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WEEK 7 - Aggregate Supply and Aggregate Demand
A Model of the Macro-Economy

QUESTIONS ???

SURVEY RESULTS

If there is high unemployment the government should increase government purchases (spending).
73% correct

If there is high inflation the government should decrease government purchases (spending).
73% correct

If there is high unemployment the government should decrease taxes.
73% correct

If there is high inflation the government should increase taxes.
73% correct

If there is high unemployment the government should increase the money supply causing interest rates to decrease
82% correct

If there is high inflation the government should decrease the money supply so that interest rates increase
82% correct

WEEKLY ASSIGNMENTS

Week 7 - AS/AD - by Thursday - Chapter 10

Chapter 10 - AS/AD

• Reading Assignments:
  • The Business Cycle: pp. 127-128
  • Promoting Stability: p. 74
  • Chapter 10 - Agggregate Supply and Aggregate Demand: ALL
  • Taxation and AS (Supply -Side Economics): pp. 295-299
  • From Short Run to Long Run: pp. 285-290
  • Types of Inflation: pp. 136-137
• Web Quizzes at http://www.mcconnell17.com
  • Quiz 1: #1, 3-10 (note: in #4 and 5 the AD graph shifts to the left)
  • Quiz 2: #2-5, 7-10 (note: #1 the full employment level is $50)
  • Quiz 3: none (quiz is from the wrong chapter)
• Study Guide
  • Multiple Choice: # 1-9, 14-20, 22-25
  • Problems: # 1, 2, 4
• Key Questions # 4, 6, and 7

   

REVIEW:

• Know how the determinants and graphs work !

  Determinants of AD

  ­ AD	AD
  C AD	C AD
  I AD	I AD
  G AD	G AD
  Xn AD	Xn AD
  MS Interest Rates I AD	MS Interest Rates I AD
  T C AD	T C AD
  S C AD	S C AD

  But what causes these things to change? Well, economists have identified some determinants of the main components of spending: C, I, G, and Xn.

  Determinants of C, I, G, and Xn:

  • C = consumer spending (and saving)

    1. consumer wealth
       Wealth C AD
       Wealth C AD
       
    2. consumer expectations
       Expected future Income C today AD today
       Expected future Income C today AD today
       
    3. consumer indebtedness
       Consumer Debt C AD
       Consumer Debt C AD
       
    4. taxes
       T C AD
       T C AD

    I = investment spending

    1. interest rates (money supply)
       MS Interest Rates I AD (memorize this, it will help in future chapters)
       MS Interest Rates I AD
       
    2. profit expectations on investment projects
       profit expectations I AD
       profit expectations I AD
       
    3. business taxes
       Business Taxes I AD
       Business Taxes I AD
       
    4. technology
       technology I AD
       
    5. degree of excess capacity
       excess (unused) plant capacity I AD
       excess (unused) plant capacity I AD
       

    G = government purchases
    

    Xn = net export spending

    1. net income abroad
       Income in Foreign Countries Xn AD
       Income in Foreign Countries Xn AD
       
    2. exchange rates
       value of the US dollar Xn AD
       value of the US dollar Xn AD

        

  Determinants of AS

  • AS	AS
    price of resources AS	price of resources AS
    productivity AS	productivity AS
    business taxes and gov't red tape AS	business taxes and gov't red tape AS

 DETERMINANTS

• Review Questions
• Review Questions with Answers

• EXAMPLE 1
• EXAMPLE 2
• EXAMPLE 3
• EXAMPLE 4

Online Lecture:

• http://www.harper.cc.il.us/mhealy/eco212i/lectures/asad/asad.htm  

Lecture Outline:

• http://www.harpercollege.edu/mhealy/eco212/lectures/asad/asadfr.htm

Online Quizzes:

• weekly required activity
• http://www.harpercollege.edu/mhealy/eco212/review/revasad.htm
• Quiz 1: #1, 3-10 (note: in #4 and 5 the AD graph shifts to the left)
• Quiz 2: #2-5, 7-10 (note: #1 the full employment level is $50)

Articles used in class:

• GERMANY: http://money.cnn.com/2001/08/23/europe/germany/index.htm
• BIG SURPRISE: http://money.cnn.com/2003/10/16/news/economy/gdp/index.htm
• KITCHEN SINK: http://money.cnn.com/2003/06/27/news/economy/secondhalf_economy/index.htm