Desmond Tutu Tuesday, December 4

Transcription

1 Desmond Tutu Tuesday, December Aliya, Reese, Sebastian, Yolian Harrison, Nadia, Mercedes, Tariq Oliver, Sydni, Cat, Marcus Ella, Ghizlane, Waid, Ivey Liv, Lily, Denzel, Ryan Theo, Ansley, David Mu., Amalia Josephine, Ethan, Kai, Maria, Rohit 8. Het, Jeheil, Rainey, David Mc. HW3-2 Due NOW Warm up (write the question and the entire correct answer in your notes): An increase in which of the following would cause the AD curve to shift to the left? (a) Consumer optimism (b) Population (c) Cost of resources (d) Income taxes (e) Net exports Learning target: I can describe aggregate supply and the factors that shift AS.

2 Desmond Tutu Tuesday, December Bella, Jaliyah, Jeremy, Devon Olivia, Emad, Jade, Mikhail Ethan, Elliott, Sydney, Annie David, Melia, Saia, Nate Tayshun, Amelia, Kennedy, Aizja Deja, Elizabeth, Hermela Bentley, March, Jazmyn, Kaitlyn, Gillian, Sydney Black HW3-2 Due NOW Warm up (write the question and the entire correct answer in your notes): An increase in which of the following would cause the AD curve to shift to the left? (a) Consumer optimism (b) Population (c) Cost of resources (d) Income taxes (e) Net exports Learning target: I can describe aggregate supply and the factors that shift AS.

3 George H. W.ednesday Bush, December 5 HW3-2 Due NOW Warm up (write the question and the entire correct answer in your notes): An increase in which of the following would cause the AD curve to shift to the left? (a) Consumer optimism (b) Population (c) Cost of resources (d) Income taxes (e) Net exports Learning target: I can describe aggregate supply and the factors that shift AS.

4 2012 Audit Exam

5 What is Aggregate Supply? Aggregate Supply is the amount of goods and services that firms will produce in an economy at different price levels. The supply for everything by all firms. Aggregate Supply differentiates between short run and long-run and has two different curves. Short-run Aggregate Supply Wages and Resource Prices WILL NOT increase as price levels increase. Long-run Aggregate Supply Wages and Resource Prices WILL increase as price levels increase. 5

6 Short-Run Aggregate Supply Price Level AS AS is the production of all the firms in the economy. Real domestic output (GDPR) 6

7 Short-Run Aggregate Supply In the Short Run, wages and resource prices WILL NOT increase as price levels increase. Example: If a firm currently makes 100 units that are sold for $1 each, the only cost is $80 of labor. How much is profit? Profit = $100 - $80 = $20 What happens in the SHORT-RUN if price level doubles? Now 100 units sell for $2, TR=$200. How much is profit? Profit = $200 - $80 = $120 With higher profits, the firm has the incentive to increase production. 7

8 Long-Run Aggregate Supply In the Long Run, wages and resource prices WILL increase as price levels increase. Same Example: The firm has TR of $100 and uses $80 of labor. Profit = $100 - $80 = $20. What happens in the LONG-RUN if price level doubles? Now TR=$200 In the LONG RUN workers demand higher wages to match price level. So labor costs double to $160 Profit = $200 - $160 = $40, but REAL profit is unchanged. If REAL profit doesn t change the firm has no incentive to increase output. 8

9 Long- Run Aggregate Supply In long run, price level increases but GDP doesn t. Price level LRAS Long-run Aggregate Supply Full-Employment (Trend Line) QY GDPR We assume that in the long-run the economy will be producing at full employment. 9

10 Shifters of Aggregate Supply R. A. P. 10

11 Shifts in Aggregate Supply An increase or decrease in national production can shift the curve right or leftas Price 2 AS AS1 Level Real domestic output (GDPR) 11

12 Shifters of Aggregate Supply 1. Change in Resource Prices a. Prices of Domestic and Imported Resources i. (Increase in price of Canadian lumber ) ii. (Decrease in price of Chinese steel ) b. Supply Shocks i. (Negative Supply shock ) ii. (Positive Supply shock ) c. Inflationary Expectations i. (If people expect higher prices in the future ) If producers expect higher prices in the future, workers will demand higher wages and costs will increase. This will decrease AS. 12

