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MACRO FINAL REVIEW All about PPF Curves Qty of Computers 4,000 3,000 2,300 2,200 0 G A 600 650 1,000 Qty of Cars 2-Types of Demand Changes • 1) Change in QUANTITY Demanded • Only price changes (move along existing curve) • 2) Change in Demand • Shift in Demand Curve (new demand curve needed) D1 Determinants of Demand/Supply (TIPSEN) • • • • • • Tastes Incomes Price Complements Substitute Price Expectations Number of Buyers (TINE) & (TP) • • • • • • • Technology Input Prices Number of Sellers Expectations Also: TP Taxes or Subsidies Price of other outputs P Result if both shifts occur: S1 P1 S2 E1 D2 D1 Qty Q Result if only one shift happens: Increase in demand: P Qty Increase in supply: P Qty Quantity must increase. Price is Indeterminate Price Ceiling & Floors S1 $900 . E1 Price Ceiling $600 D1 3,000 Computers Savings & Consumption • DI = Consumption + Savings • MPC + MPS = 1 • Multipliers: – Gov’t Spending Multiplier Tax Multiplier AD/AS Model Price Level LRAS SRAS Why AD downward sloping Why SRAS upward sloping Why LRAS vertical? What Shifts AD? AD Y1 Real GDP Shifts in Aggregate Supply • Shifts occur when you have a change in: – – – – – – – Expected Price Level Input Prices Labor Capital Natural resources Technology Gov’t Incentives BOTH WILL: shift SRAS but not LRAS Changes in the other 5 variables Will shift BOTH curves (LRAS & SRAS) Goal of an Economy: Shift AS PPF Graph Price Level LRAS1 Y1 LRAS2 Y2 Real GDP Why the USA had a strong Economy during 1980’s & 1990’s Phillips Curve Short & Long Run The Phillips Curve (b) The Phillips Curve Inflation Rate Inflation Rate (percent per year) 6 Long-run Phillips curve 3. . . . and increases the inflation rate . . . B B A A 2 Phillips curve 0 4 (output is 8,000) Unemployment 7 (output is Rate (percent) 7,500) 0 Natural rate of unemployment Unemployment Rate Loanable Funds Real Interest Rate -------------- ------------- i1 S1 Q1 Crowding Out? Investment Tax Credit E1 D1 Qty Loanable Funds MONEY MARKET Nominal Interest Rate Monetary Policy: MS1 i1 --------MD Qty of $ Graphing Exchange Rates S1 Euro Price of a dollar House of Money -------------- .75 Euro -------------- Q1 D1 Qty of Dollars Sample Price Level Economy below Full Employment U.S. dollar depreciates LRAS SRAS AD Y1 Real GDP
