Miracle Monday, January 7 Turn over a new leaf Tuesday, January 8

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1 Miracle Monday, January 7 Turn over a new leaf Tuesday, January 8 Welcome back! I hope you all had a restful break The following friends need to take the Unit 3a test this Wednesday after school: Reese, Nate, Sebsastian F, Lailah, Ruby Warm up: Use a PPC, business cycle, AS/AD and Phillips Curve to show full employment, a recessionary gap, and an inflationary gap. Draw each in your notes! 1-Aliya, Reese, Sebastian, Yolian 2-Ella, Ghizlane, Waid, Ivey 3-Oliver, Sydni, Cat, Mercedes 4-Harrison, Nadia, Marcus, Tariq 5-Liv, Lily, Denzel, Ryan 6-Theo, Ansley, David Mu., Amalia 7-Josephine, Ethan, Kai, Maria, Rohit 8-Het, Jeheil, Rainey, David Mc.

2 Miracle Monday, January 7 Turn over a new leaf Tuesday, January 8 Welcome back! I hope you all had a restful break The following friends need to take the Unit 3a test this Wednesday after school: Reese, Nate, Sebsastian F, Lailah, Ruby Warm up: Use a PPC, business cycle, AS/AD and Phillips Curve to show full employment, a recessionary gap, and an inflationary gap. Draw each in your notes! 1-Jaliyah, Jeremy, Devon 2-Olivia, Emad, Jade, Mikhail 3-Sydney, Annie, Nate, Idris 4-David, Hermela, Saia, Harrison 5-Amelia, Kennedy, Aizja 6-Deja, Elizabeth, Melia 7-Bentley, March, Jazmyn, Ethan 8-Kaitlyn, Sydney Black

3 Miracle Monday, January 7 Turn over a new leaf Tuesday, January 8 Welcome back! I hope you all had a restful break Please note: I have LOST MY VOICE! Bear with me today and keep talking + volume low. The following friends need to take the Unit 3a test this Wednesday after school: Reese, Nate, Sebsastian F, Lailah, Ruby Warm up: Use a PPC, business cycle, AS/AD and Phillips Curve to show full employment, a recessionary gap, and an inflationary gap. Draw each in your notes!

4 Problem Set 5.1 front page

5 5

6 AD/AS and the Phillips Curve

7 AD/AS and the Phillips Curve Show what happens on both graphs if AD increases. Price LRPC LRAS Inflation Level AS PLe AD1 AD QY GDPR SRPC UY Unemployment 7

8 AD/AS and the Phillips Curve Correctly draw the LRPC and SRPC with a recessionary gap. What happens when AD falls? Price LRAS Inflation LRPC Level AS PLe AD AD1 QY GDPR SRPC UY Unemployment 8

9 AD/AS and the Phillips Curve Correctly draw the LRPC and SRPC at full employment. What happens when AS falls? Price LRAS Inflation LRPC Level AS1 AS PLe SRPC1 AD QY GDPR SRPC UY Unemployment 9

10 AD/AS and the Phillips Curve Correctly draw the LRPC and SRPC with a recessionary gap. What happens when AS goes up? Price LRAS Inflation LRPC Level AS AS1 PLe SRPC AD QY GDPR SRPC1 UY Unemployment 10

11 Unit 3: Aggregate Demand and Supply and Fiscal Policy 11

12 What do you think... Should the government get involved in order to recover from a recessionary gap? OR Should the economy be left alone and allowed to correct itself over time? What could be some positives and negatives of each option? 12

13 Adam Smith Classical vs. Keynesian John Maynard Keynes

14 Whispering Wednesday, January 9 Thirsting Thursday, January 10 (Team Shakespeare) Please note: I have LOST MY VOICE! Bear with me today and keep talking + volume low. The following friends need to take the Unit 3a test TODAY after school: Reese, Nate, Sebsastian F, Lailah, Ruby Homework due Friday (A) Monday (B)--see Edmodo Warm up: Kaelah, Jackson, Winter, Brett Rahma, Jacob, Elliott, Charlotte Abby, Alex, Sam, Mohammed Ethan, Ansley, Sheniah, Parth Jaliyah, Viven, James, Lily Gray, Tushar, Bella, Nina Rainey, Dayton, Cassia, Mya

