Circular Flow, Measure + Aggregate Demand, Supply

Question 1

Why do we want to measure economic activity?

Answer 1

Economic growth (a steady rate of increase of national income)

Employment (a low level of unemployment)

Price stability (a low and stable rate of inflation)

National debt (HL) (a sustainable level of Gov debt)

Income distribution (an equitable distribution of income)

Question 2

Who are the two key stakeholders in an economy? What do they demand from each other?

What is the circular flow of income? What does it tell us?

Answer 2

Firms and households. Firms demand FOP’s from households (land, labor, capital, enterprise) in return for costs of production (rent, wages, interest, profit): this takes place in the resource market.

Households demand output (goods and services) from firms in return for revenue/expenditure: this takes place in the product/goods market.

The circular flow of income shows that in any given time period (usually a year), the value of output produced in an economy is equal to the total income generated in producing that output, which is equal to the expenditures made to purchase that output.

National Expenditure =
National Income =
National Output =
National Product

The flow of new output produced by the economy in a particular period (e.g. a year).

Question 3

Resource and income flow

Answer 3

Resources flow from households to firms, which are turned into goods and services, which then flow from firms to households.

Income flows in the opposite direction; first from firms to households in the form of wages, interest, rent and profit (the income payments for the four resources households own), then from households to firms in the form of expenditures on goods and services, which translate to revenues from firms.

Question 4

Closed circular flow of income assumptions

Answer 4

There are only two decision makers in an economy

Households own all FOPs

Households spend all of their income on the product market

Question 5

How can we measure the performance/size of an economy?

Answer 5

GDP (Gross Domestic Product) is a measure of the size of the economy (one of our ): if it’s growing,

Snapshots (of income = of expenditure = of output [the three approaches])?

Expenditure method:

GDP= C + I + G + (X - M)

C is consumer expenditure, I is business investment (ex. buying new machines [investment in FOPs]), G is govt expenditure, X - M is exports - imports

Question 6

Open economy

Answer 6

Injections and withdrawals/leakages when things flowing in, out

Financial institutions (investments, savings), govt (govt spending, taxes), other countries (exports, imports)

Question 7

Critique of the circular model

Answer 7

Value is conceptual, but there are significant differences in the real world: basically, more representative of reality, but still not capturing everything (basic things like externalities [environmental, resource impacts], tragedy of the commons, etc. not considered)

Unpaid care and other activities are not counted (raising children, caring for sick family members)—valuable thing (captured when happens in a nursing home, gets captured in GDP, but not when inside)

Inequality not addressed

Question 8

Difference between GDP and GNI

Answer 8

GDP: in a given period (usually, when giving def of GDP, add a time period), the total of all economic activity in a country (physical borders), regardless of who owns the productive assets

GNI: the total income that is earned by a country’s FOPs regardless of where the assets are located

Income earned from assets abroad (‘property income from abroad’) minus income paid to foreign assets operating domestically is known as ‘net property income from abroad’

GNI = GDP + net property income from abroad

In most cases, they’re not hugely different, but there are some exceptions (ex. you have a country who has a lot of citizens working and making money elsewhere)

(Note: foreign aid received is also part of GNI but not GDP)

Question 9

Nominal vs. real

Answer 9

Nominal = within that year, calculated GDP or GNI

If we were to compare the GDP of a country from one year to the next, and prices had risen (inflation), even if GDP had not changed, due to higher prices, it would appear that the value of GDP had increased (what we want is output difference—real growth and not revenue growth [did we really make more?])

In order to get a true picture of the change in economic activity we take the nominal GDP, which is the value at current prices, and adjust it for inflation to get the GDP at constant prices (‘GDP deflator’): the value is known as real GDP

Real GDP = Nominal GDP adjusted for inflation

Real GNI = Nominal GNI adjusted for inflation

Unless we get a table w/ data that shows us the base year, we need to pick one…

Question 10

GDP or GNI per capita

Answer 10

= GDP or GNI/ population

Measure the level of income/output per person

Better for comparing different economies

Per capita = per person (allows to compare for the avg person)—tells us some things that are valuable, but isn’t perfect (why we use PPP)

Question 11

Purchasing Power Parity (PPP)

Answer 11

Buying power equivalence

PPP is an adjustment that can be made to income statistics in order to account for the differences of pricing levels in different countries

If you can buy the “basket of goods” (some necessary set) in Indonesia for less than it would cost for an equivalent basket in the US, then it makes sense to adjust for this in GDP figures

US is the convention

Don’t adjust one you’re comparing to

Lower or higher cost of living?

