 3 percent, then the short-run aggregate supply curve does not shift.

8. The long-run aggregate supply curve is vertical because all prices adjust in the long run.

9. If the economy is not in long-run equilibrium and other things are equal, then prices will eventually adjust to bring the economy to long-run equilibrium.

10. Most economists agree that it is possible for fiscal policy to fine-tune the economy.

bluewolf591

C. Assume that the long-run aggregate supply is given Y = (2K^1/2)*(L^1/2) , while the short-run aggregate supply curve is horizontal at P = $1.0. The aggregate demand curve is Y = 5*(M/P), and money supply is M = $1,000. Assuming that the economyï¿½s L = K = 2,500,

answer the following questions:

1. What is the income velocity, V?

2. If the economy is initially in long-run equilibrium, what are the values of P and Y?

3. Suppose the aggregate demand curve becomes Y = 3*(M/P).

a. What is the income velocity, V?

b. What are the short-run values of P and Y?

c. With the new aggregate demand function, once the economy adjusts to its long-run equilibrium, what are the values of P and Y?

d. Draw a diagram showing how economy moves from its initial long-run equilibrium (found in part 2), to the short-run equilibrium (found in part 3.b.), and then back to the long-run equilibrium (found in part 3.c)

4. Now, instead of changing the aggregate demand, assume that the Fed decreases money supply from M = $1,000 to M = $400.

a. What are the short-run values of P and Y?

b. With the new aggregate demand function, once the economy adjusts to its long-run equilibrium, what are the values of P and Y?

c. Draw a diagram showing how economy moves from its initial long-run equilibrium (found in part 2), to the short-run equilibrium (found in part 4.a.), and then back to the long-run equilibrium (found in part 4.b).

azurewhale656