APMacro: Aggregate Supply


The aggregate supply (AS) curve shows the relationship between the price level and the total amount of real output or RGDP that firms are willing to produce.The shape of the curve depends on whether one is looking at a long-run aggregate supply curve (LRAS) or a short-run aggregate supply curve (SRAS).

LRAS Curve pic

The LRAS curve is a vertical line, reflecting the classical view that wages and prices are flexible, meaning that firms will always produce at the full employment level of output. The LRAS curve is a vertical fixed line at the full employment level of output. The full employment level itself, which is the same as potential GDP, depends on the availability of labor and capital and the state of technology.

Firms have no incentives to produce more or less than the full employment level. They will produce this amount regardless of market prices. If prices go up, wages will increase as well. The cots of production will increase proportionately, and thus there will be no incentive to produce more. Similarly, producers have no incentive to decrease production if prices fall. As prices fall and revenue goes down, wages will also fall and the costs of production will go down by the same amount. The result is no change in profits and no incentive to lower production.

7 AS Curve pic

The SRAS curve is based on the Keynesian belief that prices and wages are sticky, at least in the short run. The result is that firms do have an incentive to produce more as prices go up. Many workers are tied into contracts, and their wages will not increase at once, if at all, when prices go up. Therefore, the costs of production stay the same and firms increase production to take advantage of the higher revenues offered by increased prices. This AS curve slopes upward from left to right and looks like the familiar upward sloping supply curve.

The aggregate supply curve is a relationship between the price level and the RGDP firms produce. This relationship will shift as firms’ cost of doing business change. The factors that would change how much firms supply at a given price are the same factors that shift the AS curve.

9 AS Shifters

A rightward shift in the AS curve means that the supply of all goods and services is increasing. We refer to this as a positive supply shock. It usually occurs when there is economic growth or technological progress. Discoveries of natural resources and changes in the economy that promote production have this effect as well.

The AS can decrease as well. A decline in AS creates a leftward shift of the AS curve and a negative supply shock. For example, a change in the costs of major inputs for firms can create a negative supply shock. Oil, agricultural products, and labor are the most important inputs firms buy. An increase in the price of oil will shift the AS curve to the left. Bad weather that decreases the supply of agricultural products will shift the AS curve to the left as well. Finally, changes in the cost of labor or any other important input, will alter how profitable firms find it to produce at different price levels. Generally, higher wages will shift the AS curve to the left, and lower wages will shift it to the right.


 

Homework:

 

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Gov: Constitution Articles


US-Constitution

The main body of the Constitution consists of seven articles. These seven articles are further divided into sections and clauses. The first three articles establish the three branches of government – legislative, executive, and judicial – and define their powers. These articles lay out the basic structure of the national government. The four remaining articles of the Constitution cover various subjects, including relations among the states, the supremacy of national law, and the amendment process.

The first article sets up Congress as the lawmaking body in government. It describes the two chambers of Congress, the Senate and the House of Representatives, as well as the election, terms, and qualifications of their members. It also sets guidelines for rules and procedures in each chamber. This is the longest article in the Constitution, reflecting the founders’ belief in the importance of the legislature in a representative democracy.

Article II establishes the executive branch. The executive branch is led by the president and vice president. The Constitution describes the election, terms of office, and qualifications of these executive officers. It also defines the powers of the president, which include the power to command the armed forces, to make treaties, and to appoint other executive officials.

Article III creates the Supreme Court, the highest court in the land, while leaving Congress to create the lower courts. It defines the jurisdiction of the federal courts, specifying the types of cases that can be tried. It also guarantees the right to trial by jury in criminal cases and defines the crime of treason.

Article IV concerns relations among the states. It has four sections, which make the following key points: “Full faith and credit.” Each state must honor the laws and court decisions of other states. “Treatment of citizens.” No state may discriminate against the residents of another state. It must treat them as it treats its own residents. States must return suspected criminals to the states in which they are wanted. “New states and territories.” Only Congress can authorize the creation of new states. It also has power over territories and other jurisdictions of the United   States. “Protection of states.” The national government guarantees each state a republican form of government. It also promises to protect states from outside attack and, if requested, to help states put down internal rebellions.

Article V describes the amendment process. The framers understood that it might be necessary to make changes to the Constitution from time to time. Article V spells out the ways such amendments can be proposed and ratified.

Article VI covers several topics. It states that the national government agrees to repay all of the debts that were incurred under the Articles of Confederation. This was critical to ensure support for the new government. It also states that the Constitution is the “supreme Law of the Land.” This section, known as the Supremacy Clause, means that federal law supersedes all state and local laws. When the laws conflict, federal law reigns supreme. In addition, it stipulates that all federal and state officials must take an oath swearing their allegiance to the Constitution. Also, no religious standard can be imposed on any official as a qualification for holding office.