PPP better (more visibility, understanding), but not perfect

Basket has to be defined, and the things that an ex. Nigerian may buy to get buy in a week/month probably not the same thing an ex. American may buy

Not true for all places in ex. Nigeria and ex. US (some more well-off, others less)

Question 12

Why are national income statistics useful?

Answer 12

Used as a ‘report’ card for assessing economic objectives

Governments use statistics to develop policies

Economists use them to develop economic models and make forecasts about the future

Businesses use them to make forecasts about future demand (should I invest? Where?)

The performance of the economy can be assessed over time

Can be used to assess living standards and as a basis for comparing countries (inc

Economic growth one of the subjects in the report card (need one to improve)

Question 13

Limitations of national statistics

Answer 13

Accuracy (there’s a lot of data: you’ll see adjustments months later [usually, not so large, but can be] once published b/c it’s really hard to get it accurate)

Making comparisons across countries is still superficial—not appropriate for measuring living standards/economic well-being (can get a sense, but need other things)

Parallel market output not included (pretty big deal, but depends on economy): people estimate the size of the parallel market, but it’s give-or-take

Externalities, sustainability issues not accounted for

Question 14

Other measures of measuring economic well-being

Answer 14

Nominal, real, per capita, PPP (variants)

To correct flaws, add complexity

OECD Better Life Index (lots of things in it), Happiness Index (lots of things in it), Happy Planet Index (a bit narrower), Human Development Index, Gross National Happiness

Someone developed it, felt it was meaningful, and shared it w/ others, but none are perfect: right measures? Weighted the right way? Who says one’s right and one’s wrong? Different definitions of *happiness?Could argue for ages

All kinds of data in today’s world

May not mean so much on its own (economic #s don’t tell us the whole story), but allows us to compare countries

Safety, education, comfort level, etc.—the more socially structured countries pushed to top of list (why mostly European)

Question 15

The business cycle (short-term business fluctuations)

Answer 15

A business cycle fluctuates around potential output/long-term trend growth (our goal) of a country. Represents the changing levels of economic activity that an economy experiences over time, measured by changes in real GDP or real GDP growth figures (percentage) [over time].

As a country increases its potential output over time as factors of production increase in qty + qlty, should be an upwards slope of the long-term business cycle.

In the short-run, however, there may be fluctuations below this growth rate.

Occurs regularly, but is NOT predictable in terms of size and duration of fluctuations (can be pretty confident you’ll ex. hit a peak and go back down, but when? There’ll be signals…).

Significantly impacts pricing levels, employment, government intervention.

Long-term growth trend is potential output/GDP (full employment GDP [unemployment = natural rate of unemployment]): actual GDP is the line.

Question 16

Business cycle phases

Answer 16

recovery - immediately after trough

expansion (growth) - positive growth in real GDP
boom

peak (overheating) - max GDP for the cycle is reached, end of expansion downturn

contraction - negative growth in real GDP

slump (recession) - recession is negative growth in two consecutive quarters

trough - min GDP for the cycle is reached, end contraction

Growth, so economic high, so lower unemployment, but this means high inflation (pulled into markets, scarcity, prices [labor, things] go up)

W/ trough, high unemployment, low economic growth, probably low inflation

W/ expansion, unemployment falls (opposite for contraction)

High inflation means, likely, that govts will try to slow it down, which will slow down the economy (typically, when you raise interest rates, economy slows down)

When trough/contraction, pushing inside the curve

When greater than potential, output gap (unemployment less than natural rate of unemployment)

When less, still output gap (unemployment greater than natural rate of unemployment)

*See graph

Question 17

Aggregate demand

Answer 17

The planned (more of a predictive tool) level of spending on domestic output (what’s being made in the country) at different average price levels (idea of inflation [avg prices of the goods went up by an avg of how much?])

