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AP Macro Review Session 3 (Chapters 9-11)

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Aggregate Supply & Demand - Short Run & Long Run

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alright guys sorry I'm a little late my webcam wasn't working for any it was at Ross do something for me for we got started like always there is a chat on the left hand side of your screen so if you have any questions as we're true make sure you type in a question there I'll go through an answer what I can as we go on all the way  final nice to see you thanks what we're doing tonight is we're going through stuff in unit 3 of your workbook so we're talking about aggregate they were talking about your arrogant man aggregate supply so what I'm going to do is I'm going to pull up  Carlo prison Mission and we'll talk about these things that go wrong with it so you looking at unit 3 in your workbook it falls in your textbook chapters 9 through 11 okay so we talked about Aggregates remember when we talked about you're the original supply and demand curve we were talking about individual supply and demand for the actual first trying to get comfortable when we talked about Ariat were talking about total we're talking about overall so once again we're going to have our volume and you're going to have a supply and demand graph like you did previously with regular supply and demand now we're going into our total that says the sum of planned consumption plus investment plus government spending and your net export spinach on final goods and services all the wise known as GDP your aggregate demand curve oftentimes is going to follow along with more GDP just like demand when we talked about that last week aggregate demand is an inverse function we said that demand was an inverse relationship between price and quantity demanded in this case were an inverse function between price level and out so we're looking at that level of output from GDP it says your negative slope of your Agate demand curve is due to the entry play affect your wealth effect and your net export effect if you're following alone in your workbook your workbook unit 3 Activity one goes through and explain these three effects so when we talk about your interest rate affect what we were talking about is the idea that you're following people's likelihood to borrow money make purchases based on those interest rate that people like to and businesses and government are the exact same way we all like to borrow money when interest rates are low so as interest rates are low you're going to see an increase in finding because people are able to make those bigger when we talk about the wealth effect as your price level increases it takes more dollars to purchase good an increase in the price level decreases the purchasing power of your goods and services when we talk about your net export effect when you look at your domestic price level relative to form price levels when that price level goes up domestic products are more expensive foreign buyers for goods are less expensive for domestic buyers so it works in that manner  your area tomorrow curve shifts right left just like we have with our market demand curve that we discussed in unit one to get two pictures that go along with that we didn't talk about our gets Supply aggregate supply is your total supply of all goods and services in the economy at the total of what providing at that point your supply curve that shows relation between total quantity of output supplied by all forms and the overall price level depending on the quality of Labor the quantity of capital and level technology so we're looking at all these aspects and how we go about providing all of these goods and services in the economy remember when we're dealing with aggregate supply you have short run aggregate supply and you have a long run aggregate supply those are two very different graph they are going to look very different as well so you need to make certain that your labeling things appropriately when you're doing you're a gas grass remember Austin you're going to label your asset demand line but you're it supply line we label as Fraser Supply in our short run capital and level of technology or fix and only the quantity of Labor change it we have remember sticky prices and sticky wages in the short run you have those particular things are going to be fixed and other items are going to be variable the only time that those prices and user able to change his when you are actually in Long Branch of the long run is that idea that we've had the time to be able to adjust to these the short run aggregate supply curve is positively sloped it is from that top left not topless from that bottom left corner to that upper right corner because of those sticky wages and prices at the fact that we do not have that adjustment time it is going to shift if there are changes in input prices or if they are changes in productivity so you're looking at what has changed what production method did I change the actual method or did the cost of the method actually change those are the things that were looking at for shifting your short run turn it to bikers your price level rises firms will produce more output because their profit per unit will increase because their input costs remain same while they sell their products for a higher price okay so you price level is going to rise overtime when it rises remember we add that businesses like to sell things at higher prices so when it rises overall output is going to increase because ability to make money off of each additional unit that they produce is going to increase and the reason why that happens because the input cost stays the during your short run and because if they the same they're actually able to produce more at the same class with bring down the