Ch 08

44 %
56 %
Information about Ch 08
Business-Finance

Published on April 9, 2008

Author: Mertice

Source: authorstream.com

The Self Regulating Economy: From the Short Run to the Long Run:  The Self Regulating Economy: From the Short Run to the Long Run The Difference Between the Short and Long Run:  The Difference Between the Short and Long Run In the short run: Wages and prices are sticky. Short-run analysis applies to the period of time when wages and prices do not change—at least not substantially. The level of GDP is determined by the current demand for goods and services. Monetary and fiscal policies can have an impact on demand and GDP. The Difference Between the Short and Long Run (Continued):  The Difference Between the Short and Long Run (Continued) In the long run: Prices are flexible. The level of GDP is determined by the demand and supply for labor, the stock of capital, and technological progress. The economy operates at full employment. Output can’t be increased by changes in demand. Any increases in government spending must come at the sacrifice of some other use of output. An increase in the money supply will only cause the price level to rise (inflation.) Wage and Prices and Their Adjustment Over Time:  Wage and Prices and Their Adjustment Over Time Wages and prices change everyday. Sometimes, we see them rising and falling together. As prices rise, workers need higher nominal wages to maintain their real wages. This is an illustration of the reality principle: Real-Nominal PRINCIPLE What matters to people is the real value of money or income—its purchasing power—not the “face” value of money or income. This process by which rising wages cause higher prices and higher prices feed higher wages in known as the wage-price spiral. The Wage-Price Spiral:  The Wage-Price Spiral A wage-price spiral occurs when actual output produced exceeds the potential output of the economy. When the economy is producing below full employment or potential output, the process works in reverse. How Wage and Price Changes Move the Economy Naturally Back to Full Employment:  How Wage and Price Changes Move the Economy Naturally Back to Full Employment Recall that the aggregate demand curve represents the total demand for all currently produced goods and services at different price levels. The short-run aggregate supply curve is represented as a relatively flat curve that reflects the idea that prices do not change very much in the short run and that firms adjust production to meet demand. The long-run aggregate supply curve is represented by a perfectly vertical line at the full-employment level of output. How Wage and Price Changes Move the Economy Naturally Back to Full Employment:  How Wage and Price Changes Move the Economy Naturally Back to Full Employment In the short run, this economy is operating where output is below full employment. Optimally, it should operate at full employment, the long-run equilibrium (point E). As long as output is below full employment (point E), prices and wages will fall shifting the short run AS curve down until full-employment is reached. E E How Wage and Price Changes Move the Economy Naturally Back to Full Employment:  How Wage and Price Changes Move the Economy Naturally Back to Full Employment In the short run, this economy is operating where output exceeds potential. Ideally, it should operate at full employment, the long-run equilibrium (point E.) As long as output is above full employment, prices (and wages) will rise, shifting the short run AS curve. In the long run, the economy reaches full employment, the long run equilibrium (point E.) E E How Economic Policy Can Hasten the Speed of Adjustment:  How Economic Policy Can Hasten the Speed of Adjustment Rather than letting the economy naturally return to full employment (point E), economic policies could be implemented to increase aggregate demand and bring the economy to full employment. The price level within the economy would be higher, though. E Liquidity Traps:  Liquidity Traps Keynes expressed doubts about whether a country could recover from a major recession without active policy. He had two distinct reasons: First, the adjustment process requires interest rates to fall, but if nominal interest rates become so low that they cannot fall any further, the economy has fallen into what Keynes called a liquidity trap, and the adjustment process no longer works. Second, Keynes also feared that falling prices could hurt businesses. Political Business Cycles:  Political Business Cycles Using monetary and fiscal policy in the short run to improve a politician’s reelection prospects may generate what is known as a political business cycle. In a classic political business cycle, the economy booms before an election but then contracts after the election. Behind the Adjustment Process: How Changes in Money Demand, Interest Rates, and Investment Help Return the Economy to Full Employment:  Behind the Adjustment Process: How Changes in Money Demand, Interest Rates, and Investment Help Return the Economy to Full Employment With the economy initially below full employment, the price level decreases the demand for money and leads to lower interest rates. Lower interest rates lead to higher investment spending. As the economy moves down the aggregate demand curve towards full employment, higher investment spending increases aggregate demand and ultimately GDP until the economy returns to long-run equilibrium (point E). E The Long-Run Neutrality of Money:  The Long-Run Neutrality of Money As the Fed increases the supply of money, the aggregate demand curve shifts from AD0 to AD1. In the long