AP Macro
Week#7
Fall 2014
Economics 10/20/14
http://mrmilewski.com
• OBJECTIVE: Continue examination of
Chapter#27
AP Macro-II.B
• Language objective: Work on computers in library.
• I. Admin Stuff
-attandance & library
• Homework: Finish homework on learnsmart
Economics 10/21/14
http://mrmilewski.com
• OBJECTIVE: Continue examination of
Chapter#27
AP Macro-II.B
• Language objective: Talk about basic macroeconomic
relationships.
• I. Journal#23
-notes on basic economic relationships
• Homework: Questions (6-9) p565 & Problems
(6-7,9) p.566.
Interest-Rate-Investment
• Expected rate of return
• The real interest rate
• Investment demand curve
LO3
27-4
(r)
and
(i)
16%
$0
14
5
12
10
10
15
8
20
6
25
4
30
2
35
0
LO3
Investment
(billions
of dollars)
40
Expected rate of return, r
and real interest rate, i (percents)
Investment Demand Curve
16
14
Investment
demand
curve
12
10
8
6
4
2
ID
0
5
10
15
20
25
30
35
40
Investment (billions of dollars)
27-5
Shifts of Investment Demand
• Acquisition, maintenance, and
•
•
•
•
•
LO4
operating costs
Business taxes
Technological change
Stock of capital goods on hand
Planned inventory changes
Expectations
27-6
Expected rate of return, r, and
real interest rate, i (percents)
Shifts of Investment Demand
Increase
in investment
demand
Decrease in
investment
demand
0
LO4
ID2 ID0 ID1
Investment (billions of dollars)
27-7
Global Perspective
LO4
27-8
Instability of Investment
• Variability of expectations
• Durability
• Irregularity of innovation
• Variability of profits
LO4
27-9
Instability of Investment
Source: Bureau of Economic Analysis, http://www.bea.gov.
LO4
27-10
The Multiplier Effect
• A change in spending changes real
GDP more than the initial change in
spending
Multiplier =
change in real GDP
initial change in spending
Change in GDP = multiplier x initial change in spending
LO5
27-11
The Multiplier Effect
(1)
Change in
Income
(2)
Change in
Consumption
(MPC = .75)
(3)
Change in
Saving
(MPS = .25)
$5.00
$3.75
$1.25
Second round
3.75
2.81
.94
Third round
2.81
2.11
.70
Fourth round
2.11
1.58
.53
Fifth round
1.58
1.19
.39
All other rounds
4.75
3.56
1.19
$20.00
$15.00
$5.00
Increase in investment of $5.00
Total
Cumulative income,
GDP (billions of
dollars)
20.00
$4.75
15.25
13.67
$1.58
$2.11
11.56
$2.81
8.75
$3.75
5.00
$5.00
1
LO5
2
3
4
5
All others
27-12
Multiplier and Marginal Propensities
• Multiplier and MPC directly related
• Large MPC results in larger
•
increases in spending
Multiplier and MPS inversely related
• Large MPS results in smaller
increases in spending
Multiplier =
LO5
1
1- MPC
Multiplier =
1
MPS
27-13
Multiplier and Marginal Propensities
MPC
Multiplier
.9
10
.8
5
.75
4
.67
.5
LO5
3
2
27-14
The Actual Multiplier Effect?
• Actual multiplier is lower than the
•
•
•
•
LO5
model assumes
Consumers buy imported products
Households pay income taxes
Inflation
Multiplier may be 0
27-15
Squaring the Economic Circle
• Humorous small town example of the
•
•
•
multiplier
One person in town decides not to
buy a product
Creates a ripple effect of people not
spending, following the first decision
Ultimately the entire town
experiences an economic downturn
27-16
Homework Tonight
• Questions (6-9) p565 &
Problems (6-7,9) p.566.
• Begin Reading Ch#29
Economics 10/22/14
http://mrmilewski.com
• OBJECTIVE: Complete examination of
Chapter#27
AP Macro-II.B
• Language objective: Talk about basic
macroeconomic relationships.
• I. Review last nights homework
• Homework: Look over Ch#29
Economics 10/23/14
http://mrmilewski.com
• OBJECTIVE: Begin examination of aggregate
demand & aggregate supply Chapter#29
AP Macro-II.B
• Language objective: Talk about basic macroeconomic
relationships.