Add demand curves of all the things in the economy, you get the aggregate demand curve

Keeping it linear, simple; still downward sloping

APL (avg price levels) on y-axis and rGDP (real GDP [total domestic output]) on x-axis

Question 18

Similarities, differences between aggregate demand and demand

Answer 18

Similarities

Both slope downwards (inverse relationship between price and qty demanded)
Both have NPDs which cause them to shift
A decrease in both causes employment and output to fall
A fall in demand impacts a particular industry, while a fall in aggregate demand will impact an entire country
An increase in both causes prices to rise
For demand this is an increase in the price of a good or service, while an increase in aggregate demand raises the average price level in a nation (inflation)

Both have NPDs, both downward-sloping, impacts pretty much the same

Key differences

For AD, our y-axis is APL, showing price levels in the entire economy
For AD, our x-axis is total output, typically shown as rGDP

Question 19

AD and GDP through expenditure method

Answer 19

GDP is aggregate demand (total demand in economy).

AD same as GDP through expenditure method [AD = C + I + G + (X - M)].

An aggregate demand curve would shift if any of those variables changed, ceteris paribus (changes in output at the same price level)—same idea as NPDs of demand.

In almost all economies, C is the biggest contributor to AD (so, policies impacting it tend to have the biggest effect on influencing AD [keep in mind when evaluating policy options…]).

(X - M) is usually the smallest, and, depending on the economy, the fight for second and third is between G (for smaller economies) and I (second for bigger economies).

Question 20

Consumption NPDs

Answer 20

Real interest rates: if real interest rates increase, C decreases

Wealth (value of assets): if the value of assets is higher, C increases

Personal income tax levels: if tax rate increases, disposable income decreases, C decreases

Confidence: if confidence about the future income increases, C increases

Expectations: if you expect high future inflation, C increases

Household debt: if household debt increases, C decreases

Question 21

Investment NPDs

Answer 21

Real interest rates: if real interest rates increase, I decreases

Business tax levels: if taxes are low, income increases, I increases

Technology: if new tech development increases, I increases

Confidence: if confidence about the future income increases, I increases

Corporate debt: if corporate debt increases, I decreases

Legal/Institutional changes: uncertainty in this area will lead to decreased I (impact of implemented changes could go either way [if you don’t know if rules or, say, tax levels are going to change, you won’t invest—want to see what will happen before they do things])

Question 22

Govt spending NPDs

Answer 22

Changes in political priorities

Changes in prioritities of fiscal policy (taxes and government spending) driven by government’s goal of meeting macroeconomic objectives
Expansionary (grows economy) - increasing G (or reducing the tax rate) will increase rGDP and therefore employment
Contractionary (shrinks) - decreasing G (or increasing tax rate) will slow rGDP growth and reduce inflation

Government budget - in a given year, a budget deficit (expenditures > tax receipts, or injections>leakages) is expansionary

Question 23

Exports - Imports NPDs

Answer 23

Foreign incomes - if foreign incomes increase, exports typically increase and (X-M) increases

Trade Policy/Protectionism - depends upon who is implementing the protectionist policies (in the short term, measures protecting domestic goods will increase [X-M])

Tastes and preferences - if a country’s goods become more appealing to foreign consumers, (X-M) will increase

Exchange rate - if a country’s exchange rate appreciates, (X-M) will decrease (exports become more expensive to others while imports become cheaper to buy)

Question 24

External shocks to AD

Answer 24

Many unexpected events cause changes in demand, output, and employments (external “shocks”)

ex.