Article VII stipulates that the Constitution would not take effect until ratified by at least nine states. Although the Constitution was signed by the framers on September 17, 1787, ratification did not occur until the following year.

The framers never meant for the Constitution to provide a complete and detailed blueprint for government. In general, the framers made broad statements and left it to political leaders to work out many of the specific details of governing. They also built in an amendment process, in Article V, that would allow for formal changes to the Constitution. They hoped that this flexibility would allow the Constitution and the government to endure.

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APMacro: Unemployment and Inflation Review


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Unemployment and Inflation Review

 

 

  • Economic growth may be defined as either a) an increase in real GDP over time or b) an increase in real GDP per capita over time. Growth lessens the burden of scarcity and provides increases in real GDP that can be used to resolve socioeconomic problems.
  • The US and other industrial economies have gone through periods of fluctuations in real GDP, employment, and price levels. Although they have certain phases in common – peak, contraction, trough, expansion – business cycles vary greatly in duration and intensity.
  • Although economists explain the business cycle in terms of such causal factors as major innovations, political events, and money creation, they generally agree that changes in the level of total spending are the immediate causes of fluctuating real output and employment.
  • The business cycle affects all sectors of the economy, though on varying ways and degrees. The cycle has greater effects on output and employment in the capital goods and durable consumer goods industries than in the services and nondurable goods industries.
  • Economists distinguish between frictional, structural, and cyclical unemployment. The full employment or natural rate of unemployment, which is made up of frictional and structural unemployment, is currently between 4 and 6 percent. The presence of part time and discouraged workers makes it difficult to measure unemployment accurately.
  • The GDP gap, which can be either a positive or a negative value, is found by subtracting potential GDP from actual GDP. The economic cost of unemployment , as measured by the GDP gap, consists of the goods and services forgone by society when its resources are involuntarily idle. Okun’s law suggests that every 1 percentage point increase in unemployment above the natural rate causes an additional 2 percent negative GDP gap.
  • Inflation is a rise in the general price level and is measured in the US by the Consumer Price Index (CPI). When inflation occurs, each dollar of income will buy fewer goods and services than before. That is, inflation reduces the purchasing power of money.
  • Unemployment rates and inflation rates vary widely globally. Unemployment rates differ because nations have different natural rates of unemployment and often are in different phases of their business cycles. Inflation and unemployment rates in the US recently have been in the middle to low range compared with rates in other industrial nations.
  • Demand-pull inflation results from an excess of total spending relative to the economy’s capacity to produce. The main source of cost-push (supply-side) inflation is the abrupt and rapid increases in the prices of key resources. These supply shocks push up per unit production costs and ultimately raise the prices of consumer goods.
  • Unanticipated inflation arbitrarily redistributes real income at the expense of fixed-income receivers, creditors, and savers. If inflation is anticipated, individuals and businesses may be able to take steps to lessen or eliminate adverse redistribution effects.
  • When inflation is anticipated, lenders add an inflation premium to the interest rate charged on loans. The nominal interest rate thus reflects the real interest rate plus the inflation premium or the expected rate of inflation.
  • Cost-push inflation reduces real output and employment. Proponents of zero inflation argue that even mild demand-pull inflation(1 to 3 percent) reduces the economy’s real output.Other economists say that mild inflation may be a necessary by-product of the high and growing spending that produces high levels of output, full employment, and economic growth.
  • Hyperinflation, caused by rapid expansions of the money supply, may undermine the monetary system and cause severe declines in real output.

Homework:
1) Chapter 6 p.122 #3, 8a, 9a, 11, 12, 13
2) Chapter 7 p.144 #2, 6, 8, 11, 14
3) Economic Indicators Quiz – Tuesday 3/1

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Gov: Preamble


 

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The Preamble is a single, long sentence that defines the broad purposes of the republican government created by the Constitution. It begins with the phrase “We the people,” signifying that power and authority in our system of government come from the people, not the states. The Preamble goes on to set various goals for the nation under the Constitution. These goals are expressed in a series of key phrases. “Form a more perfect union.” The framers of the Constitution wanted to ensure cooperation among the states, and between the states and the national government. “Establish justice.” The framers hoped to create a system of government based on fair laws that apply equally to all people. “Ensure domestic tranquility.” The framers wanted government to ensure peace and order. “Provide for the common defense.” The framers wanted the government to protect the nation against foreign enemies. “Promote the general welfare.” The framers hoped the government would ensure the well-being of the citizens. “Secure the blessings of liberty to ourselves and our posterity.” The framers hoped to guarantee freedom for Americans, then and in the future.

