Econ Test 3
Draw the Loanable Funds Market Graph? Include ALL 3 synonymous labels for X axis. (You must label everything correctly so check yourself on Key and Pic)
(See Graph) Did you label ? 1) Interest on Y 2) All 3 labels for X (note only one on pic) i) Loanable Funds ii) Savings iii) Investment 3)Supply of LF (Bank willingness to Lend) 4) Demand for LF (Entrepreneurs wiliness to Borrow)
When are you in Equilibrium: - In the Short Run? - In the Long Run?
- Always in short run equilibrium and its where AD and SRAS intersect? - Only when SRAS LRAS and AD intersect in same place.
- The Austrian theory of the Business Cycle is the basis for what economic school of thought? -
- Capital-Based Macroeconomics
- Keynesian economics claim the cause of economic downturns is a result of what? - What is their position on how to fix it?
- Changes in aggregate demand which create gaps between the actual and potential levels of output, and that such gaps can be prolonged. Expansionary Fiscal and Monetary policy that increases Aggregate Demand.
Complementary goods - Define - What happens when the price of one complement increases? - Give an example of complementary goods
- Goods that are related to each other: - if the price of one increases the demand for the other falls and vice versa - Gasoline and cars
Is the aggregate supply curve for the same product the same shape?
- YES, just a different scale but same reasons.
Laffer Curve - What happens on Right side of Curve when you raise taxes even more? - EXPLAIN WHY? - What do we cause this area of curve? Sho it on the curve
- past the peak, an increase in the tax rate leads to lower total tax revenue collected. - This effect takes place because when the tax rate is high enough, the disincentive effect of the tax becomes so large that enough people give up working and saving so that the total tax revenue declines. - Prohibitive Region (See Pic)
Inflationary Gap - Define it - Draw Graph - Sustainable?
- what occurs when the equilibrium quantity of output is above potential output (producing beyond its full employment level) - No, only in the short run
Long Run Equilibrium - Define - Graph - At the GDP output level of Long Run Equilibrium what can we say about the economy? - What is unemployment at LR equilibrium?
-where the SRAS, LRAS and AD all intersect - See Graph - The Economy is producing at its full potential meaning GDP is equal to full employment - The unemployment rate is equal to the natural rate
Graph and label Aggregate Demand and Supply Market
1) Did you label axis correctly? (both income and GDP output on horizontal) 2) SRAS 3) LRAS 4) AD
If C or I or NX or G changes other than from a change in P how does it effect AD? - We already discussed G but what are some things that would shift AD from C/I/NX?
1) Domestically - Consumer confidence can ↑ or ↓ 2) Internationally - A Recession in just Europe so P ↓ in Europe and they would import less and US would import more ====> NX would go DOWN Other things: - Social unrest in other countries - International relations cause trade to dry up (i.e. I thought of Cuban embargo)
Ceterus parabus
All other things equal. All variables except those under immediate consideration are held constant.
Laffer Curve - What happens on Left side of Curve when you raise taxes even more? - EXPLAIN WHY?
At low tax rates, an increase in the tax rate raises the total tax revenue collected.
Capital Goods - Define
Buildings, machines, technology, and tools needed to produce goods and services.
NEW SLIDE FOR FINAL What is another name for Investment? What are they referring to?
Capital or Capital Stock mean the same as Investment (All these terms are referring to the means of production such as LAND, BUILDINGS AND MACHINERY)
Draw the relationship between PPF and Haykian Triangle.
See Pic ==> They relate as they have the same Total Consumption
Why is SRAS upward sloping?
1) Sticky Wages 2) Sticky Prices 3) AND MISPERCEPTION THEORY (Dont forget this we just added)
Draw and Label the Structure of Production with stage examples! (You must label everything correctly so check yourself on Key and Pic)
Did you label ? 1) early and late stage? 2) Y AXIS ==> Total Consumption (Output of Consumer Goods) 3) Mining, Refining, Manufacturing, Distributing, Retailing 4) X Axis ==> PRODUCTION TIME
How does Govt Spending affect AD?
Government Spending is not effected by Price level because G is done only by policy. G is not dependent on Price level. Any change in G would shift the entire curve instead of moving up and down the curve. ↑ G then AD shift Rt ↓ G then AD shift Lf
long run phillips curve - Define it - Graph it
IN THE LONG RUN unemployment does not change no matter how much inflation changes
What is another term used for "Investing" on the PPF?