run, the economy returns to long-run equilibrium (point E). E The Long-Run Neutrality of Money (Continued):  The Long-Run Neutrality of Money (Continued) Starting at full-employment, an increase in the supply of money will initially reduce interest rates and raise investment spending. We show these changes with the red arrows. The blue arrows show that as the price level increases, the demand for money increases, restoring interest rates and investment to their prior levels. The Long-Run Neutrality of Money (Continued):  The Long-Run Neutrality of Money (Continued) In the previous illustration, the increase in the supply of money had no effect on real interest rates, investment, or output. Economists call this the long-run neutrality of money. In the long run, changes in the supply of money are neutral with respect to “real” variables in the economy. Crowding Out in the Long Run:  Crowding Out in the Long Run Starting at full employment, an increase in government spending raises output above full employment. As wages and prices increase, the demand for money increases, raising interest rates and reducing investment. The economy returns to full employment but with a higher level of interest rates (e) and a lower level of investment spending (z). e z Crowding Out in the Long Run (Continued):  Crowding Out in the Long Run (Continued) In the previous illustration, a long run increase in government spending has no long-run effect on the level of output—just the interest rate. Instead, the increase in government spending displaced, or crowded out, private investment spending. “Classical Economics” in Historical Perspective:  “Classical Economics” in Historical Perspective Classical economics refers to the body of work developed over time starting with Adam Smith in the late eighteenth and nineteenth century. The term “classical model” was first used by Keynes to contrast his “Keynesian” or activist model with the conventional economic wisdom of the time that didn’t emphasize the difficulties that the economy could face in the short run. Say’s Law:  Say’s Law Say’s law is the doctrine that “supply creates its own demand.” Since production creates an equivalent amount of income, there could never be a shortage of demand for total goods and services in the economy nor any excess. If consumers saved, those savings would eventually turn into investment spending. Keynes argued that there could be situations in which total demand fell short of total production in the economy, leading to a recession or depression. The Classical View of the Credit Market:  The Classical View of the Credit Market The Classical View of Say’s Law in a Money Economy:  The Classical View of Say’s Law in a Money Economy Classical Economists on Prices and Wages:  Classical Economists on Prices and Wages Classical economists believed most, if not all, markets are competitive. Prices and wages will adjust quickly to any surpluses or shortages and equilibrium will be quickly reestablished. Real GDP and Natural Real GDP: Three Possibilities (Graph: Next Slide):  Real GDP and Natural Real GDP: Three Possibilities (Graph: Next Slide) a) Recessionary Gap: Real GDP is less than the Natural Real GDP b) Inflationary Gap: Real GDP is Greater than Natural Real GDP c) Long-Run Equilibrium: Real GDP is Equal to Natural Real GDP Real GDP and Natural Real GDP: Three Possibilities:  Real GDP and Natural Real GDP: Three Possibilities Real GDP is less than the Natural Real GDP Real GDP is Greater than Natural Real GDP Real GDP is Equal to Natural Real GDP The Labor Market and The Three States of the Economy:  The Labor Market and The Three States of the Economy Recessionary Gap: the unemployment rate is higher than the natural unemployment rate (surplus of labor) Inflationary Gap: the unemployment rate is lower than the natural unemployment rate (shortage of labor) Long-Run Equilibrium: the unemployment rate is equal to the natural unemployment rate. What happens if the Economy is in a Recessionary Gap?:  What happens if the Economy is in a Recessionary Gap? Recessionary gap Unemployment > Natural Unemployment Surplus in labor market Wages to fall SRAS shifts to the right Economy moves to long-run equilibrium. See next slide Slide27:  The Self-Regulating Economy: Removing a Recessionary Gap What happens if the Economy is in an Inflationary Gap?:  What happens if the Economy is in an Inflationary Gap? Inflationary gap Unemployment < Natural Unemployment Shortage in labor market Wages rise SRAS shifts to the left Economy moves to long-run equilibrium. See next slide Slide29:  The Self-Regulating Economy: Removing an Inflationary Gap Self-Regulating Economy: A Recap:  Self-Regulating Economy: A Recap Flexible wages (and other resource prices) play a critical role. Classical, New-Classical, and Monetarist believe the economy is self-regulating. Policy Implications of Believing the Economy is Self-Regulating:  Policy Implications of Believing the Economy is Self-Regulating Laissez-faire: A public policy of not interfering with market activities in the economy. Some economists believe the government does not have an economic management role to play. Keynesian and Classical Debates:  Keynesian and Classical Debates In the 1940s, professors Don Patinkin and Nobel laureate Franco Modigliani clarified the conditions for which the classical model would hold true. They emphasized that one of the necessary conditions was that wages and prices be fully flexible—that is, that they adjust rapidly to changes in demand and supply. Coming Up (Ch. 10): The Federal Budget and Fiscal Policy:  Coming Up (Ch. 10): The Federal Budget and Fiscal Policy

