Copyright © 2004 South-Western Mods 17-21, 30 Macro Analysis Part III

Copyright © 2004 South-Western

Mods Mods 17-21, 17-21,

3030Macro Analysis

Part III


Slate Scenario Practice

• Get Partner• Get Slates, markers, erasers• Wait for scenarios on screen



• For each scenario, draw the Macro AD/AS graph, label all parts, including Equil PL and GDP

• …and then show the shift, label the new curve, show and label the new Equil Price Level and GDP



1. Economic booms in both Japan and Europe result in massive increases in orders for exported goods from the U.S.



2. The government reduces taxes and increases transfer payments



3. Fine weather results in the highest corn and wheat yields in 40 years



4. While the U.S. was in the midst of the Great Depression, a foreign power attacked, Congress declared war, and more than a 1 million soldiers were drafted in the first year while defense spending was increased several times over.



5. To balance the budget, the federal government cuts Social Security payments by 10% and federal aid to education by 20%.



6. During a long, slow recovery from a recession, consumers postponed major purchases. Suddenly they begin to buy cars, refrigerators, televisions, and furnaces to replace their failing models.



7. In response to other dramatic changes, the government raises taxes and reduces transfer payments in the hope of balancing the federal budget.



8. News of possible future layoffs frightens the public into reducing spending and increasing saving for the feared “rainy day.”



9. Net exports decrease



10. The government engages in a new highway building program.


THE LONG-RUN AGGREGATE-SUPPLY CURVE

In the long run, an economy’s amount of production of goods and services depends on its supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services, plus the gov’t policies that promote productivity • The price level does not affect

these variables in the long run.


The Long-Run Aggregate-Supply Curve

Quantity ofOutput

Natural rateof output

PriceLevel

0

Long-runaggregate

supply

P2

1. A changein the pricelevel . . .

2. . . . does not affect the quantity of goods and services supplied in the long run.

P



THE LRAS CURVE

• So…In the long run, the aggregate-supply curve is vertical at what we call the natural rate of output

• This is also called its potential output or full-employment output


Comparing PPC to LRAS

These are just 2 ways to show the same thing:The ultimate potential—the full capability

— of your economy overall.


Why the Long-Run Aggregate-Supply Curve Might Shift

• Any change in the economy that alters the natural rate of output shifts the long-run aggregate-supply curve.

• The shifts may be categorized according to the various factors of production that affect output.


Why the Long-Run Aggregate-Supply Curve Might Shift

• Shifts arising • Labor• Capital• Natural Resources• Technological Knowledge

AND• Gov’t Policies


AGAIN…Long-run Economic Growth can be represented by 2 different

models in Macroeconomics

Macroeconomic Growth = PPC shift = LRAS shift


Long run analysis …

• Explains our business cycle over long periods of time growing in GDP output…and our slow, steady price rises


Long-Run Growth and Inflation

Quantity ofOutput

Y1980

AD1980

AD1990

Aggregate Demand, AD2000

PriceLevel

0

Long-runaggregate

supply,LRAS1980

Y1990

LRAS1990

Y2000

LRAS2000

P1980

1. In the long run,technological progress shifts long-run aggregate supply . . .

4. . . . andongoing inflation.

3. . . . leading to growthin output . . .

P1990

P2000

2. . . . and growth in the money supply shifts aggregate demand . . .



NOW---let’s put the graphs together: The Long-Run Equilibrium—LRAS, AS, AD

Natural rateof output

GDP--Quantity ofOutput

PriceLevel

0

SRAS--Short-runaggregate

supply

LRAS--Long-runaggregate

supply

Aggregatedemand

AEquilibriumprice



Long-Run Macroeconomic Long-Run Macroeconomic EquilibriumEquilibrium

• Long-Run Macroeconomic Equilibrium

• Recessionary Gap

• Self-Correction

• Inflationary Gap

• Self-Correction

• Output Gap: % diff between Ye from Yp

100 x (Ye-Yp)/Yp


LRAS Slate Scenario Practice

This time, draw the macro graph including the LRAS as it would be BEFORE the scenario occurs.

Then, draw the shift and label whether this is an inflationary or recessionary gap.



11. A series of natural disasters disrupt production and delivery of goods.



12. New immigration laws have led to labor shortages.



13. Interest rates fall.



14. Labor strikes cause an interruption in shipment of parts.



15. Stock and bond markets soar.



16. After a long period of rising housing prices and values, the incidence of foreclosures increases and housing values begin to plummet. Consumers react with concern due to shrinking estimates of housing-based wealth.

Documents

Copyright © 2004 South-Western Mods 17-21, 30 Macro Analysis Part III