Investment = Capital Goods
Once the Economy Bust has occurred (ie. Recession or Depression) what Policies do Austrian Economist think should be done to recover economy?
Policy Prescription = No policy Prescription Don nothing and let the markets prices and demand self adjust no matter how painful or long it takes.
Inflationary Gap - Draw the elimination of an inflationary gap on a graph and discuss in detail how an inflationary gap is self correcting
Since job seekers are less than job openings in the market, employers are forced to raise the wage to attract new workers. High wage will decrease the AS, and raise the price. Higher price will lower consumption. This process will repeat until the long run equilibrium is reach
- Explain the Keynesian view of what happened in the Great Depression? THE 3 STEPS - How did we end up implementing the Keynesian policy?
Step 1: Aggregate demand decreased from a decrease in I and C (Consumer confidence way down etc...) creating a recessionary gap. Step 2: SRAS began to decline some due to falling wages falling. (DURING PRESIDENT HOOVER YEARS). But we see that the shift in short-run aggregate supply was insufficient to bring the economy back to its potential output. Why you say: Because President Franklin Roosevelt blocked further reductions in wages and prices which stopped further shifts in aggregate supply. With recovery blocked from the supply side, and with no policy in place to boost aggregate demand, it is easy to see now why the economy remained locked in a recessionary gap so long. Step 3: Keynes argued that *expansionary fiscal policy* (ie. increase AD) represented the surest tool for bringing the economy back to full employment. - Mainly with the increased federal spending a) Defense during WWII. A little bit of help from the New Deal policies (increased infrastructure spending) under PRESIDENT ROOSEVELT.
Answer for Previous slide
THE OVERALL GROWTH IN THE ECONOMY Consumption, as well as saving/investment, increasing in each period.
What happens to PPF when people become more thrifty and save more (Decreased Time Preference)? DISCUSS AND SHOW ON PPF.
They reduce their current consumption and save instead.
Aggregate Supply
the quantity supplied of all goods and services (real GDP) at different price levels
Cole lets go through this together. - If a lender wanted to earn 5% interest on a loan but he expected inflation to be 6% what nominal rate would he charge the borrower? - If a lender expected 10% inflation would he ever loan at a nominal rate of 6%
- 11% - Never because the money he got back would be worth 10% less in purchasing power so he would lose 4% As long as he can earn a 6% or greater interest rate if he keeps it then he'd be better off not lending.
Laffer Curve - Define it - Draw it - Whats on the x & y axis - What concept does it capture - What type of Policy is it analyzing (Fiscal or Monetary? Why
- A curve that shows the relationship between the TOTAL TAX REVENUE collected by the govt and the Average or Marginal Tax Rates charged by the Govt - See Graph - tax revenue on the y-axis and tax rates on the x-axis. - the concept that raising the tax rate eventually leads to lower tax revenues being collected. - Fiscal Policy because raising or lowering taxes is considered FISCAL POLICY
Specific Factors of Production - Define - Give 1 examples of Non Specific Factors
- A factor of production that is unable to move into or out of an industry to produce something else. The term is used to describe factors that would *not be of any use in other industries* - Specific Raw Materials like blueberries and chocolate chips (Not easily used to make other things unless something new gels invented)
- What do Austrians/Capital Based Macro-Economist believe determines the following: Households ==> Consumer versus Save Entrepeneurs ==> Borrow and Invest OR do nothing - How does this happen?
- Entrepreneurs and Consumers will make their decisions based on THE RATE OF INTEREST. - Interest rate will determine the AMOUNT OF LOANABLE FUNDS which will drive BUSINESS INVESTMENT BORROWING FOR CAPITAL.
Keynesian - View of Markets - Best Model that demonstrates this SRAS, LRAS
- Markets do not self correct quickly because prices and wages take time to adjust.
Short Run Equilibrium - Define - Draw Graph
- Occurs at the intersection of the aggregate demand (AD) and short-run aggregate supply curve (SRAS)
Sketch the relationship between the AD/AS Curve and the Phillips Curve. Describe the relationship between the two?
- See Graph Step 1 - Something causes AD to increase and shift right Step 2 - As aggregate demand increases price level to increase (inflation) and real GDP to increase (need more employees so lower unemployment Step 3 - Same thing on Phillips Higher inflation = Lower UE and vice versa These two factors are captured as equivalent movements along the Phillips curve from points A to D.