13 Shifters of Aggregate Supply 2. Change in Actions of the Government (NOT Government Spending) A. Taxes on Producers a. (Lower corporate taxes ) B. Subsidies for Domestic Producers a. (Lower subsidies for domestic farmers ) C. Government Regulations a. (EPA inspections required to operate a farm ) 13

14 Shifters of Aggregate Supply 3. Change in Productivity Technology (Computer virus that destroy half the computers ) (The advent of a teleportation machine ) 14

15 Summary of SRAS Shifters Anything that makes production more expensive or more difficult, or any belief by firms that this will happen, will cause the SRAS to shift to the left. On the other hand, anything that makes production cheaper or easier to produce will cause the SRAS curve to shift right.

16 Shifters of Aggregate Demand AD = C + I + G + (X-M) Change in Consumer Spending Change in Investment Spending Change in Government Spending Net EXport Spending Shifters of Aggregate Supply AS = R + A + P Change in Change in Change in Resource Prices Actions of the Government Productivity 16

17 Practice Problems

18 Practice AD/AS Graphing

19 2008 Audit Exam

20 2008 Audit Exam 20

21 2012 Audit Exam 21

22 Practice AD or AS Shifter Increase or Decrease

23 Practice 1. An increase in consumer spending. 2. The impact on net exports when a trading partner has a recession. 3. A significant increase in the price of oil that affects the resource costs of businesses. 4. Government increases spending but not taxes. 5. Increase in wages that businesses pay workers. 6. Effect on businesses when they expect inflation. 7. Effect on investment when interest rates decrease. 8. An increase in productivity. 9. The impact on net exports when the country s currency depreciates. 10. Government increases corporate taxes. 23

24 Practice AD or AS Shifter Increase or Decrease 1 AD C Increase 2 AD X Decrease 3 AS R Decrease 4 AD G Increase 5 AS R Decrease 6 AS R Decrease 7 AD I Increase 8 AS P Increase 9 AD X Increase 10 AS A Decrease 24

25 Which Aggregate Supply Shifter? 25

26 Which Aggregate Supply Shifter? 26

27 Which Aggregate Supply Shifter? 27

28 In the News: Cost of Resources Why do oil prices affect the entire economy? Will an increase in oil prices help or hurt the US 28

29 In the News: Corporate Taxes Who are the winners and losers from a cut in corporate taxes? 29

30 Desmond Tutu Tuesday, December Aliya, Reese, Sebastian, Yolian Harrison, Nadia, Mercedes, Tariq Oliver, Sydni, Cat, Marcus Ella, Ghizlane, Waid, Ivey Liv, Lily, Denzel, Ryan Theo, Ansley, David Mu., Amalia Josephine, Ethan, Kai, Maria, Rohit 8. Het, Jeheil, Rainey, David Mc. HW3-2 Due NOW Warm up (write the question and the entire correct answer in your notes): An increase in which of the following would cause the AD curve to shift to the left? (a) Consumer optimism (b) Population (c) Cost of resources (d) Income taxes (e) Net exports Learning target: I can describe aggregate supply and the factors that shift AS.

31 Think about it Thursday, Dec. 6 Fret no more Friday, Dec. 7 Warm up: Assume there is an increase in consumer spending. What happens to PL and output in the short- run? Draw a AS/AD graph that demonstrates your answer. Learning target: I can define and explain what happens when the macro-economy is not in equilibrium (inflationary and recessionary gaps) Aliya, Reese, Sebastian, Yolian Harrison, Nadia, Mercedes, Tariq Oliver, Sydni, Cat, Marcus Ella, Ghizlane, Waid, Ivey Liv, Lily, Denzel, Ryan Theo, Ansley, David Mu., Amalia Josephine, Ethan, Kai, Maria, Rohit 8. Het, Jeheil, Rainey, David Mc.

