Monday, May 18, 2015

Unit 5 & 6 Notes

Short Run Aggregate Supply
  • Time is too short for wages to adjust to the price level
  • Workers may not be aware of changes in their real wages due to inflation and have adjusted their labor decisions and wage demands accordingly
  • Nominal Wages
    • Amount of money received per hour per day or per year
  • Sticky Wages
    • Nominal wage level is set according to an initial price level and it does not vary

Price Level
Wage Level
Employment Level
Implications
1.Keynesian/
Horizontal
Fixed
Fixed
Flexible
Output depends upon changes in employment
2.Intermediate
Flexible
Fixed
Flexible
Output depends upon changes in price level and employment
3.Classical/
Vertical
Flexible
Fixed
Fixed
Output dependent upon changes in price level


Long Run Aggregate Supply
  • Time long enough for wages to adjust to the price level
Long Run Phillips Curve
  • Relationship between unemployment
  • Long Run Phillips Curve occurs at the natural rate of unemployment
  • Represented by a vertical line
  • No trade off between unemployment and inflation in the long run
  • Means that the economy produces at the full employment level
  • Long Run Phillips Curve will only shift if the LRAS curve shifts
  • More worker benefits create higher natural rates
  • Fewer worker benefits create lower natural rates
Short Run Phillips Curve
  • Tradeoff between unemployment and inflation (inverse relationship)
  • High inflation equal to low employment
  • Relevance to Okun’s Law
  • Since wages are sticky, inflation changes move the points on the SRPC
  • If inflation persists, and the expected rate of inflation rises then the entire SRPC moves upward due to stagflation
  • If inflation expectations drop, due to new technology or economic growth then the SRPC moves downward
  • Aggregate supply shocks cause both the rate of inflation and the rate of unemployment to increase
  • Supply shocks- Rapid and significant increase in resource cause
  • Misery Index- Combination of inflation and unemployment in any given year; single digit misery is good
Long-Run Phillips Curve
  • LRPC exists at the natural rate of unemployment so structural changes that affect the natural rate of unemployment will also cause the LRPC to shift
  • Increases in the natural rate of unemployment will shift the LRPC to the right
  • Decreases in the natural rate of unemployment will shift the LRPC to the left
Stagflation
  • When Inflation and Unemployment increase simultaneously
  • 1946-1964 Baby Boom
  • Women’s Movement
  • Civil RIghts Movement
  • Vietnam War ends
  • Oil Embargo of 1973 & 1979
Disinflation
  • Reduction in the inflation rate from year to year
  • Occurs when aggregate demand declines
Deflation
  • General drop in the price level
Supply Side Economics
  • The belief that the AS curve will determine levels of inflation, unemployment, and economic growth
  • To increase the economy, the AS curve will have to shift to the right which will benefit the company first
  • Supply side economist focus on marginal tax rates
    • Marginal Tax Rates: Amount paid on the last dollar earned or on each additional dollar earned
  • Lower taxes or incentives for businesses to invest in our economy
  • Lower taxes or incentives for workers to work more and harder thereby becoming more productive
  • Lower taxes or incentives for people to increase savings and therefore create lower interest rates which will increase business investment
  • Supply Side Economists Support policies that promote GDP Growth by arguing that high marginal tax rates along with our current system of transfer payments (Unemployment compensation/welfare programs) provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures
Reaganomics
  • Lowered the marginal tax rate to get the U.S. out of a recession. This actually led to a deficit.
Laffer Curve
  • Trade off between tax rates and government used to support supply side argument
  • As tax rates increase from zero, tax revenues increase from zero to some maximum level and then decline
  • Three criticisms of the laffer curve:
    • Research suggests that the impact of tax rates on incentives to work, invest, and to save are small
    • Tax rates also increase demand which can fuel inflation and it causes demand to exceed supply
    • Where the economy is actually located on the curve is yet to be determined
Focus 4/15/15
  1. Debit/Capital
  2. Credit/Current
  3. Debit/Capital
  4. Debit/Current
  5. Credit/Current
  6. Debit/Official Reserves
Foreign Exchange
  • The buying and selling of currency
  • The exchange rate (e) is determined in the foreign currency markets
  • The exchange rate is the price of a currency. Do not try to calculate the exact exchange rate
Tips
  • Always change the D line on one currency graph, the S line on the other currency’s graph
  • Move the lines of the two currency graphs in the same direction (right or left) and you will have the correct answer
  • If D on one graph increases, S on the other will also increase
  • If D moves to the left, S will move to the left on the other graph
Changes in Exchange Rates
  • Exchange Rates (e) are a function of the supply and demand for currency
  • An increase in demand for a currency will make it more expensive to buy one unit of that currency
  • A decrease in demand for a currency will make it cheaper to buy one unit of that currency
Appreciation
  • Appreciation of a currency occurs when the exchange rate of that currency increases
Depreciation
  • Depreciation of a currency occurs when the exchange rate of that currency decreases
Exchange Rate Determinants

  • Consumer Tastes
    • People want Japanese goods, more dollars go there, increasing Yen
  • Relative Income
    • Mexico has stronger economy than US, more US products being bought, more demand for dollars, USD appreciates, pesos depreciate
  • Relative Price Level
    • Higher price level, less demand
  • Speculation
    • Swiss interest rates will rise, greater demand for their money, appreciates value

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