- Draw the LRAS curve with several shifting AD curves next to the LR Phillips Curve - Whats the main point of these graphs?
- See pic - That in the long run inflation and money supply does not matter, the economy will
Recessionary Gap - Draw the elimination of a recessionary gap on a graph and discuss in detail how a recessionary gap is self correcting - Which Economic School believes in this self correcting theory? -Which school does not believe in it and why? What do they propose?
- Since more job seekers are in the market, they tend to settle with a lower wage. Lower wage will lower the AS curve (lower wages means more profit so firms will produce more at all price levels shifting Curve) and causing the price to decrease. Lower price will increase consumption. This process will continue until the economy reaches the long run equilibrium (potential real GDP). - Both Monetarist and Austrians - Keynesians because they think wages are sticky (either by contracts or minimum wage laws etc..) and wont adjust the SRAS enough to get back to full employment. - Fiscal and Monetary Policy to increase AD to get back to FUll Employment Equilibrium
- Where does the SUPPLY Loanable Funds come from? - Where does the DEMAND Loanable Funds come from? - What determines the magnitude of both of the above? Discuss.
- The DEMAND of loanable funds comes from peoples SAVINGS. Put in bank then gets loaned out. - The DEMAND for Loanable funds comes from the *business community's* (entrepreneurs) *willingness to borrow* and undertake investment projects. - INTEREST RATES Higher Rates = Inc Savings & decreased Borrowing/Invest Lower Rates = Inc. Borrowing/Invest & decreased Savings
REVISED FOR FINAL EXAM STUDY CAREFULLY Taylor Rule - Whats it used for? - Give the 4 main components of the Taylor Rule?
- The Fed uses the rule to make estimates of ideal short-term interest rates FEDERAL FUNDS TARGET RATE - 1) REAL INTEREST RATE 2) INFLATON 2) INFLATION GAP 3) OUTPUT GAP (Examine the pic and see if you can spot the 3 comennts in the equation)
NEW SLIDE FOR FINAL Net Investment - Define - How does it affect Growth?
- The extra capital over and above the current level after replacement investment has been done. (The difference between the "replacement" and the "gross" magnitudes constitutes net investment) - Positive net investment means that the economy is growing. The PPF shifts outward from year to year, permitting increasing levels of both consumption and investment.
NEW SLIDE FOR FINAL Replacement Investment - Define - How does it affect Growth?
- The investment needed just to replace worn out or obsolete capital. - If you just do Replacement Capital the economy will stay the same and not grow in future years
- Describe what happens when peoples Time Preference Declines? - Show this on the PPF and Loanable Funds graph? - How does this effect the Loanable Funds Market? - How is the PPF effected?
- They can wait more and get more focused on the future. MEANING SAVINGS INCREASES. - See Graph - increased savings increases loanable funds and lowers interest rates. The Business Community then Borrows and Invest MORE. - Investment increases and consumption decreases. See Graph
Substitute Good - Define - What happens when the price of one substitute increases?
- Two or more goods that satisfy a similar need, so that one good can be used instead of the other. - If two goods are substitutes, an increase in the price of one leads to an increase in the demand for the other.
