Econ 2301 Chapter 10 Learning Objectives

Illustrate economic growth with a PPC and with a LRAS curve and list the sources of that growth.

-PPC curve moves outward -LRAS line moves right -population increase, labor force participation rate increase, capital equipment, improvements in technology

Draw a sketch of the aggregate demand (AD) curve and discuss its meaning to economic analysis.

-aggregate demand: total of all planned expenditures in the entire economy -aggregate demand curve: shows planned purchased rates for all goods and services in the economy at various price levels -an aggregate demand curve is a shorthand way of talking about the components of GDP -AD curve has real GDP/year on the x-axis and price level on the y-axis, slopes downward

Use the LRAS/AD model to illustrate and explain supply side inflation. (x2)

-decrease in LRAS leads to increase in price level -this could be caused by reductions in labor force participation, higher marginal tax rates on wages, or the provision of government benefits that give households incentives not to supply labor services to firms -the AD has actually shifted to the right, so supply-side inflation can't be the correct explanation (it's demand-side inflation)

Explain how to use the model of the LRAS curve with the AD curve to determine macroeconomic equilibrium and to further explain what happens if the price level is not at the equilibrium level.

-equilibrium price level occurs at the point where the AD curve crosses the LRAS curve- long-run equilibrium -total of all planned real expenditures for the entire economy is equal to actual real GDP produced by firms -if the price level is above equilibrium, the GDP exceeds the total planned real expenditures real GDP, unsold goods would accumulate and firms would offer more services than people want to buy so the price level would fall -if the price level is below equilibrium, total planned real expenditures would exceed actual real GDP, so inventories of stored goods would get depleted and the price level would rise so firms can produce more to replenish stores

Explain why the long run aggregate supply curve has the shape that it has and its meaning to economic analysis.

-in the long run, everybody has full information so there is full adjustment to price level changes -so, this doesn't affect the real GDP per year

Explain the impact of price level changes on the quantity demanded of all output with the use of the real balance effect, the interest rate effect, and the open economy effect.

-real-balance effect: when you have more money, you spend more -if you have $100 and the price level increases, the purchasing power of that money decreases so you will spend less -interest rate effect: a higher price level means people don't have enough money, so they borrow money, which causes interest rates to go up, which leads to people borrowing less, so they have less money and buy less stuff -open economy effect: higher price levels causes lower net exports because less people want to buy US goods and we want to buy more foreign goods

homework notes

-relationship between real GDP, nominal GDP, and price level in index form, PI: PI=NGDP/RGDP*100

Explain how economic growth can lead to deflation using the LRAS/AD model.

-secular deflation: economic growth (increase in LRAS) and unchanged AD results in lower price level (deflation)

a) draw a sketch of a long run aggregate supply curve (LRAS), and b) discuss the relationship between the production possibilities curve and the LRAS curve.

a) -LRAS: vertical line representing the real output of goods and services after full adjustment has occurred, represents real GDP of economy with full employment b) -if PPC shifts outward, LRAS shifts outward

Discuss what factors can cause a shift of the AD curve to the right (an increase in AD) and what factors can cause a shift of the AD curve to the left (a decrease in AD).

increase AD: -increase in amount of money in circulation -increased security about jobs and future income -improvements in economic conditions in other countries -reduction in real interest rates not due to price level changes -tax decreases -drop in foreign exchange value of the dollar decrease AD: -decrease in amount of money in circulation -decreased security about jobs and future income -declines in economic conditions in other countries -rise in real interest rates not due to price level changes -tax increases -rise in foreign exchange value of the dollar