Textbook Notes (280,000)
US (110,000)
UCLA (2,000)
ECON (100)
ECON 2 (10)
Chapter 33

ECON 2 Chapter Notes - Chapter 33: Aggregate Supply, Aggregate Demand, Money Supply


Department
Economics
Course Code
ECON 2
Professor
Keskinel, M.
Chapter
33

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Production*of*U.S.*economy*measured*by*rGDP*has*grown*about*3%*per*
year*
a.
Period*of*declining*real*incomes*and*rising*unemployment*
i.
Recession:
b.
Severe*recession*
i.
Depression:
c.
d.
!"#$%&'(#)%"
1.
Correspond*to*changes*in*business*
1)
Suggests*that*changes*follow*a*regular,*predictable*pattern*
2)
Fluctuations*in*economy*are*often*called*business*cycle*
i.
Fluctuations*are*not*predictable*at*all*
ii.
a.
For*monitoring*short-run*fluctuations,*does*not*really*matter*which*
measure*of*economic*activity*is*looked*at*
i.
Recessions*are*economy*wide,*show*up*in*many*sources*of*
macroeconomic*data*
1)
Most*macroeconomic*variables*fluctuate*closely*together*
ii.
Fluctuate*by*different*amounts*
iii.
When*economic*conditions*deteriorate,*much*of*the*decline*is*
attributable*to*reductions*in*spending*on*new*factories,*housing,*
and*inventories*
iv.
b.
Changes*in*economy's*output*of*G/S*are*strongly*correlated*with*
changes*in*economy's*utilization*of*its*labor*force*
i.
rGDP*declines,*rate*of*unemployment*rises*
ii.
33.1C:*Fact*3-As*Output*Falls,*Unemployment*Rises
c.
**+,-.*./01.23(#4.35%'#.6(%"%7)(.28'(#'3#)%"4
2.
In*a*sense,*money*does*not*matter*in*a*classical*world*
i.
33.2A:*Assumptions*of*Classical*Economics
a.
**+9-.6:;83)")"<.=>%$#?@'".6(%"%7)(.28'(#'3#)%"4
3.
Chapter(33:(Aggregate(Demand(and(Aggregate(Supply
Tuesday,* May* 23,*2017
00:44

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

If*quantity*of*money*changed,*change*would*be*nominal
1)
Things*people*really*care*about*would*be*exactly* the*same*
2)
In*a*sense,*money*does*not*matter*in*a*classical*world*
i.
Nominal*variables*may*be*the*first*things*seen*
1)
What's*important*are*the*real*variables*behind*the*veil*
2)
"money*is*a*veil"
ii.
Most*economists*believe*that*classical*theory*describes*the*world*in*
the*long*run*but*not*in*the*short*run*
i.
Real*and*nominal*variables*are*highly*intertwined**
1)
Changes*in*money*supply*can*temporarily*push*rGDP*away*
from*its*LR*trend*
2)
Year-to-year*changes,*assumption*of*monetary*neutrality*no*longer*
appropriate*
ii.
33.2B:*Reality*of*Short-Run*Fluctuations
b.
real
a)
Output*of*G/S
1)
Nominal*
a)
Average*level*of*prices*
2)
Model*of*SR*economic*fluctuations*focuses*on*behavior*of*two*
variables*
i.
Model*that*most*economists*use*to*explain*SR*fluctuations*in*
economic*activity*around*its*LR*trend*
1)
Model*is*different*from*model*of*market*D/S
2)
Model*of*aggregate*demand*and*aggregate*supply:
ii.
Curve*that*shows*the*quantity*of*G/S*that*households,*firms,*
the*gov't,*and*customers*abroad*want*to*buy*at*each*price*
level*
1)
Aggregate-demand*curve:
iii.
Curve*ta*shows*the*quantity*of*G/S*that*firms*chose*to*
produce*and*sell*at*each*price*level*
1)
Aggregate-supply*curve:
iv.
33.2C:*Model*of*Aggregate*Demand*and*Aggregate*Supply
c.
Y*=*C*+*I*+*G*+*NX
1)
Affects*quantity*demanded*
a)
C,*I,*NX*depend*on*economic*conditions*and*in*particular*the*
price*level*
2)
Why*does*a*change*in*the*price*level* move*the*quantity*of*G/S*
demanded*in*opposite*direction?
i.
33.3A:*Why*Aggregate*Demand*Slopes*Down
a.
**+*-.A<<$0<3#0?B073"&.C'$D0
4.

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Affects*quantity*demanded*
a)
Nominal*value*is*fixed*
a)
Real*value*is*not*
b)
Money*in*wallet*and*bank*account*
1)
When*price*level*falls,*dollars*held*rise*in*value,*increases*
wealth*and*ability*to*buy*G/S*
2)
Decrease*in*P*-->*increases*real*value*and*wealth*-->*
encourages*spending*-->*increases*quantity*of*G/S*demanded*
3)
Increase*in*P*-->*deceases*real*value*and*wealth*-->*reduces*
consumer*spending*and*quantity*of*G/S*demanded*
4)
Price&Level&and&C:&Wealth&Effect
ii.
When*P*decreases,*households*try*to*reduce*their*holdings*of*
money*by*lending*
1)
When*they*try*to*convert*some*money*into*interest-bearing*
bonds,*drive*down*interest*rates*
2)
Lower*interest*rate*-->*less*expensive*borrowing*-->*
encourages*firms*to*invest*-->*encourages*households*
to*invest*in*new*housing*
a)
Interest*rates*affect*spending*
3)
Lower*interest*rate*increases*the*quantity*of*G/S*demanded*
4)
Lower*P*-->*reduces*interest*rate*-->*greater*spending*-->*
increases*quantity*of*G/S*demanded*
5)
Higher*P*-->*increases*interest*rate*-->*Discourages*
spending*-->*decreases*quantity*of*G/S*demanded*
6)
Price&Level&and&I:&Interest-Rate&Effect
iii.
Lower*price*level*in*U.S.*lowers*U.S.*interest*rates*
1)
U.S.*investors*seek*higher*returns*abroad*
2)
Relative*price*of*domestic*and*foreign*goods*
a)
Real*exchange*rate:
3)
foreign*goods*become*more*expense*>*domestic*goods*
a)
Each*dollar*buys*fewer*units*of*foreign*currencies
4)
Change*in*relative*prices*affects*spending*
5)
U.S.*imports*decrease*
a)
Americans*buy*less*from*other*countries*
6)
U.S.*exports*increase*
a)
Foreigners*buy*more*from*U.S.*since*goods*are*cheaper*
7)
Fall*in*real*exchange*value*leads*to*n*increase*in*quantity*of*
G/S*demanded*
8)
Price&Level&and&NX:&Exchange-Rate&Effect
iv.
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