Long Run Aggregate Supply - Define - Discuss why behind the shape of it
- shows the relationship between the aggregate price level and the quantity of aggregate output (ie. GDP) supplied that would exist if all factor of production prices, including nominal wages, were fully flexible (not sticky in the long run) - Changes in price level don't affect the long run aggregate supply curve making it vertical
Aggregate Demand - Define - Is it downward sloping because of the same reasons? Explain
- the amount of goods and services in the economy that will be purchased at all possible price levels - BECAUSE WE HAVE MULTIPLE GOODS ON HORIZONTAL AXIS WE CAN NO LONGER USE DIMINISHING MARGINAL UTILITY FOR AN EXPLANATION OF THE SLOPE OF THE DEMAND CURVE
1) Draw the basic Graphs 1) Loanable Funds 2) PPF 3) Stages of Production Graphs and Label. 2) Show and describe the SEVEN effects on the graphs from an decrease in TIME PREFERENCE (Being Future Oriented). HINT: 1) Loanable Funds (Effects 1-3) 2) PPF (Effects 4) 3) Stages of Production (Effects 5-7)
1) See pic 2) EFFECT #1 ==> If we save more the supply for savings increases (shifts right) this is seen as (position 1 in graph above) EFFECT #2 ==>The shift in savings results in a) lower interest rates (position 2 above) EFFECT #3 ==> Investment INCREASES (More Funds borrowed) from the lower interest rates (ie. the new equilibrium) as seen as the shift from S=I to S'=I' or a shift to the red vertical line EFFECT #4 ==> If we choose to save more, that means that our desire to consume now decreases. This a shift along a stationary PPF (position 3 above) from the black dot to the red dot.. This means that consumption drops from C to C' (position 4 above) EFFECT #5 ==> The result is a shorter vertical leg on the Hayekian Triangle. EFFECT #6 ==> With increased investment Production Time increases. This is seen as a lengthening of the horizontal leg of the Hayekian triangle at position 5 above EFFECT #7 ==> The interest rate dropped at (position 2 above) this means that the slope of the hypotenuse of the Hayekian Triangle decreases (position 6 above)
Name the 4 primary components of Capital-Based Macroeconomics
1) The Production Possibilities Frontier 2) The Loanable-Funds Market 3) The Structure of Production 4) Stage-Specific Labor Markets
Give 3 Reasons why AD is downward sloping?
1) WEALTH EFFECT 2) INTEREST RATE EFFECT 3) INTERNATIONAL TRADE EFFECT
Recessionary Gap - Define it - Draw it
A situation where real GDP is less than potential GDP, and unemployment is greater than the natural rate of unemployment.
Which economist would have said the following quote (ie. Austrian, Monetarist, Keynesian). Also give the reason why? : "With interest rates artificially low, consumers reduce savings in favor of consumption, and entrepreneurs increase their rate of investment spending. And then you have an imbalance between savings and investment. You have an economy on an unsustainable growth path."
An Austrian - "interest rates artificially low" - "unsustainable growth path." ==> by using the phrase artificial in terms of interest rates and unsustainable growth they are obviously being critical of the Fed. This could be discussing the Capital Based Model in looking at the economy.
The moral of the story
An artificial Boom is always followed by a BUST! It causes: - Fake boom - Malinvestment - overconsumption - Capital Consumption - Riskier Investments - Incorrect allocation of Lines of Production and labor *So DON'T engage in Monetary Policy let the free market reign*
Answer for Previous slide
An increase in savings because of a decrease in time preference.
What is Start of a Change in the Economy in the Capital Based
As before, we let people become more future-oriented. They save more, which transmits a signal (a lower interest rate) to the business community.
According to Austriam Macroeconomics, what is the reaction to Monetary Policy that reduces interest rates to artificially low rates: - Consumers? - Entrepreneurs?
Consumers => reduce savings in favor of consumption Entrepreneurs => increase their rate of investment spending.
Give the Sticky Wage Explanation of why SRAS is upward sloping a) Why sticky? b) Employee perspective c) Employer perspective and impact on SRAS d) OK now summarize the chain of events that leads from an increase in the price level to an increase in output in the sticky-wage model.
Go here ===> http://www.sparknotes.com/economics/macro/aggregatesupply/section2.rhtml - Short run wages are set by employment contracts and are slow to change so when the economy changes, the wage the workers receive cannot adjust immediately. (ie. they are sticky) - Nominal wage stays same because sticky but the real wage falls because this is based on the purchasing power of the wage and when prices rise workers cant buy as much. - When the real wage that firms pay employees falls, labor becomes cheaper. However, since the amount of output produced for each unit of labor is still the same, firms choose to hire more workers and increase revenues and profits. When firms hire more labor, output increases. Thus, when the price level rises, output increases because of sticky wages. - When the price level rises, real wages fall. When real wages fall, labor becomes cheaper. When labor becomes cheaper, firms hire more labor to make more profit. When firms hire more labor, output increases so SRAS slopes up.
International Trade Effect
If P ↓ then Dom Goods are cheap so Foreigners would rather buy in US so NX ↑ ALSO Imports decrease because US buyers now buy more in US instead of importing because of Price drop Note: NX = Net Exports (Exports-Imports)
Interest Rate Effect
If P ↓ ⇨ Wealth ↑ ⇨ Savings ↑ (along with C but we already discussed that) ⇨ LF ↑ ⇨ i ↓ ⇨ I ↑ ⇨ AD ↑ occurs when a change in the price level leads increased savings leads more LF and lower interest rates leads to increased Investment and, therefore, in the quantity of aggregate demand
What does the intersection of I & C caused bye the credit expansion by the Fed imply about the economy? Show this on the PPF.