per-unit price which makes it a air per unit profit okay so what's going to cause our aggregate demand aggregate supply curve to shift right we're shifting left and right just like we did with the man so your left is less your right is more just like we did with the man if we're shifting your area to man you're going to focus on those particular segment of GDP for the 5 + 3 + x - M so you looking at what would cause using consumer spending or a consumer expectation affect your looking at what would cause changes in investment spending or investment expectations you looking at any type of changing in government spending any type of change in foreign income but you also want to look at changes in in text those changes in income taxes are going to affect people's ability to spend okay so we look at your supplied her once again we're shifting left and right just like your supply curve just left and right and our reason for shifting are aggregate supply curve left and right would be things like the actual resource prices cost of input did the cost to produce the product actually think you looking at any action of the government of specifically to the business so did the biz did the government charge businesses more taxes or their extra regulations that they have to go through if they have to go through those X regulations it's going take more money to produce that particular product and you're looking at the actual productivity of the actual firm at that point play market to actually identify if this is something that which just left right did we were we able to produce more product all goods and services were we able to produce less so you're looking at those particular types of things  we have short run equilibrium just like we had equilibrium for our supply and demand the difference is that we're going to have short run equilibrium and we're going to have a long run equilibrium I have a short run macroeconomic equilibrium what happens here is that the real GDP demanded is going to be equal to the real GDP supplied when you have your grass your output on the bottom on your horse out of where you actually have your real GDP we mark it out level with the actor of why so whenever your drawing because you're a Das model Allston times going to be that very first free response question it will show up you will have to put it there make sure that output level is identified as what just like when we were dealing with the blind man if you are above equilibrium you have a surplus if you're below equilibrium you have a in this case we identified simile but it's a little bit different so the price level is above equilibrium supplies rate Adam at the man firms experienced an accumulation of inventory over also we're just identifying different terms instead of saying syrup we have accumulation of inventory so you're not looking at it in The Firm perspective that this particular product extra you're looking at overall in the economy we have accumulation of inventory in particular in that case what happens is they begin to cut production in hopes of having real GDP start to decrease and get back towards that Librium level we're going to look at a grass in a little bit so we can identify what happens in these particular areas  stop things you need to be certain of  make sure whenever you're doing your abs model you label everything appropriately they are going to make certain that you're identifying where all your labels are supposed to be if there is a shift in aggregate demand or you're short run aggregate make sure you show it show that you know exactly where this is going be able to describe what happens to the price level do more than just do our shorthand P up Arrow why down tomorrow and things like that make sure you're able to explain that you know that price level is going to increase because of their looking that you can that you're going to be able to connect those Point together so make certain that you're able to show on that grass and explain why these things are going to happen in a certain matter you have your long run aggregate supply when we talk about long run run a blank acid is a period of time that's long enough for our firm to be able to change any of their output it is the time that you have to adjust to changes short-run we couldn't adjust to those changes to all of those things your wages and your prices were sticky at the time so input cost we're going to remain the same so now you had time to adjust to those changes and now every one of those input or now lexical okay none of your costs are going to be fixed everything is variable so we've had the time to make the adjustment with happening as long run it says you're showing your Elation ship between the price level and the level of real GDP these things exist if all wages and prices are fully flexible so we're looking to see how these things were able to work with each other over time because any time the price level changes wages and other inputs fully adjust there is no overall effect remember we identified our long run aggregate supply with that vertical line that goes straight through and that represent full employment in your particular economy that is where every is going to be equal to each other as far as your real output demanded person your real output supplied so I can send in a long run all of our input cost of adjusted so anytime that you see shift happen do you know that eventually what's going to happen is that your long rabbit supplies going to return to Full Employment so he mentally if you see first a shift in your aggregate demand to left or right in the long run eventually what happens is that long run supply curve is going to shift to bring you back to long run macroeconomic equilibrium going to come back to that one particular spot when we talked about for employment output the level of our real GDP they exist when