UNIT 3! :D

So we are back here again with notes :P its been a long Unit but here you go, i hope you guys can learn from what i wrote. Leave a comment if i seem to miss something, did something wrong, or just to show a little love. Well have fun See YA!! d[-_-]b

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AGGREGATE DEMAND! : Shows the amount of Real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price level (Change in AD calculated by [Multiplier * Change in spending])

• The relationship between the price level and the level of Real GDP is INVERSE!

• *Three reason AD is downward slopping

1. Real Balance Effect: When the price level is high, households and business can't afford to purchase as much output. When the price-level is low house hold and businesses can afford to purchase more output.
2. Interest-Rate Effect: A high price-level increases the interest rate which tends to discourage investment. A Lower price-level decreases the interest rate which tends to encourage investment.
3. Foreign Purchases Effect: A higher Price-Level increases the demand for relatively cheaper imports. A lower Price-Level increases the foreign demand for relatively cheaper U.S. exports.

1. Change in C, Ig, G, and/or Xn (EXPENDATURE APPROACH!)
2. A multiplier effects that produces a greater change that the original change in the 4 components

•  Increase in AD = Shift to Right
• Decrease in AD = Shift to Left 

Aggregate Supply: The level of Real GDP (GDPr) that firms will produce at each Price Level (PL)

Long-Run: Period of time where input prices are completely flexible and adjust to changes in the price-level. In the long-run, the level of Real GDP supplied is independent of the price-level.

Short Run: Period of time where input prices are sticky and do not adjust to changes in the price-level. In the short run, the level of Real GDP supplied is directly related to the price level

Long-Run Aggregate Supply (LRAS): The Long-Run Aggregate Supply or LRAS marks the level of full employment in the economy (analogous to PPC) (LRAS IS ALWAYS Vertical)

Short-Run Aggregate Supply (SRAS): Output will decrease because profit will not increase. Graph goes toward the sky.

• An increase in SRAS is seen as a shift to the right. 
• A decrease in SRAS is seen as a shift to the left. 
• The key to understanding shifts in SRAS is per unit cost of production
• Per-unit production cost= (Total input cost/ Total output)

Determinants of SRAS (all of the following affect unit production cost):

Input Prices - Factors of Production (Land, Labor, Machinery, etc.)

Productivity - Technology (How well an item works)

Legal-Institutional Environment 

• Input Prices
• Increases in Resource Prices = SRAS Shifts to Left
• Decreases in Resource Prices = SRAS Shifts to Right
• Productivity = Total Output/ Total Inputs
• More productivity = lower unit production cost = SRAS Shifts to Right
• Lower productivity = higher unit production cost = SRAS Shifts to Left

The AS/AD Model: The equilibrium of AS & AD determines current output (GDPr) and the price level (PL)

Full Employment: Full employment equilibrium exists where AD intersects SRAS &LRAS at the same point.

Recessionary Gap: A recessionary gap exists when equilibrium occurs below full employment output.

Inflationary Gap: An inflationary gap exists when equilibrium occurs beyond full employment output.

Changes in AD:

Change in Consumption:

↑: AD→, GDPr↑ & PL↑, U%↑& Inf%↑

↓: AD←, GDPr↓ & PL↓, U%↑ & Infl%↓ 

Change in Gross Private Investment

↑: AD→, GDPr↑ & PL↑, U%↑& Inf%↑

↓: AD←, GDPr↓ & PL↓, U%↑ & Infl%↓ 

Change in Government Spending

↑: AD→, GDPr↑ & PL↑, U%↑& Inf%↑

↓: AD←, GDPr↓ & PL↓, U%↑ & Infl%↓ 

Change in Net Export

↑: AD→, GDPr↑ & PL↑, U%↑& Inf%↑

↓: AD←, GDPr↓ & PL↓, U%↑ & Infl%↓ 

Increase in AD

C↑, I↑, G↑, Xn↑: AD→, GDPr↑ & PL↑, U%↑& Inf%↑

Decrease in AD

C↓, I↓, G↓, Xn↓: AD←, GDPr↓ & PL↓, U%↑ & Infl%↓ 

Changes in SRAS:

Changes in Prices:

Input Prices↓: SRAS→, GDPr↑ & PL↓, U%↓ & Infl%↓ 

Productivity↑: SRAS←, GDPr↑ & PL↓, U%↓ & Infl%↓ 

Changes in Productivity:

Productivity↑: SRAS→, GDPr↑ & PL↓, U%↓ & Infl%↓

Productivity↓: SRAS←, GDPr↓ & PL↑, U%↑ & Infl%↑ 

Changes in Legal-Institutional Environment:

Deregulation: SRAS→, GDPr↑ & PL↓, U%↓ & Infl%↓

Regulation: SRAS←, GDPr↓ & PL↑, U%↑ & Infl%↑ 

Increase in SRAS:

Input Prices↓, Productivity↑, and Deregulation: SRAS→, GDPr↑ & PL↓, U%↓ & Infl%↓ 

Decrease in SRAS:

Input Prices↑, Productivity↓, and Regulation: SRAS←, GDPr↓ & PL↑, U%↑ & Infl%↑ 

Range/Shape/View of AS:

• Keynesian Range: Has a horizontal AS curve when the economy is below unemployment, which causes  AD to shitft outward. This causes real GDP to increase the drop of the unemployment rate and the PL to remain constant. (Demand Creates its own Supply)
• Classical Range: In Long Run, AS curve is vertical because the only effects of a increase in AD happens when WAR are at Full Employment. (The Suplly creates its Own Demand)(Say's Law)
• Intermediate Range: Is where AS is in between the Keynesian and Classical range. When this occurs AS shifts outward, Both GDP and Price Level INCREASE