Add a comment

Related presentations

Related pages

Schweizer Soldatenmesser 08 | Victorinox Schweiz

Mit zehn Funktionen und rutschfesten Zwei-Komponentenschalen meistert dieses 111 mm lange Multifunktionsmesser jede Herausforderung.
Read more

Von Wahrheitsagern und Bargeldvernichtern, TimeToDo.ch 08 ...

Thema: Stratfor - George Friedmanns Rede, auf deutsch und Putins Gegendarstellung. Schau an, schau an, was er so alles weiss, der Herr Friedmann ...
Read more

TimeToDo.ch 19.08.2014, Metatron - Engel-Event - YouTube

Thema: Litios Lichtkristalle finden vielfältige Anwendungen und haben erstaunliche Reaktionen und Genesungen ausgelöst. Auf dem Event werden ...
Read more

Startseite - Kei 08-15

Alte, gebrauchte Bretter erzählen ihre Geschichte. Ich dekoriere sie mit Schwemmholz, Steinen, Tannenzapfen und Deko-Materialien zum Tür- / oder ...
Read more

2.08 Beiträge - Informationsstelle AHV/IV

3 Beiträge 1 Wie hoch sind die Beitragssätze? Bis zu einer Grenze von 148 200 Franken beträgt der Beitragssatz an die ALV 2,2 % des massgebenden ...
Read more

Sumamei - Einzelberatungen

Einzelberatungen Terminvereinbarung. Anmeldungen für Einzelberatungen nehmen ich gerne telefonisch entgegen. Am besten erreichen Sie mich zwischen 08:00 ...
Read more

Peter Reber – Wikipedia

Grüeni Banane CH: 4: 07.07.1985 (40 Wo.) Jede bruucht sy Insel CH: 1: 11.05.1986 (39 Wo.) Dr Sunne entgäge CH: 1: 31.01.1988 (18 Wo.) Ufem Wäg nach Alaska
Read more

Katharina Meier Kosmetik

Adresse: Katharina Meier Kosmetik Birchdörfli 66 8050 Zürich . Telefon: 0041 (0)43 343 08 08 : E-Mail: katharinameierkosmetik@hotmail.com : H omepage ...
Read more

Hörgeräte der IV - Informationsstelle AHV/IV

7 Fachverbände und Organisationen Die IV-Stellen sowie folgende Fachverbände und Organisationen geben Ih - nen gerne Auskunft: www.akustika.ch ...
Read more

FC Stettlen 08: Aktuelle Themen

Die Hinrunde der Saison 2015/2016 ist abgeschlossen. Beide Teams des FC Stettlen 08 haben eine gute Hinrunde gespielt und gehen mit guten Chance auf den ...
Read more