how do you calculate growth rate?
Growth rate= (Y17-Y16)/Y16 *100
what is the rule of 70?
Rule of 70= 70/Growth rate
what are the determinants of long-run economic growth?
quantity of capital available to workers and the level of technology
what are the components of technological change?
better physical capital (machinery and equipment), better human capital (skills and knowledge), better organization
what causes a movement along the per-worker function? what causes a shift?
a movement is caused by change in capital, a shift is caused by a change in technological change
what policies increase knowledge capital?
intellectual property price (patent, copyrights), subsidy research and development, subsidy education
what does the catch-up theory predict? is this theory verified by data?
predicts that countries with a lower GDP (low-income countries) are expected to grow faster. has had mixed results.
examples of failures in low-income countries and policies to address these failures
1. failure: low level of human capital.
policy: improved education, address health problems
2. failure: political instability.
policy: reduce corruption
3. failure: international trade.
policy: build better infrastructures
components of aggregate expenditure
AE= C + I + G + NX
what are inventories?
inventories are goods that are produced but not yet sold
what determines macroeconomic equilibrium in the aggregate expenditure model?
when the aggregate expenditure is equal to GDP
Y=AE
45 degree line
when GDP is equal, less than and greater than aggregate expenditure
Y=AE: inventories are unchanged, economy is in macroeconomic equilibrium
Y<AE: inventories fall, GDP and unemployment increase
Y>AE: inventories rise, GDP and unemployment decrease
What determines consumption?
income and wealth
MPC
Marginal Propensity to Consume.
How much you spend for every dollar earned`
Slope of the consumption function
MPS
Marginal Propensity to Save.
How much you save for every dollar earned.
MPS = 1 - MPC
How are investment, government spending, and net export represented in the consumption function?
They are summed together and remain constant
What is the consumption function?
Aggregate Expenditure is on the y-axis and real GDP is on the x-axis
How to graph the macroeconomic equilibrium?
Add a 45 degree line to the graph. This means that for all points, Y = AE
The point where the 45 degree line intersects the consumption function is the point of equilibrium
What is the vertical distance between the two lines?
The change in inventory
As you get closer to the point of equilibrium, the change in inventory gets smaller
To the left of equilibrium, firms are increasing production
To the right of equilibrium, firms are cutting production
How to solve numerically for macroeconomic equilibrium?
Plug in Y = AE and solve for Y
What shifts the aggregate expenditure line?
A change in investment
What is the multiplier?
1/(1+MPC)
Change in Y = Change in investment * Multiplier
What shifts the aggregate demand curve?
Change in spending
What is the short-run aggregate supply?
Price level versus real GDP
In the short run, a change in price level causes an increase in GDP
Sticky Wages
Wages don't change immediately as the price level changes
What causes a movement along the SRAS curve?
A change in price
What causes a shift in the SRAS curve?
Production
What is the long run aggregate supply curve?
It is a vertical line because an increase in price level leaves the GDP unchanged in the long run because wages become flexible
What causes a movement of SRAS
A change in price level
What causes a shift of SRAS
production"
increase in labor force
increase in capital stock
increase in factors of production
technological change
why is AD curve downward sloping
a fall in the price level increases the quantity of real GDP demanded
AD curve shift: increase in interest rates
shifts left because higher interest rates raise the cost to households and firms of borrowing, reducing consumption and investment spending
AD curve shift: increase in government purchases
shifts right because govt purchases are a component of aggregate demand
AD curve shift: increase in personal income taxes or business taxes
shift left because consumption spending falls when personal taxes rise, and investment falls when business taxes rise
AD curve shift: households expectations of their future incomes increase
shift right because consumption spending increases
AD curve shift: firms expectations of future profitibility of investment spending
shift right because investment spending increases
AD curve shift: the growth rate of GDP relative to growth rate of foreign GDP increases
shift left because imports will increae faster than exports, reducing net exports
AD curve shift: the exchange rate (the value of the dollar) relative to foreign currencies
shift left because imports will rise and exports will fall reducing net exports
SRAS curve shift: increase in labor force or the capital stock
shift right because more output can be produced at every price level
SRAS curve shift: increase in productivity
shift right because costs of producing output fall
SRAS curve shift: increase the expected future price level
shift left because workers and firms increase wages and prices
SRAS curve shift: increase in workers and firms adjusting to having previously underestimated price level
shift left because workers and firms increase wages and prices
SRAS curve shift: the expected price of an important natural resource
shift left because costs of producing output rise
recession
a decline in investment shifts AD to the left causing this, the GDP will lower thus result in a recession as a lower GDP causes declining in profits for firms and layoffs for workers
expansion
an increase in investment shifts AD to the right causing this, the level of GDP rises above potential GDP and firms are operating beyond their normal level of capacity and normally unemployed workers are employed
short run effect of supply shock
an increase in oil prices shifts SRAS to the left moving short run equilibrium up the AD curve giving a lower real GDP and higher price level
long run effect of supply shock
the recession caused by the supply shock eventually leads to falling wages and prices, shifting SRAS back to its original position, equilibirum moves back down the AD curve to original price level and potential GDP
stagflation
combination of inflation and recession, SRAS shifts left which makes the price level higher but the real GDP is lower
inflation
AD curve shifts to the right by more than the LRAS curve, inflation results because equilibrium occurs at a higher price level
economic growth without inflation
AD increases by the same amount as short run and long run aggregate supply, the price level will not change and the economy will grow without inflation
difficulty with basic aggregate demand and aggregate supply model
because we assumed that the economy does not experience continuing inflation and the economy does not experience long run growth
incorrect conclusion that AD curve shifting to left will result in a lower price level