A large rise or fall in the value of the exchange rate

A recession, slowdown or boom in one or more of a nation’s key trading partner countries

A slump in the housing market/construction sector of a country

An event such as the Global Financial Crisis which caused a fall in the supply of credit available to businesses and households

A large change in commodity prices for a country that is a commodity exporter

Question 25

Aggregate supply and equilibrium

Answer 25

SRAS (SR meaning short run [can only influence one FOP]) will look much like our microeconomics view of supply

LRAS (LR meaning long run) will be a little more complex, as it brings in competing economic theories

Aggregate supply is flexible wage and price period (how long does it take for flexible wages to adjust in an economy?)

LRAS illustrates the relationship between the avg price level and the level of output in the flexible-wage and price period, which is the period of time following a change in AD over which all wages and prices in the economy can adjust to the level of demand (before that time is what we call short run)

Question 26

Aggregate supply

Answer 26

The total quantity of goods and services produced in an economy (real GDP) over a given period of time at different price levels

Question 27

SRAS

Answer 27

In the period when resource prices (mostly wages) do not change

Just like supply, AS is impacted by:
the costs of FOPs
government policy

We will draw our SRAS, as a straight line (for now)

Factors that shift:
Changes in wages
Changes in non-labour resource prices
Changes in indirect taxes
Changes in subsidies offered to businesses
Supply shocks

All of these changes impact the costs of production

Question 28

Short-run equilibrium: changes in AD, AS

Answer 28

Decreases in AD lead to lower pricing and a lower level of output—a recessionary or deflationary gap

Increases in AD lead to higher pricing and a higher level of output—an inflationary gap

Increases in AS lead to lower pricing and a higher level of output—higher GDP with a lower price level

Decreases in AS lead to higher pricing and a lower level of output—recession with inflation, or “stagflation”

Question 29

LRAS

Answer 29

There are two different “schools of thought” concerning the shape of the LRAS (new classical/monetarist and Keynesian)

Question 30

Brief history of econ (rev.)

Answer 30

Classical (1800s): Smith + marginal utility, value

Wages would self-adjust so cycles would correct themselves

Keynesian (1930s): Keynes

During a period of high unemployment wages were ‘sticky downwards’ so they could not fall easily for firms to then higher more labour at a cheaper price, demand would also remain low and thus government intervention would be needed in the form of govt spending in order to boost the economy

Monetarist/New (Neo) Classical (1970s): Friedman, Lucas

Driven by “stagflation” which the Keynesian approach was not equipped to address
Importance of market-based supply side policies

Adam Smith, people added on, classical economics
Great Depression (‘30s): at beginning, people said markets would correct themselves, but they didn’t, which led to the Keynesians, who said there was a flaw and we needed to come up w/ a new theory
Keynesians didn’t exist until people saw that the Monetarist theory wasn’t working
Government spending became the way to do it

Question 31

New classical/Monetarist view

Answer 31

The LRAS curve is perfectly inelastic at the “full employment level of output (this is not zero unemployment)

Potential output is based purely on the quantity and quality of the factors of production and NOT the price level (therefore, the LRAS is independent of and doesn’t change depending on the price level)

Why is the LRAS vertical?
Since wages (and other resource costs) are now changing to match output price changes, the firm’s costs of production remains constant even as the price level changes. As price level increases or decreases, with constant real costs, profits are also constant, and firms no longer have incentive to increase or decrease output
Price increases in the short run are fully offset by cost increases in the long run.

ex. you own a business making classroom desks: the price level increases, so you are incentivized to increase supply (you move upward along the SRAS curve).

In the long run though, wages and other input costs also go up.
In the net, nothing has changed for you: your price is higher, but so are your costs

Downward-sloping AD curve, upward-sloping SRAS curve
New classical monetarist approach
Wages will come down w/ prices (lower output means people will probably be let go, and companies should be able to get labor for less)
If costs of FOPs go down, supply curve will shift to the right
Output goes down, people lose jobs
Self-feeding cycle (people can’t buy, more l [great depression]
Monetarists say that this is a market at work
Neo-classical theory
Will bring you back, naturally, to
Back to y1, so from an overall producer perspective, we’re okay, assuming that was a good economic level
Wages have gone down too, and though they’re paying less for labors, the price levels have gone down
Earning less, but paying out less—same problem
Same output, but at a lower price in wage level (everyone’s still happy)
As a worker, your wage has gone down, but so have prices
This whole monetarist view depends on wages coming down