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APMacro: Gross Domestic Product Review


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GDP Review

 

 

  • Gross Domestic Product (GDP) is a basic measure of an economy’s economic performance. GDP is the market value of all final goods and services produced within the borders of a nation in a year.
  • Intermediate goods, nonproductive transactions, and secondhand sales are purposely excluded in calculating GDP.
  • GDP may be calculated by summing total expenditures on all final output or by summing the income derived from the production of that output.
  • By the expenditure approach, GDP is determined by adding consumer purchases of goods and services (C), gross investment spending by businesses (I), government purchases (G), and net exports (X): GDP = C + I + G + X.
  • Gross investment is divided into replacement investment and net investment. Replacement investment is required to maintain the nation’s stock of capital at its existing level. Net investment is the net increase in the stock of capital. In most years, net investment is positive and therefore the economy’s stock of capital and production capacity increases.
  • Price indexes are computed by dividing the price of a specific collection or market basket of output in a particular period by the price of the same market basket in a base period and multiplying the result, the quotient, by 100. The GDP price index is used to adjust nominal GDP for inflation or deflation and thereby obtain real GDP.
  • Nominal GDP measures each year’s output valued in terms of the prices prevailing in that year (current dollar). Real GDP measures each year’s output in terms of prices that prevailed in a selected base year (constant dollar). Because real GDP is adjusted for price level changes, differences in real GDP are due only to differences in production activity.
  • GDP is a reasonably accurate and very useful indicator of a nation’s economic performance, but it has its limitations. It fails to account for nonmarket and illegal transactions, changes in leisure and in product quality, the composition and distribution of output, and the environmental effect of production.

Homework: 
1) Chapter 6 p.122 #3, 8a, 9a, 11, 12, 13
2) Chapter 7 p.144 #2, 6, 8, 11, 14
3) Economic Indicators Quiz – Tuesday 3/1

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Gov: Constitutional Convention


Priciples of Constitution
The Constitution forged at the convention was designed to provide for a government in which political power would limited yet adequate to govern. The Framers wanted to ensure that the government they were creating would not itself be a threat to freedom. Delegates to the convention struggled with many issues, especially how to allocate seats in Congress and how to deal with the issue of slavery. Finally, a compromise was reached that formed a bicameral Congress with the House of Representatives based on population, and the Senate with two members from each state. Other compromises allowed counting three-fifths of enslaved persons for purposes of House representation and taxes, giving Congress the power to regulate interstate and foreign commerce, and using the Electoral College system to elect the president.

The framers’ main goal in crafting the Constitution was to create a system of limited government. They knew that absolute power often leads to the abuse of rights. On the other hand, they also knew that a lack of governmental power could result in chaos and instability. The limited government envisioned in the Constitution is based on six guiding principles: (1) popular sovereignty, (2) the rule of law, (3) separation of powers and checks and balances, (4) federalism, (5) an independent judiciary, and (6) individual rights.

Popular Sovereignty is the principle that lies at the heart of democratic rule. It means that power resides not with the government or its leaders, but with the people. The framers understood that making the people the source of power is the best assurance that government will act in the people’s interest. The principle of popular sovereignty is expressed in the opening phrase of the Preamble: “We the people.” Another provision ensures representative government in the states. By guaranteeing republican government in the states, the Constitution extends the principle of popular sovereignty to the states.

The rule of law is the principle which requires that the American people and their government abide by a system of laws. This is another way to ensure that power is limited and not used in an arbitrary manner.

The Constitution divides power in the national government among the three separate branches. This separation of powers was a key component in the framers’ vision of limited government. In the framers’ view, separating the powers of government among the three branches would ensure that no one branch could dominate. The framers took this principle a step further by inserting provisions in the Constitution that would allow each branch to check, or limit, the power of each of the other branches.

The fourth guiding principle, federalism, divides power between the central government and the various state governments. In creating a federal system of government, the Constitution also established three types of powers: delegated, reserved, and concurrent. Delegated powers are those powers granted to the national government. Delegated powers may be either enumerated or implied in the Constitution. The delegated powers of the federal government include regulating immigration, making treaties, and declaring war. Reserved powers are those powers kept by the states. Reserved powers allow states to set marriage and divorce laws, issue driver’s licenses, and establish public schools, among many other things. Under the Constitution, much of the exercise of day-to-day power affecting citizens is carried out by the states. Concurrent powers are those that are shared by the federal and state governments. Examples of concurrent powers include taxation and law enforcement.