It pushes the economy toward a point that lies beyond the PPF. BEYOND THE AVAILABLE RESOURCES that can be sustained by the level of consumption and investment.
"In the long run, we are all dead."
John Maynard Keynes in when he dismissed the notion that the economy would achieve full employment in the long run as being irrelevant and that classical economist were wrong.
Real Interest Rate Equation
Nominal interest rate - expected Inflation rate
New Deal
President Franklin Roosevelt's program to combat economic depression by increased government spending to stimulate the economy
What does PPF stand for?
Production Possibilities Frontier
Nominal Interest Rate Equation
Real interest rate + expected Inflation
Explain the Monetarist view of what happened in the Great Depression?
Said it was caused by a fall in the money supply. They say that because the money supply fell so much an ordinary recession turned into a major deflationary depression. MS ↓ => Deflation => AS ↓ => Unemployment - Said Bank Failures even caused a further fall in MS
Look at the pic on other side and describe what caused the SHIFT
See Next Slide for answer
How does the Aggregate Supply and Demand Curve relate to the Phillips Curve? (I suggest your draw)
See PIC (ALSO WORKS VICE VERSA) As AD shifts and you move along the R curve that brings a HIGHER price level and INCREASE in real GDP. THIS IS EQUIVALENT TO a movement along a short-run Phillips curve that brings a INCREASE in the inflation rate and an DECREASE in the unemployment rate xxxxxxxxxxxxxxxxxxxx AD↑ ==> Move along SRAS so PL↑ AND GDP↑ *SAME AS* Move along PC ==> Inflation ↑and ↓UE and ↑ or ↓
Sketch the Graphs of Loanable Funds and PPF and showing how they RELATE - What does the Loanable Funds Market Graph Show? - What is the PPF showing?
See Pic The loanable-funds market shows how the *interest rate brings saving and investment in line with one another* - The production possibilities frontier shows the tradeoff between consumption and investment.
Show how growth in the overall economies production capacity is shown on the PPF
See pic
Why is the Individual Demand Curve Downward Sloping?
THIS IS REVIEW Because of the Law of Diminishing Marginal Utility - rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased so they will pass less for it.
Capital Based Macroeconomics makes what claim?
That there is a *coordination of saving and investment decisions that are driven by market-governed movements in interest rates*
In Capital Based Macroeconomics, what is shown on the PPF?
The different combinations of using RESOURCES within the economy between CONSUMING them and INVESTING them.
Why is the Individual Supply Curve Downward Sloping?
The supply curves lopes upward, reflecting the higher price needed to cover the *higher marginal cost of production* Each additional factor of production cost more so firms only supply more when prices are higher or they would lose money.
If the PPF shift outward what does this mean?
The the OVERALL ECONOMY is GROWING (SEE PIC)
What is difference between short run and long run aggregate demand?
Trick question: There is not one so there is only AD.
Aggregate Demand Equation - Give it 2 ways
Y= C + I + G + NX or Y= AD Where: Y = GDP/Total Output/Total Income C= Consumer spending I = Investment Spending G = Govt Spending NX = Net exports
a) Draw the impact of the increase in MS by the Fed on the Hayekian Triangle. AND on the Stage Specific Labor Markets b) Discuss the effects on the Early Stage of Production GIVE THEY WHYS! c) Discuss the effects on the Early Stage Specific Labor Market. GIVE THEY WHYS! b) Discuss the effects on the Late Stage of Production GIVE THEY WHYS! c) Discuss the effects on the Late Stage Specific Labor Market. GIVE THEY WHYS! also label these new effects
a) - See image for Haykeian Triangle here (MAKE SURE YOU LABEL Malinvestment and Overconsumption - Stage Specific Labor Markets ==> just show Demand line shift to right and point out wage and labor hour increase for both early and late stage b) - Early Stages Production => The investment activities in the early stages increase so the Production time increases and stretches the triangle to the left. c) Early Stage Labor Market = Demand Increases shiting the curve and increase both wages and labor hours d) Late Stages Production => Increased consumer demand draws some resources toward the late stages making both ends of the triangle/production process increase e) late Stage Labor Market = Demand Increases shifting the curve and increase both wages and labor hours
NEW SLIDE FOR FINAL What are the two components of Gross Investment on a PPF? Show both on PPF.
