TEST REVIEW MACRO UNIT-3.
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Transcript of TEST REVIEW MACRO UNIT-3.
TEST REVIEW
MACRO UNIT-3
Unit #3 Key Graphs
QtyFood
Qty Shelter
. B
. A
. C
(100, 0)
(0,100)
(50,50)
(100, 0)
(0,100)
(50,50)
AS/AD ModelPPF
AS/AD Short Run Equilibrium• Output deviates only in short run when actual price
level deviates from expected price level
• In long run, wages & prices are not “sticky” and do not affect output (price level has no effect)– Prices/wages become flexible!
Why the AD curve is Downward Sloping
1. The Wealth Effect
2. The Interest Rate Effect
3. Exchange Rate Effect
Y = C + I + G + NX
Shifts in AD Curve• Shifts arise from changes in any of the 4 Determinants of AD
– Consumption– Investment– Government Purchases– Net Exports
AD = C + I + G + NX
AD1
AD2
AD2
PriceLevel
Real GDP = Y
Shifts in SRAS & LRAS Curve
• If PPF shifts => LRAS shifts.– Expected Price Level– Input Prices– Labor– Capital – Natural resources – Technology– Gov’t Incentives Changes in the other 5 variables
Shifts BOTH curves (LRAS & SRAS & PPF)
Shift ONLY SRAS => NOT LRAS
2 Ways to get back to full potential
Inflationary Gap
Contractionary Fiscal PolicyGov’t would raise income taxes => (C↓)Decrease Gov’t Spending (G↓ )
End result: AD shifts left, deficit falls
Classical Economics
At E1 actual price level is HIGHER than expected price level
Expected price level rises, => SRAS decreases
End result: SRAS shifts left
Recessionary Gap
Economy below full outputExpansionary Fiscal Policy
Gov’t would lower income taxes => (C↑) Increase Gov’t Spending (G↑)
End result: AD shifts right, debt rises
LRAS1PriceLevel
RealGDP
AD1
SRAS1
--------------------
P1
Y1 Y*
E1
Savers & Investors• Loanable Funds is where savers & investors meet
– Savers buy securities (bonds)– Investors borrow money
• Savers = Supply curve of loanable funds – Private savings = Firms & households savings– Public savings = government savings (it can be negative!)
– National Savings = Public & Private savings
• Investors = Demand curve for loanable funds– Business demands loans for investment (I in GDP)
Government Budget Deficit
Loanable Funds(in billions of dollars)
0
RealInterestRate
3. . . . and reduces the equilibriumquantity of loanable funds.
S2
2. . . . This raisesReal interest rate
Business Investmentcrowed out!
S1
D
$1,200
5%
$800
6% 1. A budget deficitDecreases supply ofLoanable fundsNational Savings ↓
Government Spending
• Social Security 22.0%• Medicare 14.0%• Medicaid 7.0%• Interest on Debt 6.0%• Defense Spending 18.0%• Homeland Security 1.0%• Education 2.0%• Other 26.0• Total 100.0%
43% of Budget
24% of Budget
THANK YOU!
Not Enough Workers?• The ratio of workers to retirees is falling
– This means less money coming in => more going out