the economy's unemployment rate is at its natural rate so when were at that natural rate of unemployment we've gotten rid of a cyclical unemployment that is zero United States is in that 45% range at that point we know that we are at full employment remember that there is that there is an inverse relationship between unemployment and real GDP real GDP what was up the amount of people employed will go up as well which means that your unemployment is going to decrease there's anniversary between real GDP and unemployment does long by curve ever shift on a rod yes it does so like I said if you have your arrogant demand curve what they to the right  eventually what happened in the long run whenever we have the ability to adjust our put car because of the change in the aggregate demand that long run aggregate supply curve is going to have the ability to shift left or right to go with it okay just know I want to happen you will always eventually in the long run have everything go back to equilibrium so eventually that long run aggregate supply curve is going to shift either left or right to bring you back to equilibrium witches full employment level here it looks very similar to what we had whenever we talked about demand and supply you had your short run aggregate supply you have your aggregate demand our priorities we have our label of price level vertical your quantity of output you could also label this as real GDP thanked notice that are output identifier over here or why that they looking at why you would be why equilibrium PE would be price equilibrium over here ranges in resource prices will not increase as price level increases our price level increases remember those wages and pretend other prices are going to be sticky this is price level in the long run we had time to adjust so now this is where we're staying that everything is going to be we have the ability  to adjust to those price levels over time so just like this can move left and right this out the man can move left and right your long at run aggregate supply is going to have the ability to move left and right as well okay so this arrogant demand curve shifts turn to the right over time what you're going to see is where that new equilibrium price is your going to have your long run aggregate supply shifting at Area at case that is going to be something that we're going to look at as well whenever you talk about inflationary and recessionary Gap  so stationary get see if we remember these particular type things you have your price level and real GDP if you're short run aggregate supply aggregate demand your long run Eric supplies over here to the right of your macroeconomic equilibrium what we're staying at point is that we are not fully operating at full potential in this particular economy so this long run I remember is we're saying that this is full employment your recessionary Gap is the space between the equilibrium point and the long run Supply you are recessionary Gap will always be when your long run aggregate supply curve is to the right of your short run macroeconomic equilibrium  when this happens we say that our economy is in a recession we have high unemployment this particular Point what we're going to do whenever we talk about fiscal policy and your Phillips curve the time on Thursday is that we're going to talk about the policies that we would do that would at least shift it so what we're saying here is that which we would either shift are for when I get supply or aggregate demand depending on the scenario that describe to you to move your Librium back to long run if I shift my aggregate supply aggregate demand curve to the right I shifted to the right where my area Bankers going across my long run aggregate supply and my short run aggregate supply and now I close that particular recessionary Gap so always always always recall recessionary Gap occur when long run aggregate supply is over to the light of your macroeconomic equilibrium if the long run Supply shifts why doesn't it move in this case as they are Supply or I could demand shift to me there are certain scenarios that we're going to talk about whenever we come in on Thursday topical policy was going to explain when are longer shifting left and right but yet in this case your every command of your agri-supply is going to shift to meet up with your long run aggregate supply depending on the scenario put that beer going to provide to you okay so if they explain in that particular scenario  how in this particular case you have an increase in government spending will that's going to go ahead and shift your area manager so we can try to go ahead and meet up on the opposite side here to come to our long run our so how do we fix the recessionary gap like I said they resolved with adjusting your average man or accurate supply curve you need to bring that back into equilibrium in this case the picture that I'm providing was a change in your short Target Supply you had that recessionary Gap it shifted your short run aggregate supply to the right Crossing wear your long run out of it I meet your demands therefore we're moving back to long run aggregate supply in this case they're saying that what happen is that change because of that change in salaries we shift for that particular recessionary Gap inflationary Gap doing the opposite here inflationary Gap occurs when actual G he is above full employment GDP so this is our full employment GDP this is where we're expecting to produce our long run aggregate supply in this stop that equilibrium point falls to the right of it so long I get supplies on the left of our economic macroeconomic equilibrium so because of that we are innocent over-performing we are performing beyond what we believe our economy was potentially able to achieve so what happens whenever we have this situation we don't want that equilibrium point three