15 Frosty Friday, January 11 Misty Monday, January 14 (Team Steak Sauce) Homework due today: Completion of work from Wednesday when I was sick. Any questions from HW 3-7 that I checked earlier this week? Warm up: Get out problem set 5.1 and make sure you completed the FRQ on the back of the page Aliya, Reese, Sebastian, Yolian Ella, Waid, Ivey, Kai Oliver, Sydni, Cat, Mercedes Harrison, Nadia, Marcus, Tariq Liv, Lily, Ryan, Jeheil, Matthew Theo, Ansley, David Mu., Amalia Josephine, Ethan, Maria, Rohit Het, Rainey, David Mc., Gillian

16 Frosty Friday, January 11 Misty Monday, January 14 (Team Energizer) Homework due today: Completion of 1. work from Wednesday when I was sick. 2. Any questions from HW 3-7 that I checked earlier this week? 3. Warm up: Jaliyah, Jeremy, Kaitlyn, Ethan Emad, Jade, Hermela, Sydney Black Sydney Bowens, Idris, Amelia David, Olivia, Saia, Harrison Kennedy, Aizja, Annie Deja, Elizabeth, Melia, Annie Bentley, March, Jazmyn

17 Frosty Friday, January 11 Misty Monday, January 14 (Team Shakespeare) The following friends need to take the Unit 3a test TODAY after school: Reese, Lailah, Ruby Homework due today: Completion of work from Wednesday when I was sick. Warm up: Kaelah, Jackson, Winter, Brett Rahma, Jacob, Elliott, Charlotte Abby, Alex, Sam, Mohammed Ethan, Ansley, Sheniah, Parth Jaliyah, Viven, James, Lily Gray, Tushar, Bella, Nina Rainey, Dayton, Cassia

18 Frosty Friday, January 11 Misty Monday, January 14 (Team Obi Wan) The following friends need to take the Unit 3a test TODAY after school: Reese, Lailah, Ruby Homework due today: Completion of work from Wednesday when I was sick. Warm up: Kaelah, Jackson, Winter, Brett Rahma, Jacob, Elliott, Charlotte Abby, Alex, Sam, Mohammed Ethan, Ansley, Sheniah, Parth Jaliyah, Viven, James, Lily Gray, Tushar, Bella, Nina Rainey, Dayton, Cassia

19 If you are new to A-1, please join this class and take yourself out of the old one! Edmodo Codo: aasy72

20 If you are new to A-2, please join this class and drop the old one! Edmodo Codo: 7cn7av

21 If you are new to B-1, please join this class and drop the old one! Edmodo Codo: 8h89j9

22 If you are new to B-2, please join this class and drop the old one! Edmodo Codo: 6bm437

23 Debates Over Aggregate Supply Classical Theory A change in AD will not change output, even in the short run, because prices of resources (wages) are very flexible. AS is vertical so AD can t increase without causing inflation. AS Recessions caused by a fall in Price AD are temporary. level Price level will fall and economy will fix itself. No Government Involvement Required! AD AD1 Qf Real domestic output, GDP 23

24 The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again. John Maynard Keynes Translation: In times of need, economists should do more than say that the economy will fix itself. They should suggest policies that can help the economy, like government spending. Do you agree or disagree? 24

25 Debates Over Aggregate Supply Keynesian Theory A decrease in AD will lead to a persistent recession because prices of resources (wages) are NOT flexible. Increase in AD during a recession doesn t cause inflation. Price level AS AD Qf Real domestic output, GDP 25

26 Debates Over Aggregate Supply Keynesian Theory A decrease in AD will lead to a persistent recession because prices of resources (wages) are NOT flexible. Increase in AD during a recession puts no pressure on prices. Price level AS Sticky Wages prevents wages from falling. The government should deficit spend to close the ADgap. AD1 Q1 Qf Real domestic output, GDP 26