a) 1) Replacement Investment 2) Net Investment
a) What does each of the following like more (inflation or deflation)? Why - Borrowers - Lenders b) How could deflation hurt a lender?
a) Borrowers like INFLATION because they pay back with money that has less buying power. Borrower hate Deflation because the money they pay back with now has more buying power. THEIR REAL INTEREST RATE COST INCREASES SIGNIFICANTLY. (This is why monetarist want to err on the side of inflation) - Lenders hate inflation as when they get the money it has less purchasing power Lenders love deflation - Now they can buy more stuff with the money they receive back as it has more buying power. THEIR REAL RETURN IS NOW HIGHER Example fi Deflation is 2% and Nominal is 5% Real Return = 5% -(-2%) =7% Note: Deflation is a negative b) Normally it helps UNLESS the borrower declares bankruptcy and dont pay anything back
THEN END RESULT a) What happens in the Short Run? b) What happens in the Long Run? c) Using the 4 graphs drawn to date SHOW and DISCUSS the impact on each of the Markets.
a) Consumption and Investment increase and Unemployment goes down. Every seems awesome. Its a BOOM! b) The C & I are unsustainable and the economy goes BUST!!!!!! c) Draw the effects on each graph see image LF Market - After businesses start going bankrupt and economy goes bad lenders stop lending and interest rates go up PPF - the economy goes into recession—and possibly into deep depression and the PPF curve goes below where it initially started Stage of Production- The Triangle gets smaller then it was initially showing less overall production in the economy Labor Markets - The demand Shifts to below where it started in both stages when the economy shrinks and unemployment increases
Austrian Economics a) Name three famous DEAD Austrian Economist b) What is their position on the we should regualate the economy c) What is the basis of their belief system? d) Who do they hate? e) If not government intervention how does the economy fix itself?
a) Friedrich Hayek Carl Menger Ludwig von Mises b) The free market can solve most of our problems and the more we reduce government or eliminate government the better off we will all be. - LESS GOVERNMENT AND LESS CENTRAL BANK INVOLVEMNT IS GOOD c) Austrian Business Cycle Theory d) - the Federal Reserve, - "Keynesians" - anyone who advocates for government intervention in markets. e) Prices and Profitability are information that help drive a coordination between production and consumption
a) Are the new projects for investment sustainable over the long term? WHY (3 reasons)? b) Give an example table that shows an entrepreneurs level of preference when choosing investment projects. c) What do we call these BAD Investment Choices?
a) NO, because when the interest rate decreased, the Entrepeneur chose new investment projects that were: 1) Take longer to complete 2) Have a lower rate of return (lower profit) 3) Are riskier b) See Pic c) Malinvestment (hey remember "Mal" means bad in spanish)
Hayekian Triangle - Draw and Label it b) What do bars represent? c) What does the preceding (the one before) bar represent to each firm? d) What does the difference between each bar represent? e) How can we simplify drawing? f) What does X axis represent? g) What does height Represent? h) What does the slope of the Hypotenuse Represent? i) Explain the theory of the slope?
a) See Next Slide to b) Each bar represents the REVENUE (R) that each stage of production receives when it sells it to the next firm.. It starts with raw goods and ends with the final good sold to consumers c)The cost of what they had to pay for their input d) R-C=P or Revenue - Cost = Profit e) Connecting the bars makes a RIGHT TRIANGLE f) Base or X axis = Passage of TIME g) the FInal Selling Price to each Consumer (or Revenue to the Retailer of the good) h) INTEREST RATE or Time Preference of tying up my money in the factors of Production i) Overtime if profits are too high new firms will come in and produce. This increase the cost of production and drives down the profit. Their is always some profit because noone comes in and wants to make nothing. They want to get an INTEREST RETURN on their investment (Time PRefeernce)
Sketch the supply and demand graphs of the following: a) Two substitute goods and the effects of an increase in demand for one of them? b) Sketch the effects of a) above on their SPECIFIC FACTORs of PRODUCTION - Describe the main effects c) Sketch the effects of a) above on a non specific Factor of Production. - Describe the main effects
a) See graph b) See Graph - The demand for the other good goes DOWN and the price and quanity supplied also goes down. c) Nothing happens on the Supply and demand graph BECAUSE the NON Specific Good can be used in the production of the increase quantities of the first good
a) Graph what it looks like in the LF Market when the Federal Reserve increases the Money Supply through Monteray Policy. b) When the Federal Reserve increases the Money Supply through Monteray Policy, how does it enter the economy? c) Is this new money considered SAVINGS? d) How does this increase in the money supply effect savings by consumers? e) What is Investor reaction to the above? f) What is savers reaction to the above?