main two the right like that we are going to start experiencing higher prices and that could do some damage to our economy so we want to prevent types of things were happening so what happens is that you have that shift that is going to bring that equilibrium point back over to where we meet up with Lauren so this whole idea of inflationary Gap was created by our man came that we talked about in class in this case we have an excess of what we had is anticipated expenditures for available output at base price what we're saying is that what we expected our price level to be is actually higher than what we expected so we're expecting that higher price level that anticipated in expenditure we need to adjust for that and that anticipation  is his when money income in the hands of people exceeds the supply of goods and services we create that between demand-supply results inflation and we want to bring down those inflation rate your economy has attempt to not perform as well as it should whenever you have that inflation happen inflation isn't always a bad thing inflation can be a good thing but we don't want experience too much of it all at one time and that's where the fiscal and monetary policy portion of this is going to come back into a fit whenever talk on Thursday about fiscal policy so how we fixing place just like we shifted short run aggregate supply and aggregate demand to meet up with art Lauren Adam and long run aggregate supply we're going to do the exact same thing in this case you have your short run Eric Supply shifting  to the right so that we have the ability did I do this I gave you two I think I gave you two of them to pictures with recessionary my bad whenever I looked at this I automatically is I made an assumption one part so that is my mistake I didn't give you an inflationary Gap picture to show the change so come back to this one if we have our inflation air gap short run aggregate supply if we shift that to the eventually we can have it crossover where he crosses your area to man for work in that section so we're moving back to iPod the things that I recall that people had a lot of issues with whenever we discuss this portion was that it was a difficulty in understanding the difference between these two and then coming back and looking at your range of the aggregate supply curve that was something that I know was identified as something hard you understand by several several of you so there's two different theories when looking at economic classical theory in your Keynesian Theory if you're talking about your classical economic theory what happens is that in this case you believe that the economy will still correct but if the government gets involved in economic activity then it prevents the stuff correction from happening that government involvement will a bigger problem than what it was trying to fall in the first place so when we look at our three identify that classical portion as the vertical rage this is the that is the area where you have your economy with the ability to self-correct if we're talking about Keynesian economic theory what happening here is that Keynes believed that the government should get involved in actually manipulate our economy this whole study of macroeconomics did not even begin until after we have had our Great Depression and whatnot so this ability to describe that we do not need our people of our economy to just work harder and find a way to get themselves out of the situation that sometimes the government needs to get in and that's where King came into play here he believes that the government should go through an actively manipulate the economy to try to reach so when FDR came in and put forth all these government programs to provide jobs through the government was the Keynesian belief that the government should be doing these particular types of thing so when you look at your when you look at your supply curve that is your horizontal ring then you have your intermediate area where to Top-Up particular one  your whores are range that is your Keynesian so that is from your price level act your vertical axis to where we we start to see this curve upward we have inflexible prices at this point so wages and prices are sticky if we increase aggregate demand we're going to increase output but we're not going to change the price level at this point so what we're saying at this point is that this is where change would have said the government getting involved trying to bring about a change in what's going to happen over all so it's identifying where your average demand curve is going to come across your short run aggregate supply curve anything beyond full employment your short-run output cannot increase the prices are going have to change so once we get past this action is horizontal range prices have to change to go along with a change in output so we are beyond our full employment at this particular point where we have this upward-sloping or intermediate range we have both prices and GDP Champion intermediate-range both prices and real GDP are going to change with a change in aggregate demand this point  if we're changing aggregate demand we're not changing your prices we're not changing any wages that they think but every macon's flexible starting in that hurt when you get to that vertical rings at Classic erase all of your costs are going to be fully flexible this is when you're going to see that self-correction happen so if there's an adjustment that happened to aggregate demand in that Ray we're going to have that flexibility happen at that point that vertical rain should be reminiscent of that long run aggregate supply curve no I said that this is falling along with unit 3 in your workbook you have a lot of activities in your work with that you practice with it the only activity workbook that we're not covering with this is activity to