Question 32

NC/Monetarist LR equilibrium: creating, eliminating gaps

Answer 32

See diagrams…

Deflationary
Shift from AD1 to AD2 leads to deflationary gap
Long run: fall in prices is matched by a fall in wages and other resource costs, leading AD back to the LRAS at an output of Yp
We are again at full employment output, but at a lower price level

Inflationary
Shift from AD1 to AD2 leads to inflationary gap.
Long run: increase in prices is matched by a rise in wages and other resource costs, leading AD back to the LRAS at an output of Yp
We are again at full employment output, but at a higher price level

Question 33

Keynesian view of LRAS

Answer 33

During the Great Depression, the world’s economies were not self-correcting

Wages were downwardly inflexible since workers were unwilling to accept lower nominal wages, and and unions and government protected worker rights

With weak demand, firms had to decrease output and lay off workers

A fall in AD below the full-employment level resulted in high unemployment and a large fall in output

With C, I, and (X - M) low, the government had to fill the “recessionary gap” by increasing government spending

The economy will NOT “self-correct” due to “sticky wages and prices”, so government is maintaining full-employment output

In the Keynesian view, AS is horizontal below full-employment and vertical beyond full employment

Looks like perfectly inelastic supply curve (regardless of price levels, fixed)

Sticky downward wages: wages stayed up, so supply curve didn’t shift up (confidence in the economy, yes, but contracts [incomes didn’t change suddenly])

Unions typically have long-term agreements on wages
Contractual agreements that are hard to get out of

Also the mindset of workers (you don’t wa

The Keynesian AS curve shows three possible phases that distinguished between the short and the long run:
(1) where AS is perfectly elastic (due to ‘spare capacity’ producers can raise their output without incurring higher average costs e.g. wages)
(2) as the economy approaches its potential output, spare capacity is used up and the economy’s FOPs being more scarce (therefore, in order to gain more FOPs and increase output, firms have to pay higher costs—thus the AS curve is upwards sloping)
(3) when the economy reaches full capacity, it is impossible to to increase output any further because all FOPs are fully employed (thus, AS is inelastic like the classical LRAS curve)

Keynesian theorists do not draw a separate SR and LRAS curve: they show all changes on this curve

Question 34

The competing views of AS

Answer 34

Generally, neither view is totally correct

Keynes was right in the short-run because wages and prices tend not to adjust quickly to changes in the level of demand

The new-classicals are right in the long-run because over time, following a decrease or an increase in AD, wages and prices tend to rise or fall accordingly, causing output in the nation to return to a relatively constant, full-employment level, regardless of the level of AD

Neither perfe
W/ classical, eventually, but when you have people waiting around to feed their families and stuff, not a good way
Empirical evidence that sticky-down wages exist
If you’re used to selling at a particular price, (wages haven’t gone down, and you don’t want
Neither hrorrible either
Times when it’s better to use one or the other—
You’ll either be told/given a clear hint, or you can draw either one (if no clear indication)

Question 35

Keynesian views of equilirbrium

Answer 35

Relative to the full employment level of output:
Deflationary gap shows decreased price and significantly reduced output relative to full employment
Inflationary gap shows increased price and small increase in output relative to full employment

Question 36

What will shift the Keynesian AS and New Classical LRAS curves (how do you increase the productive potential of an economy)?

Answer 36

See diagrams…

An increase in the quality and quantity of factors of production

Land, labor, capital, enterprise

Qty for each:

Reclaim land, build-up, farming techniques, extraction techniques, intensive livestock production, discovery of new resources, increased access to supply of resources

Immigration, raising retirement age, lowering working age, encouraging reproduction. Education and training more accessible

Increased Investment through ways such as easier access to finance, lower corporate tax

Encourage entrepreneurship through enterprise schemes, access to micro credit, start-up incubators etc, attracting FDI

Qlty for each:

Fertilization, mono-cultures, irrigation, organic farming, sustainable farming, better technology that allows increased access to resources or discovery of new resources

Education, training, re-training, apprenticeship programmes

Technological advancements, R&D

Training, start-up/ business support schemes

Question 37

Short- and long-run equilibrium

Answer 37

Short

Draw on a graph AD = SRAS

Here the economy is in short-run equilibrium, producing at an output level of Y at the price level of P. The output produced by the economy is exactly equal to the total demand in the economy and there is no upward or downward pressure on the price level. Ceteris paribus, the economy rests at this equilibrium.