Expected Rates of Return:

• How does business make investment decisions?
• Cost/Benefit Analysis
• How does business determine the benefits?
• Expected rate of return
• How does business count the cost?
• Interest costs
• How does business determine the amount of investment they undertake?
• Compare expected rate of return to interest cost
• If expected return > interest cost, then invest
• If expected return > interest cost, then do not invest

Real (r%) v. Nominal (i%):

• What’s the difference?
• Nominal is the observable rate of interest. Real subtracts out inflation (Infl%) and is only known ex post facto.
• How do you compute the real interest rate (r%)?
• i% - infl%
• What then, determines the cost of an investment decision?
• The real interest rate

Investment Demand Curve (ID):

• What is the shape of the Investment demand curve?
• Downward sloping
• Why?
• When interest rate are high, fewer investments are profitable’ when interest rates are low, more investments are profitable. Conversely, there are few investments that yield high rates of return, and many that yield low rates of return

Shifts in Investment Demand (ID):

1. Cost of Production
2. Business Taxes
3. Technological Change
4. Stock of Capital
5. Expectations

Disposable Income (DI):  Income after taxes or net income  (DI = Gross Income – Taxes)

• You have 2 Choices with disposable income. Households can either
• Consume (spend money on goods & services)
• Save (not spend money on goods & services)

Consumption:

Household spending:

• The ability to consume is constrained by
• The amount of disposable income
• The propensity to save
• Do households consume if DI = 0?
• Autonomous consumption
• Dissaving

Saving:

Household NOT spending

• The ability to save is constrained by
• The amount of disposable income
• The propensity to consume
• Do households save if DI = 0?
• NO

APC (Average Propensity to Consume) & APS (Average Propensity to Save):

• APC + APS = 1
• 1 – APC = APS
• 1 – APS = APC
• APC > 1: Dissaving
• - APS: Dissaving

MPC & MPS

• Marginal Propensity to Consume:
• (Change in Consumption/ Change in DI)
• % of every extra dollar earned that is spent
• Marginal Propensity to Save:
• (Change in Saved/ Change in DI)
• % of every extra dollar earned that is saved
• MPC + MPS = 1
• 1 – MPC = MPS
• 1 – MPS = MPC

Determinants of C&S:

• Wealth
• Expectations
• Household
• Taxes
• Debts

The Spending Multiplier Effect:

An initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending , or Aggregate Demand (AD).

• Multiplier = Change in AD/ Change in Spending
• Multiplier = Change in AD/ Change in C, Ig, G, Xn

• Why does this happen?
• Expenditures and income flow continuously which sets off a spending increase in the economy

Calculating the Spending Multiplier:

The Spending Multiplier can be calculated from the MPC or the MPS.

• Multiplier = 1/1-MPC or 1/MPS
• Multipliers are (+) when there is an increase in spending and (-) when there is a decrease.

Calculating the Tax Multiplier:

When the government taxes, the multiplier works in reverse

• Why?
• Because now money is leaving the circular flow
• Tax Multiplier (Usually always Negative)
• Tax Multiplier = -MPC/1-MPC or -MPC/MPS
• If there is a tax-CUT, then the multiplier is (+), because there is now more money in the circular flow

Fiscal Policy:

Changes in the expenditures or taxes revenues of the federal government

• 2 tools of fiscal policy

1. Taxes – government can increase or decrease taxes
2. Spending – government can increase or decrease spending

Fiscal policy is enacted to promote our nation’s economic goals: full employment, price stability, economic growth

Deficits, Surpluses, and Debt:

• Balanced budget:
• Revenues = Expenditures
• Budget deficit:
• Revenues < Expenditures
• Budget surplus:
• Revenues > Expenditures
• Government debt:
• Sum of all deficits – Sum of all surpluses
• Government must BARROW money when it runs a budget deficit

Government borrows from:

• Individuals
• Corporations
• Financial institutions
• Foreign entities or foreign government

Fiscal Policy Two Options

• Discretionary Fiscal Policy (action)
• Expansionary fiscal policy – think deficit
• Contractionary fiscal policy – think surplus
• Non-Discretionary Fiscal Policy (no action)

Discretionary Fiscal Policies:

• Increasing or Decreasing Government Spending and/or Taxes in order to return the economy to full employment. Discretionary policy involves policy makers doing fiscal policy in response to an economic problem

Automatic Fiscal Policies:

• Unemployment compensation & marginal tax rates are example of automatic policies that help mitigate the effects of recession and inflation. Automatic fiscal policy takes place without policy makers having to respond to current economic problems.

Contractionary fiscal policy – policy designed to decrease aggregate demand

• Strategy for controlling inflation
• Expansionary fiscal policy
• Strategy for increasing GDP, combatting a recession, & reducing unemployment
• Decrease government spending (G↓)
• Increase taxes (T↑)

Expansionary Fiscal Policy

• Recession is countered with Expansionary policy.
• Increase government spending (G↑)
• Decrease taxes (T↓)

Tax Systems

• Progressive Tax System:
• Average tax rate (tax revenue/GDP) rises with GDP
• Proportional Tax System:
• Average tax rate remains constant as GDP changes
• Regressive Tax System:
• Average tax rate falls with GDP
• The more progressive the tax system, the greater the economy’s built-n stability.

Okay i think that about wraps it up.. I hope you enjoyed the notes and learned. Im going to go sleep now. Night Guys :D