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Chapter 5 Cheetsheet Econ MIDTERM VERSION (2).odt

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ECON 105
Barry Cartwright

Chapter 5: aggregate supply and demand Potential GDP: the total amount that an economy is capable of producing when all of it's resources are being fully utilized Labour Productivity: a measure of the amount of output produced per unit (per unit of time) human capital: the accumulated knowledge and skills of human beings business cycle: the expansionary and contradictory phases in the growth of real GDP -this is measured via growth rates (remember that grwoth rates are calculated year by year, not off of a base rate) -usually represented on a line chart-expansionary phase (upward trending) contractionary phase (downward trending), peaks and troughs LABOUR PRODUCTIVITY: OUTPUT PER PERIOD/UNITS OF LABOUR 4 Sources of Economic Growth the quantity and quality of it's labour resources -amount of physical capital available (higher capital-labour ratio) the rate of technological change -the amount and quality of it's natural resources ECONOMIC GROWTH=a right shift in the potential GDP curve Aggregate supply: the aggregate quantity of goods and services produced by all sellers at various price levels -an aggregate supply curve is not a straight line because as production increases productivity decreases real wage: the amount of goods and services that an employee can buy for a given amount of nominal wage Nominal wage: the present day value of a current wage REALWAGE= NOMINALWAGE/PRICE LEVEL Aggregate Demand: the total quantity of final goods and services that consumers, businessmen, government and those living outside of the country (CIGX) would buy at various price levels Real Balances Effect: the effect that a change in the vale of real balances has on consumption spending (IE, less REALweath, less consumption spending. Inflation drives a reduction in consumption spending) Interest Rate Effect: the effect that a change in prices has on interest rates, leads to the effect that interest rates have upon investment MACROECONOMIC EQUILIBRIUMl:AGGREGATE DEMANX EQUALS SHORT RUN AGGREGATE SUPPLY Foreign trade effect: the effect that a change in prices has upon exports and imports The aggregate demand curve is downward sloping because of -the interest rate effect -the foreign trade effect -the real trade effect POTENTIALGDP:the potential economic output of an economy at FULLEMPLOYMENT AN INCREASE IN POTENTIALGDP MEANSAN INCREASE IN THE PRODUCTION POSSIBLITIES CURVE MACROECONOMIC EQUILIBRIUM: a situation in which the quantity of real GDP demanded is equal to the qauntity of real GDP supplied RECESSION: a period of time when the economy is producing below it's potential and has had two Chapter 5 consecutive quarters of negative growth RECESSIONARYGAP: the difference between actual real GSP and POTENTIALReal GDP, the the economy is producing below potential Recessionary to the left INTFLATIONARYGAP: the difference between actual real GDP and potential real GDP when the economy is temporarily producing an output above full employment Inflationary to the right *MACROECONOMIC EQUILIBRIUM MAYOCCURAT FULLEMPLOYMENT, OR RESULT INA RECESSIONARYGAP, OR RESULT INAN INFLATIONARY GAP THE BIG LIST OF DETERMINANTS OFAGGREGATE DEMAND Chapter 5 1. wealth 2, age of consumer durables 3.consumer expectations 4. interest rates 5.purchase prices, installation and maintainance costs of capital goods 6.age of capital goods and amount of spare capacity 7. business expectations 8. government regulations 9.value of exchange rate 10. income levels abroad 11. price of competitive (foreign) goods 12. tastes of foreigners 13.GOVERNMENT SPENDING 14. TAX RATES 15. MONEY SUPPLY DETERMINANTS OFAGGREGATE SUPPLY -improvement in human capital -an increase in the amount of capital -technological improvement -an increase in natural resources -change in wages rates or the price of factor services (note: change in wages/factors services is the only determinant of aggregate supply which does notALSO effect potential GDP) NOTE-TRICK QUESTION-THE CHANGE IN THE PRICES OF THE NATURALRESOURCES DOESN”T SHIFT POT GDP-the change in the EXISTANCE of them does ESSAY QUESTION: Rightward shift means more COMMENT ONALL14 OF THE DETERMINANTS OFAGGREGATE DEMAND,ANDALL4 OF THE DETERMINANTS OFAGGREGATE SUPPLY Who spends? Consumers account for the consumption spending, firms count for investment spending, foreign markets for net exports, the government for, well, the government. CIGX rides again!!! (Also, the money supply-which we'll talk about later) Aggregate demand is broken up into 5 different areas. The first is CONSUMPTION. An increase in individual wealth will increase aggregate demand. The age of consumer durables, such as cars and appliance is calculated-the higher it is, the higher aggregate demand will be. The last is customer expectations. If a customer expects future prices will be higher, they will spend now, lower, they will spend later (recall the negative effects of deflation from last section). The second is Investment, the most important factor of which is the Interest rate. If the rate of interest is high, then investors
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