Econ 4.3

Wednesday, February 8, 1999

Announcements: The online quizzes are up on the webpage. They are worth a maximum of 10 points each. You need a 70% or higher to get the points and you can take it up to three times. Homework assignment #2 is up on the web. It is due Friday, February 12.

Lecture notes:  

Gross Domestic Product

• Rising prices cause a rise in the money value of the GDP
• There has been a rise in the GDP in the US, but it hasn't been smooth

Fluctuations in GDP

• GDP rises and falls over short spans of time
• At any point intime, it may be above or below its long run to end
• These fluctuations define the business cycle
• Peak: the beginning of a recession
• Trough: the beginning of expansion
• Trend line: average of the fluctuations

Unemployment

• Unemployment rate: percent of people in labor force unable to find a job (about 4%)
• Labor Force: people either employed or actively seeking a job

Unemployment Rate Calculation

• Labor Force = The employed + the unemployed
• 137.24* = 131.38 + 5.86
• * US, millions of people as of April 1998
• Unemployment Rate = Unemployed / Labor Force = 5.86 / 137.24 = 4.3%

Inflation and Prices

• Price level measure of price behavior
• Price level used as a yard stick -- compare prices over time
• Inflation: rate of change in price level

Aggregate Demand

• Aggregate demand (AD) schedule
• Aggregate demand (AD) curve
• AD = C + I + G + (EX - IM)
• Aggregate Demand = Personal consumption purchase of new goods and services + Investment purchase of new goods and services + Government purchase of new goods and services + (International Trade)
• International Trade = Exports - Imports

Why AD Slopes Downward

• Real money balances effect -- price level decreases/increases real quantity of money
• Intertemporal substitution -- price level decrease, people current for future purchases
• International substitution -- price level decrease, people substitute domestic for import purchases

AD Curve Shifters

• AD = C + I + G + (EX - IM)
• AD Shifts right when C, I, G, EX increases, IM decreases