27 Debates Over Aggregate Supply Keynesian Theory A decrease in AD will lead to a persistent recession because prices of resources (wages) are NOT flexible. Increase in AD during a recession puts no pressure on prices. Price level AS When there is high unemployment, an increase in AD doesn t lead to higher prices until you get close to full employment. AD 3 AD AD1 2 Q1 Qf Real domestic output, GDP 27

28 Three Ranges of Aggregate Supply 1. Keynesian Range- Horizontal at low output 2. Intermediate Range- Upward sloping 3. Classical Range- Vertical at Physical Capacity AS Price level Keynesian Range Classical Range Intermediate Range Qf Real domestic output, GDP 28

29 Problem Set 5.1 back page

30 1995 Exam 30

31 1995 Exam 31

32 2006B Practice FRQ 32

33 2006B Practice FRQ 33

34 Unit 3: Aggregate Demand and Supply and Fiscal Policy 34

35 The Car Analogy The economy is like a car You can drive 120 mph but it is not sustainable. (Extremely Low unemployment) Driving 20 mph is too slow. The car can easily go faster. (High unemployment) 70mph is sustainable. (Full employment) Some cars have the capacity to drive faster than others. (industrial nations vs. 3rd world nations) If the engine (technology) or the gas mileage (productivity) increase then the car can drive at even higher speeds. (Increase LRAS) The government often speeds up or slows down the economy by using fiscal and/or monetary policy. 35

36 The Role of Consumers in the Economy Consumption is the most important part of the economy and the biggest part of GDP. Disposable income is the amount of income remaining after you pay your taxes. AKA net income. Consumers spend their disposable income as (1) autonomous spending and (2) discretionary spending. Consumers will spend a certain amount of their disposable income no matter what, regardless of their income. This is called autonomous spending (or consumption). For items like housing, food and utilities. Discretionary income is the amount remaining after autonomous spending and includes additional spending, investing or saving; includes money spent on luxury items, vacations, and nonessential goods and services. 36

37 The Role of Consumers in the Economy, continued If incomes are less than autonomous spending, then there is dissaving (or negative savings--people have to borrow $ or dip into their savings). But what if incomes fall and people stop buying things? Who often steps in? 37

38 How does the Government Stabilizes the Economy? The Government has two different tool boxes to use: 1. Fiscal PolicyActions by Congress to stabilize the economy. 2. Monetary PolicyActions by the Federal Reserve Bank to stabilize the economy. 38

39 For now we will only focus on Fiscal Policy. 39

40 Discretionary vs Non-Discretionary Discretionary Fiscal Policy Congress creates a new bill that is designed to change AD through government spending or taxation. One problem is lag times due to bureaucracy. It takes time for Congress to act. Ex: In a recession, Congress increases spending like the New Deal or the American Recovery and Reinvestment Act. 40

41 Discretionary vs Non-Discretionary Non-Discretionary Fiscal Policy AKA: Automatic Stabilizers Permanent spending or taxation laws enacted to work counter-cyclically to stabilize the economy. Ex: Welfare, Unemployment, Progressive Income Tax. When there is high unemployment, unemployment benefits to citizens increase consumer spending. 41

42 Great Depression New Deal vs Great Recession American Recovery and Reinvestment Act 42

43 Contractionary Fiscal Policy (The BRAKE) Laws that reduce inflation, decrease GDP (Close an Inflationary Gap). Decrease Government Spending. Increase Taxes (Decreasing disposable income). Combinations of the Two. Expansionary Fiscal Policy (The GAS) Laws that reduce unemployment and increase GDP (Close a Recessionary Gap). Increase Government Spending. Decrease Taxes (Increasing disposable income). Combinations of the Two. 43

44 Problem Set 5.2: Questions 8, 36, 11, 21 and 22

45 2008 Audit Exam

46 2008 Audit Exam

47 2012 Audit Exam

48 2012 Audit Exam

49 2012 Audit Exam 22. Which of the following are the most likely short-run effects of an increase in government expenditures?