a) See image b) - Through credit markets/banks. c) NO, The new money masquerades as saving BUT and the supply of loanable funds shifts rightward—but without there being any increase in actual savings by consumers. d) It actually reduces savings because interest rates are artificially lowered. e) Investors move down along their demand curves, taking advantage of the lower borrowing costs. f) Savers move down along their unshifted saving curves in response to the weakened incentive to save.
a) Tying in the previous LF Market graph, graph what it looks like in the PPF when the Federal Reserve increases the Money Supply through Monteray Policy. b) Explain what happens with Investment? c) Explain what happens with Consumption?
a) See image b) Favorable credit conditions spur on investment activity, which suggests a clockwise movement along the PPF in the direction of investment. c) But income-earners are actually saving less (and hence consuming more), which suggests a counterclockwise movement along the PPF in the direction of consumption.
Time Preference a) What is Time Preference? b) Why do consumer time preferences change? c) What are 3 ways to phrase that people will SAVE more? d) If consumers increase savings what is the first impact it has?
a) The liklihood that a consumer wants to consumption currently as opposed to future consumption, or vice versa. b) *the consumer's expectations of his future income changes* Example: If the future income is expected to be higher than the consumer's current income, he or she will have a high rate of time preference; thus, the interest rate has to be high enough to induce savings instead of spending. (Attitude: Future looks bright so spend and enjoy now) if the future income is expected to be less than the current income, a rational consumer will be inclined to save Example 2: Future looks scary. May lose job. Save NOW c) SAVE MORE 1) Low/Decreased Time Preference 2) They become more Future Oriented (Save now for future/more worried about the future) d) Inc Savings = Inc Loanable Funds = Interest Rates go down
Non-Specific Factors of Production - Define - Name 2 examples
has equal values in the production processes of more than one particular type of economic good or service and is thus capable of alternate uses - - Non Specific 1) Capital Good (Equipment) Like ovens (Can Bake other things not just one good) 2) Labor (Can easily retrain to go produce other things
Read this carefully
http://staffwww.fullcoll.edu/fchan/macro/2sr_&_lr_equilibrium.htm
Do the test problems WITH ME ON PHONE and skip 16, 18, 19
http://www.uta.edu/faculty/crowder/data/ECON3312_Exam3_Review.pdf
Mystery Solved Ignore
https://en.wikipedia.org/wiki/Ludwig_von_Mises_Institute http://www.zerohedge.com/article/presenting-capital-based-macroeconomics-overview-austrian-school-and-business-cycle
Watch the Video in ints entirety
https://www.khanacademy.org/economics-finance-domain/macroeconomics/inflation-topic/phillips-curve-tutorial/v/phillips-curve
Watch the Video
https://www.youtube.com/watch?v=FqLjyA0hL1s
Wealth Effect - discuss in detail
if P inc = less wealthy (reduces purch power) if P dec = more wealthy so *If P ↓ ⇨ C ↑ (as long a W does not change) so AD ↑* A lower price level raises the real value of households' wealth as Purchasing power increases. Higher real wealth stimulates consumer spending and thus increases the quantity of goods and services demanded.
Give the Sticky Price Explanation of why SRAS is upward sloping
if P ↑ (in general all prices go up) ⇒ But your prices for some reason stays same (like menu or catalog already printed or price printed on good already) ===> So if P ↑ in general your particular good D ↑ so Y ↑
Read Section 3.2 starting on page 49 of your text book. Highlight anything that is not super clear so we can discuss briefly
n/a
Real Interest Rates - Define
nominal interest rate less inflation
Short Run Aggregate Supply
shows the relationship between the price level and the quantity of real output (real GDP) *when resource prices (especially wages) do not change*
Nominal Interest Rates
the interest rate as usually reported without a correction for the effects of expected inflation.
