Increase in the Price of a Substitute in Production

• shifts the S curve to the left
• more of the substitute is produced and less of the good is produced

Price Floor and Price Ceiling

Graph

Price Floor is the top Green line,

[image]

Price ceiling in the bottom green line

then inventories are unchanged

and the economy is in macroeconomic equilibrium

then inventories rise

and GDp and employment decrease

then inventories fall

and GDP and employment will increase

Five Most Important Variabled that Determine the Level of Consumption:

1. current disposable income
2. household wealth
3. expected future income
4. the price level
5. the interest rate

the slope of the consumption function:

                              change in consumption  =  Δ C

                      change in disposable income    Δ YD

=GDP=Disposable Income-Net taxes

= Consumption+Savings+Taxes

the change in saving/ change in disposable income

1=MPS+MPC

1. Expectations of future profitability
2. interest rate
3. taxes
4. cash flow

1. the price level in the us relative to the price levels in other countries
2. the growth rate of GDP in the US relative to other countires
3. the exchange rate between the dollar and other currencies

• planned aggrigate expenditure is greater than GDP for points above the 45 degree line

• planned aggrigate expenditure is less than GDP for points below the 45 degree line

• all points on the macroeconomic equilibrium must line on the line

              change in equilibrium real GDP               = ΔY

            change in autonomous spending                    Δ I

     1     

1-MPC

Aggrigate Demand and Aggrigate Supply Model

explains the shorts run fluctuations in real GDP and the price levels

1. wealth effect: how a change in the price level affects consumption
2. the interest-rate effect: how a chnage in the price level effects the investment
3. The international- trade effect: how a change in the price level effect the net exports

1. changes in gov policies
2. changes in the expectations of households and firms
3. changes in foreign variable

AD shifts left

higher interest rates raise the cost to firms and housholds or borrowing, reducing consumption and investmentspending

AD shifts rigtht

gov purch are a component of AD

AD shifts left

consumption spending falls when personnal taxes rise, and investment falls when business taxes rise

AD shifts right

consumption spending increase

AD shifts right

investment spending increases

AD shifts left

imports will increase faster than exports, reducing net exports

AD shifts left

imports will rise and exports will fall, reducing net exports

chnages in the price level do not affect the level of Aggregate supply in the long run.

Vertical Line

Short-Run Aggregate Supply Curve

Three Most Common Explantions:

1. contracts make some wages and prices "sticky"
2. firms are often slow to adjust wages
3. menu costs make some prices sticky

1. increases in the labor force and in the capital stock
2. tech. change
3. expected changes in the future price levels
4. adjustments of workers and firms to errors in past expectations about the price levels
5. unexpected changes in the price of an important natural resources

AS shifts to the right

more output can be produced at every price level

AS shifts right

costs of producting output fall

AS shifts right

costs of producing output fall

AS shifts left

workers and firms increase wages and prices

AS shifts to the left

cost of producing output rise

• an increase in investment shifts AD to the right, causing an inflationary expansion
• as firms and workers adjust to the price level being higher than they had expected, costs will rise and cause SRAS to shift to the left
• equilibrium moves up with a higher price level

M x V = P x Y

money supply x velocity of money = price level x real output

1. medium of exchange
2. unit of account
3. store of value
4. standard of deferred payment

1. Currency, which is all the paper money and coins that are in circulation, means not held by banks or gov
2. the value of all checking account deposits at banks
3. the value of travelers checks

1. the money supply consists of both currency and checking account deposits
2. b.c balances in checking account deposits are included in money supply, banks pay an important role in the way th emoney supply increases and decreases.

1. price stability
2. high employment
3. stability of financial markets and institutions
4. economic growth