Long

This is where AD=LRAS, as there are two LRAS curves we distinguish between the Keynesian equilibrium output in the long run and the new classical equilibrium output .

New Classical -

The economy will always move towards its long-run equilibrium at the full-employment level of output. The impact of any changes in AD will be on the price level only. The economy will always move ‘automatically’ (without any government intervention) to its long-run equilibrium. Show an increase in AD on the new classical LRAS curve.

In the short-run, an increase in AD will lead to a temporary increase in real output, the economy will be experiencing an inflationary gap, where the economy is in equilibrium at a level of output that is greater than the full employment level of output. This leads to an increase in the price level, which increases the costs of production to firms (labour, raw materials, capital). Thus SRAS shifts back reducing output back to Yfe. The final result is that output returns to its full employment level, but at a higher price of P2.

Similarly, in AD falls, In the short-run, a fall in AD will lead to a temporary fall in real output, the economy will be experiencing a deflationary (or recessionary) gap, where the economy is in equilibrium at a level of output that is less than the full employment level of output. This leads to a fall in the price level, which decreases the costs of production to firms (labour, raw materials, capital). Thus SRAS shifts forward, increasing output back to Yfe. The final result is that output returns to its full employment level, but at a lower price of P2.

Keynesian -

1. AD = LRAS
   According to Keynesian economists, the long-run equilibrium level of output may occur at different levels. The equilibrium level of output depends mainly on the level of aggregate demand in the economy. In the Keynesian view, AD can increase such that there is an increase in the level of real output, without any consequent increase in the price level - assuming the economy is experiencing spare capacity and there is a deflationary gap.
   Show AD increasing at a point on the perfectly elastic section on the Keynesian LRAS curve
2. If AD increases further, the economy will start to experience inflationary pressures as available factors of production become scarcer and their prices are bid up. The price level and real output will both increase. Show this on a graph.
3. If the economy is operating at full employment/ capacity and there is an increase in AD, the outcome will be purely ‘inflationary’. This is because it is impossible for the economy to produce any further increase in output in the long run, given the existing factors of production. Show AD increasing on the perfectly inelastic portion of the LRAS curve.

Question 38

NOTE

Answer 38

National income
Tell us what’s going on w/ our output and economy
If output goes down, employment tends to go down too (don’t need as many people if you’re not making as many things)
Bigger incentive to save (get more for leaving in bank), disincentive to borrow/spend (costs more)
There’s PMI (there’s a base level, and it’s an indicator of economic growth—is it above or below?)…
Crude and refined…
Wheat import
Fall in value of currency would increase AD (M goes down, X goes up)
Mechanics same (logical shifters)
A recession is a period when the level of real GDP falls over two quarters (three month periods) in a row
Price index/level concerned w/ base year
Dividing by something smaller than one will make it grow, so makes sense
Whole # if lots of zeros + decimal places, but otherwise, two decimal places
Don’t use a taken letter
Shift in one, movt along in another?
Deflation is a decrease in APL
Wages match prices?

global income effect (if countries exporting to are more wealthy), tastes + preferences (if ex. Nigerian suya becomes really popular), currency (if depreciates, becomes easier for everyone to buy more of your stuff)