which is your multiplier of your marginal propensity consume in your Marshall 450 to stay we're going to cover those with Physical policy I get into different things to go along with that make sure you're going through practices in there to identify the changes in y identify which component you're dealing with for your aggregate demand which direction going to change and they have you ask where you're going identify what happens with those particular graph they have your introduction to short run aggregate supply so they identify your possible shape your short run aggregate supply with something that more horizontal something that more day ignores something that's almost particle in this particular situation can be flat it can be steeped it can be more than that what it tells you in these particular thing is that real GDP in price level or not related if you're short run aggregate supply  is going to be more flat  what do we follow today you're looking at more diagonal instead of that flat or that very very it's really steep then changes in Real GDP or not possible only changes in price level possible so going back to your workbook unit 3 Activity 3 there's some practice with practices with that it has you practice with your sticky wages versus when they flexible your short run equilibrium price level and output they have a lot of situations in there where they I that either the aggregate demand curve or you're short run like her have shifted left and right and they're wanting you to identify what happens what real GDP when the shift happens what happens to price level when the shift happens and then what happens to unemployment level when this particular think I remember your real GDP is going to inverse related inversely related with your unemployment so if we're increasing our output then more people are working till unemployment levels are going down if I'll put is going down then we're having some situation some difficulty so therefore people are going to start to lose jobs in at your unemployment rate is going to go up  they offer you changes in equilibrium price level output they give you a Ranieri on an identified which ways the this is going to ship that you have to identify what happened to price level and real GDP and we did types of inflation already run aggregate supply  and then they do actual versus School employment on that as well so you have a lot of thing have to go back to practice in your workbook I knew this one wasn't going to be as long today I wanted to give you some free topics from AP Central just because that a Das model is being able to identify when that shift happens left or right being able to identify what's going to happen to price level what's going to happen to Output what's going to happen to unemployment that's important for you to be able to identify go back and look at those particular practice so going back to AP Central your free response topic your plain versus classical thought you have those particular question there it's not something that's often in your affection but it's air  sometimes so it's a good idea to have an idea now  if I were to put money on what question is going to be number one on your free response portion your free response question number one will either be dealing specifically with your ad as model or you're going to go into your monetary fiscal policy still require you to draw your ad as model often times what's happening with them is that you're going ask you a question about that atas mouth then they're going to ask you to build upon it so they may ask some things about a recessionary and place and they may ask you to go back and fix your graph to show how you fix that inflationary and recessionary GAP and what would have been a reason for that shift to happen that would have brought you back to full employment then they would possibly go through and ask you about a Phillips curve that can be drawn with that particular situation which we are going to talk about whenever we come back Thursday Thursday is fiscal policy and the Phillips curve this is cheap this is something go back to these questions go back and practice them look at those scoring guidelines and see what it is that they were looking for whenever they asked that particular question so go ahead answer it on your own go back and look at the scoring guidelines and see how you would have done last year the number one question was not a Das model it was dealing with monetary and fiscal policy so you still have to draw it they are but you weren't specifically asked about shifters for your Adidas model it was about the policy and went into Phillipsburg I'm more popular in that particular question so make sure you're whenever we talk about that on Thursday you get that good understanding of it though that whenever it comes time for you to actually answer this question you're going to be able to get it today was just to review what exactly was your ad as model what shift did you left and right and we're going to come back and talk about those policy fix those problems with your abs while we're come back and talk about those on Thursday so I'm turn about 20 minutes early so if you have no questions we're going to go ahead and stop for tonight okay because the next part there's way too much to go into that for us to be able to get started with that so go back Mystery Spot look at those things that we had in our workbook that would cause those shift to happen you should be perfectly fine once again this is this is easy this is going along with your supply and demand so as long as you're able to work with at the kind of man you should be able to get your aggregate demand have a lovely evening and I hope to see you on Thursday

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AP Macro Review Session 3 (Chapters 9-11)

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