32 Think about it Thursday, Dec. 6 Fret no more Friday, Dec. 7 Warm up: Assume there is an increase in consumer spending. What happens to PL and output in the short- run? Draw a AS/AD graph that demonstrates your answer. Learning target: I can define and explain what happens when the macro-economy is not in equilibrium (inflationary and recessionary gaps) Bella, Jaliyah, Jeremy, Devon Olivia, Emad, Jade, Mikhail Ethan, Elliott, Sydney, Annie David, Melia, Saia, Nate Tayshun, Amelia, Kennedy, Aizja Deja, Elizabeth, Hermela Bentley, March, Jazmyn, Kaitlyn, Gillian, Sydney Black

33 #1. Assume there is an increase in consumer spending. What happens to PL and output in the short- run? Price Level LRAS AS PL and Q will Increase PL1 PLe AD QY Q1 AD1 GDPR 33

34 Let s go over 2nd problem set

35 Putting AD and AS Together 35

36 Use the AD and AS model to show an economy at full employment output. Price LRAS AS Level PLe QY AD GDPR 36

37 Inflationary and Recessionary Gaps 37

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39 There are a few ways the AP test may describe each state of the economy. Be sure to use these in discussion and examples so your students are familiar. Full Employment = Long Run Equilibrium. The economy is at potential output Inflationary Gap = ABOVE or BEYOND full employment, positive output gap Recessionary Gap = BELOW or LESS THAN full employment, negative output gap 39

40 The economy can only be in one of three places at any time Capital Goods Max Capacity 0% Unemployment Real GDP Real GDP Consumer Goods Full Employment 5% Unemployment Time Recessionary Gap Full Employment Inflationary Gap 40

41 Example: Assume the government increases spending. What happens to PL and Output? Price Level LRAS AS PL and Q will Increase PL1 PLe AD QY Q1 AD1 GDPR 41

42 Inflationary Gap Output is high and unemployment is less than NRU. Price LRAS Level AS Actual GDP above potential GDP PL1 AD1 QY Q1 GDPR 42

43 Example: Assume consumer spending falls. What happens to PL and Output? Price Level LRAS AS PL and Q will decrease PLe PL1 Q1 AD1 QY AD GDPR 43

44 Recessionary Gap Output low and unemployment is greater than NRU Price LRAS Level AS Actual GDP below potential GDP PL1 Q1 AD1 QY GDPR 44

45 Example: If there is a negative supply shock of oil. What happens to PL and Output? Price Level LRAS AS1 AS Stagflation PL1 Stagnate Economy Inflation Still+considered PLe recessionary gap! AD Q1 QY GDPR 45

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47 In the News: Inflation Are we heading for another period of stagflation? 47

48 Article: Stagflation in the 1970s Inflation seemed to feed on itself. People began to expect continued increases in the price of goods, so they bought more. This increased demand pushed up prices, leading to demands for higher wages, which pushed prices higher still in a continuing upward spiral. Labor contracts increasingly came to include automatic cost-of-living clauses, and the government began to peg some payments, such as those for Social Security, to the Consumer Price Index, the best-known gauge of inflation. While these practices helped workers and retirees cope with inflation, they perpetuated inflation. The government's ever-rising need for funds swelled 48

49 Stagflation in the 1970s 1. What were some of the causes of inflation mentioned? 1. What do you think could have been done to help bring down inflation and lower unemployment? 49

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51 Whiteboard practice!

52 Calvin, and other children, convince their parents to purchase more big ticket items for the Holidays. 52

53 The effect on production when a 5% excise tax is placed on several resources. 53

54 A large purchase of U.S. wheat by Russia 54

55 A cut in Federal spending for Health Care 55

56 The complete disintegration of OPEC causing oil prices to fall 56

57 A 10% decrease in personal income tax rates 57

58 A significant increase in labor productivity 58

59 A severe recession in a country that imports many U.S. products. 59

60 The effect on investment when the government increases the money supply causing interest rates to fall. 60

61 Widespread fear of depression on the part of consumers 61

62 To stimulate the economy, the government increases spending on public works programs. 62

63 A 12% decrease in nominal wages. 63

64 Problem set: Released AP multiple choice Qs 1st Q, 4, 27, 36, 42, 10, 35 (the one that starts a simultaneous increase in inflation... )