If don’t correct, AD losses will keep building on themselves
When C and I go down, govts now fairly quickly increase th
B/c of interconnectedness of economies, probably in the same place, so imports go down, but countries also wouldn’t want to be buying, so not much difference w/ X and M (not such a big im
That’s the monetarist (neo-/new-classical) view
LRAS is another view
Adam Smith and then newer ones?
Limitation on ability to supply
Kind of like PPC
Given your FOPs and the efficiency w/ which you use them, can’t be outside (unless more FOPs or increased efficiency)
Can move LRAS curve if more FOPs or more efficiency
W/ expansion, can’t stay there b/c you’re making more than your LRAS says you can (like being outside of the PPC): only a temporary thing you can do to p
Wages go up; SRAS shifts to the left, and we’ll be back to a point where we’re at full ecmployment (producing what we did before at a higher price level and higher wages [both producers and workers okay])
Recessionary gap when economy producing less than it should (recession); w/ inflationary gap, extra output causes price level increase
Stagflation (stagnant inflation—hard to get rid of) unknown until oil embargo in ‘70s (?); economy in recession, but prices going up (lower output, higher prices)
How to deal?
Keynesian: recession, so have to spend govt money, but prices will go up even more (makes inflation worse—no one knew what to do [where supply-side of economics came in])
For Keynesian, AS is some exponential-looking thing
Vertical portion corresponds to LRAS, so Keynesians agree that at some point, you’ll hit that limit
W/ curving part, kind of like SRAS
Perfectly elastic supply for first portion
Add AD line
Shift left
Shift again
W/ horizontal section, lots of unused resources (potential output is right when starts looking inelastic)
Not creating inflation when shifted earlier b/c inexpensive, good-quality FOPs
People willing to work
As you get closer and closerto full employment level (everyone who’s capable and willing to work is working), the people you’re bringing into thelabor force are more marginal employees (may be less motivated, not have the right skills,…)
But if AD shifts out and you want to make more, have to hire them
Will spend a lot of time and energy trainign them, but still won’t be as productive (for the additional output they’re giving, cost will be high
So, it’s related to scarcity: FOPs becoming more scarce as you
Big price level increase for hardly any additional output
Inflation becomes bigger w/ every additional increment of output
Pushing pricelevels way up for marginal increase in output

Just like supply, AS impacted by costs of FOPs and govt policy
Basically, all comes down to cost; supply shifts are cost driven

Didn’t come down as quickly as monetarists thought they would

Govt had to come in and break the downw
Led to govt funding everything

W/ curve, resources becoming more scarce
Just to left of vertical section, we dra

LRAS/AS shift b/c of more/better FOPs
Like outward expansion of PPC

Ceteris paribus
Neglects X - M
Consumption should equal output if looking at circular flow
But if domestically produced, closed
Doesn’t account for spending on imports
Public sector = govt
Is the investment faster than what’s depreciating?
X 100
Divide by GDP deflatior in decimal f
Deflator goes down = prices went down = deflation
Comparing to that year
Disinflation is a slowing of

Output of different
Look at each step of the chain: only recognize what comes from each o
Have to subtract input
Final link of the chain is ultimate output…(?) in a simple example (more complex)
Don’t double-count (subtract input)
Policy options, comparison, forecasting (extrapolation to help make decisions [using what’s happening now])
Not just govt (also business)
Put yourself in the role of the stakeholder depending on the question
When do you start hiring labor, building new factories, buying more FOPs (when economy increasing)
When economy reaches peak, may want to hold off on them until
Interest rate is the price of money
If higher, invest less (b/c costs more to borrow)
Incentive to save, disincentive to borrow, spend
Factors = determinants
For investment, confidence, interest rates, cost of FOPs, debt, income level (parallels consumer)
Not investment when not helping the productive capacity of the economy
If shares bought are publicly traded, company gets nothign from it, so not investment
If company thinks lower th , buy it back, increasing demand and supply
If thinks needs more money,

Could turn into investment (withdrawal
But not investment
Even w/ IPO,
I
B for monetarists and E for Keynesians
Operating on LRAS means efficient use of
So, B
Shift in AD curve for peak (inflation, trying to make more than LRAS)
Govt spending is key Keynesian policy
Not all govt intervention, just G
AD increases w/ I
Increasing FOP increases LRAS
No impact to AD, but will push out LRAS
Think primary
Monetarist/Neoclassical is all abt wages (prices go up, wages go up… [?])

Supply-side neoclassical