• I. Journal#24
-notes on basic AD & AS
• Homework: Questions on Learnsmart
Aggregate Demand
• Real GDP desired at each price level
• Inverse relationship
• Real balances effect
• Interest effect
• Foreign purchases effect
LO1
29-20
Price level
Aggregate Demand
AD
0
LO1
Real domestic output, GDP
29-21
Changes in Aggregate Demand
• Determinants of aggregate demand
• Shift factors affecting C, I, G, Xn
• 2 components involved
• Change in one of the determinants
• Multiplier effect
LO1
29-22
Price level
Changes in Aggregate Demand
AD2
AD3
AD1
0
Real domestic output, GDP
LO1
29-23
Consumer Spending
• Consumer wealth
• Household borrowing
• Consumer expectations
• Personal taxes
LO1
29-24
Investment Spending
• Real interest rates
• Expected returns
• Expectations about future business
conditions
• Technology
• Degree of excess capacity
• Business taxes
LO1
29-25
Government Spending
•
•
LO1
Government spending increases
• Aggregate demand increases (as long as
interest rates and tax rates do not change)
• More transportation projects
Government spending decreases
• Aggregate demand decreases
• Less military spending
29-26
Net Export Spending
• National income abroad
• Exchange rates
• Dollar depreciation
• Dollar appreciation
LO1
29-27
Aggregate Supply
• Total real output produced at each price
•
LO2
level
Relationship depends on time horizon
• Immediate short run
• Short run
• Long run
29-28
AS: Immediate Short Run
Price level
Immediate-short-run
aggregate supply
P1
0
ASISR
Qf
Real domestic output, GDP
LO2
29-29
Aggregate Supply: Short Run
AS
Price level
Aggregate supply
(short run)
0
Qf
Real domestic output, GDP
LO2
29-30
Aggregate Supply: Long Run
Price level
ASLR
Long-run
aggregate
supply
0
Qf
Real domestic output, GDP
LO2
29-31
Economics 10/24/14
http://mrmilewski.com
• OBJECTIVE: Continue examination of
aggregate demand & aggregate supply
Chapter#29
AP Macro-II.B
• Language objective: Talk about basic macroeconomic
relationships.
• I. Journal#25
-notes on interest, & continue AD & AS
• Homework: Finish Questions on Learnsmart
Changes in Aggregate Supply
• Determinants of aggregate supply
• Shift factors
• Collectively position the AS curve
• Changes raise or lower per-unit
production costs
LO2
29-33
Changes in Aggregate Supply
AS3
AS1
Price level
AS2
0
Real domestic output, GDP
LO2
29-34
Input Prices
• Domestic resource prices
• Labor
• Capital
• Land
• Prices of imported resources
• Imported oil
• Exchange rates
LO2
29-35
Productivity
• Real output per unit of input
• Increases in productivity reduce costs
• Decreases in productivity increase
costs
Productivity
=
Per-unit production cost
LO2
total output
total inputs
=
total input cost
total output
29-36
Legal-Institutional Environment
• Legal changes alter per-unit costs of
output
• Taxes and subsidies
• Extent of government regulation
LO2
29-37
Price level (index numbers)
Equilibrium
AS
100
a
92
b
Real Output
Demanded
(Billions)
Price Level
(Index Number)
Real Output
Supplied
(Billions)
$506
108
$513
508
104
512
510
100
510
512
96
507
514
92
502
AD
0
502
510 514
Real domestic output, GDP
(billions of dollars)
LO3
29-38
Decreases in AD: Recession
• Prices are downwardly inflexible
• Fear of price wars
• Menu costs
• Wage contracts
• Efficiency wages
• Minimum wage law
LO4
29-39
Decreases in AS: Cost-Push Inflation
Price level
AS2
AS1
b
P2
P1
a
AD
0
Q1 Qf
Real domestic output, GDP
LO4
29-40
Increases in AS: Full-Employment
Price level
AS1
P3
P2
P1
AS2
b
c
a
AD2
AD1
0
Q1
Q2 Q3
Real domestic output, GDP
LO4
29-41
Impact of Oil Prices Diminished?
• 1970’s
• Reduced AS and negative GDP gap
• Cost-push inflation
• Rising unemployment
• 2000’s
• Core inflation steady
• Use 50% less oil and gas today
• Federal Reserve more vigilant
29-42