June 17, 2008

How Floods Will Hurt the Economy

Posted in Aggregate Supply, Articles, CPI, Globalization, Inflation, International Trade at 3:10 pm by davidprudente

For all you veterans of AP Economics, this weeks floods in the mid-west made you think back to those easy days in high school when all you had to worry about was how natural disasters would affect aggregate supply.  Now you may be concerned with how they’ll affect the amount of money in your pocket. Check out the latest on the floods in the mid-west from CNN.

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March 18, 2008

Review For Exam

Posted in Aggregate Demand, Aggregate Supply at 4:21 pm by davidprudente

Chapter 31

  • Why the AD curve slopes downward:
    • wealth effect
    • interest-rate effect
    • exchange-rate effect
  • Factors that shift the AD curve:
    • Δ Consumption
    • Δ Investment
    • Δ Government Spending
    • Δ Net Exports
  • Why the AS curve slopes upward:
    • Misperceptions theory
    • Sticky-wage theory
    • Sticky-price theory
  • Why the SRAS curve might shift
    • Δ in Labor
    • Δ in Technology
    • Δ Natural Resources
    • Δ Capital
    • Δ in expected price level

Chapter 32

  • Liquidity preference theory
  • MPC & MPS
  • Spending Multiplier 1/1-MPC
  • The Crowding-out Effect
  • Automatic Stabilizers

Chapter 33

  • Phillips Curve
  • Natural Rate Hypothesis
  • Supply Shock
  • Stagflation
  • Sacrifice-Ratio
  • Rational Expectations Theory

March 9, 2008

End to the Good Times (Such as They Were)

Posted in Aggregate Demand, Aggregate Supply, Articles at 4:21 pm by davidprudente

Here’s an interesting graphic from the New York Times showing a downturn in some key economic indicators. Not a pretty picture. What do you think has happened to the AD/AS curve over the past 6 months?

Signs of Trouble

February 22, 2008

Lovin’ The Rain!

Posted in Aggregate Demand, Aggregate Supply, Assignments at 9:31 am by davidprudente

Well, here we are again; home in the rain. I hope you all enjoy your long weekend and you are being safe and making smart decisions. One smart decision would be to check out Mankiw’s book website and take the online practice quiz for chapter 31. You’ll need to select the AS/AD chapter from the drop down box. Then select Tutorial Quiz from the menu on the left. In this version of the book, the AS/AD chapter  is chapter 20. Remember the 40 question quiz is Monday. Enjoy your weekend.

February 13, 2008

SRAS Shift Discussion

Posted in Aggregate Supply, Assignments at 3:45 pm by davidprudente

Hey Folks,

I’m glad to see many of you working on your day off. Juan Vega and I exchanged email’s earlier and I thought the discussion might help.

Juan Asks:

“On page 722, Mankiw says that when the AD curve decreases because of a wave of pessimism, the quantity of output and the price level decrease. According to Mankiw, this is a recession because output has fallen and therefore unemployment has risen. I understand this, but then he goes on and says that without intervention by policy-makers the economy will remedy itself when perceptions, wages, and prices change. My question is, how can the SRAS curve shift to the right when the price level is low? Doesn’t a low price level lead to cuts in production due to perceptions, wages, and sticky prices, as explained by Mankiw on page 717?”

My Answer:

Good question. Remember that the short-run fluctuation is a deviation from the natural-rate of output in the long-run. So the natural tendency is to shift towards the long-run aggregate supply over time. For example, let’s say we are currently in a recession and our unemployment rate is 8%. Prices and output would be low in this situation (think about the graph). During a recession, businesses would be trying to lower output and cut costs. One way they do this is by letting their inventories decrease. At the same time, consumers have generally put-off major purchases (cars, houses, other durable goods) because they are concerned about a recession. But after awhile, some major purchases can no longer be put off (if you need a new car for transportation you have to buy one now rather than later). As more and more consumers begin purchasing goods out of necessity, businesses start seeing rising demand for their goods. So businesses start to increase their output. As this occurs, they hire more workers, who inevitably spend their wages. As more and more workers begin being hired and consequently spend their wages, more and more businesses increase output and hire more workers. Soon the unemployment rate begins to decline (gravitating towards the natural rate of output or full employment level). Now we see that our SRAS begins to shift right towards the LRAS.

School’s rained-out; we’ll play two tomorrow.

Posted in Aggregate Supply at 8:34 am by davidprudente

Hey everyone! How wonderful is it to get an extra day off. In order to stay on top of your work, I recommend you read (at least) up to page 720 in chapter 31. This section of the chapter covers the Aggregate Supply curve and is very important. Feel free to finish up the chapter as well.

I would like you to focus on a couple of things in this section.

  1. Why is the Aggregate Supply curve vertical in the long-run? What is meant by the Natural Rate of Output? What is implied by the idea of full-employment output?
  2. What factors will cause the Long-run Aggregate Supply Curve (LRAS) to shift?
  3. Why Does the Short-run Aggregate Supply Curve (SRAS) slope upward?
  4. Why might the SRAS shift?
  5. How does the SRAS differ from the LRAS?

Use these questions as a guide for your reading and be sure you can answer them as we start talking about Aggregate Supply tomorrow. Enjoy your day off.