The fifth guiding principle, an independent judiciary, was considered essential by the framers to support the rule of law and preserve limited government.

The sixth guiding principle, individual rights, played a major role in the struggle to ratify the Constitution. The Anti-Federalists argued that the Constitution did not offer adequate protection for individual rights. The Bill of Rights was added to address their concerns.

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APMacro: Aggregate Demand


5 AD graph2
Aggregate demand is a schedule or curve that shows the amounts of real output, or real GDP, that buyers collectively desire to purchase at each possible price level. The relationship between the price level, as measured by the GDP price index, and the amount of real GDP demanded is inverse. When the price level rises, the quantity of real GDP demanded decreases and when the price level falls, the quantity of real GDP demanded increases. The aggregate demand (AD) curve slopes downward from left to right. There are three reasons why the AD curve slopes downward: wealth effect, interest rate effect, and exchange rate effect.

As the price level increases, the purchasing power of money declines. Similarly, purchasing power increases when the price level decreases. There is an inverse relation between real wealth and the price level. Assume that you are holding some of your wealth in the form of cash under your mattress or in a bank. If prices double, the value of your cash decreases by one half. You are worse off and would reduce your spending, a negative wealth effect. However, if all prices are cut in half your cash is now worth twice as much. Because lower price levels increase the value of wealth in the form of cash holdings, you spend more when price levels fall because of the positive wealth effect. This contribute to an inverse relationship between the price level and real GDP.

When price level rises, interest rates rise too, reducing borrowing and spending. Demand falls as a result, and again we have a negative relationship between price level and real GDP. The opposite is true when prices fall. Decreasing prices mean decreasing interest rates, and lower interest rates stimulate the economy. Consumers will buy more interest sensitive goods such as, cars, furniture, and appliances, that require financing. Businesses will increase spending on property, factories, and equipment when interest rates are low. the interest rate effect thus contributes to the downward slope of AD. The sequence of events is as follows: the price level falls, saving increases, interest rates fall, and real GDP increases. The overall result is an inverse relation between price and quantity, real GDP.

If domestic prices fall, US interest rates will fall. Interest rates are often higher in other countries and this fact will prompt some US investors to invest abroad. For instance, am investor who has US government bonds might sell them to buy German bonds. The result is that this investor will increase their supply of dollars as they try to convert dollars into euros.Therefore, the value of the dollar falls or depreciates relative to the euro. Foreign goods become ore expensive compared to domestic goods and people would rather buy US goods because they are now cheaper,causing US exports to increase and imports to fall. These shifts are not simply or even usually the result of individual actions. Imagine a firm such as the Union Bank of Switzerland (UBS), which manages assets in the United States and other countries. The UBS might choose to shift assets from lower yielding bonds in one country to higher yielding bonds in another. Hundreds of other investment management firms would do the same thing with their individual investors’ assets and this market action would create changes in imports and the value of the dollar. The overall effect on the GDP is as follows: Americans will buy more domestic products and fewer foreign products causing the value of imports to fall. Foreigners will buy more US products causing the value of exports to rise and buy fewer of their own products.Remember that the net exports figure X, which is exports minus imports, is one of the four components of aggregate expenditures all other things being equal, real GDP will expand as net exports increase.

6 AD Shifters
The AD curve will shift when the components of spending change. The components of spending are consumption spending (C), business investments (I), government spending (G) and net exports (X). AD = C + I + G + X

Government spending and taxes are in the hands of the president and Congress; changes, adjustments, and strategies are called fiscal policy.

When government spending (G) goes up, AD does too and the AD curve shifts to the right, When government spending goes down, AD follows, and the AD curve shifts to the left.

When taxes go down, disposable income goes up. People have more money to spend or to save. They will increase their consumption (C) by some percentage of the new disposable income. The result is an increase in AD and the AD curve shifts right.When T increases, disposable income falls; people have less money to spend or save, and C falls. AD goes down and the AD curve shifts left.

When the money supply increases, there is more money to spend, interest rates fall, and consumers can borrow more. The result is that firms and consumers increase their spending and both C and I go up. There is an increase in AD and the AD curve shifts to the right. The reverse happens if money supply decreases or interest rates rise. The money supply is under the control of the Federal Reserve; changes, adjustments, and strategies are called monetary policy.


Homework:
1) Chapter 6 p.122 #3, 8a, 9a, 11, 12,13
2) Chapter 7 p.14 #2, 6, 8, 11, 14
3) Economic Indicators Quiz – Tuesday 3/1

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