ECO-2013 Lecture Notes - Lecture 10: Permanent Income Hypothesis, Business Cycle, Real Interest Rate

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goldfly51

12 Jan 2016

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The interest rate is inversely related to how much households consume and business invest. Interest rates rises: shifts ad curve left: changes in the expectations of businesses and households about the future. Measured by the consumer sentiment index: changes in the expected rate of inflation. Expect inflation to increase: spend more now (ad curve shifts right) Expect inflation to decrease: spend less now (ad curve shifts left: changes in income abroad. Foreign income decreases: ad shifts left: changes in exchange rates. Shifters of aggregate demand (ad): changes in real wealth. Increase in real wealth: shifts ad curve right. Decrease in real wealth: shifts ad curve left: changes in the real interest rate. Shifters of long-run aggregate supply (lras): change in resource base, change in level of technology, change in institutional arrangements that affect productivity. Productivity: average output produced per worker during a specific time period.

Related Questions

Here is the question and the answers. But I need an explanation of WHY the answer is what it is. Any answers that don't answer why for each one will only get 1 star.

What effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and level of real output. Assume that all other things remain constant.

a. A widespread fear of depression on the part of consumers.

b. A $2 increase in the excise tax on a pack of cigarettes.

c. A reduction in interest rates at each price level.

d. A major increase in Federal spending for health care.

e. The expectation of rapid inflation.

f. The complete disintegration of OPEC, causing oil prices to fall by one-half.

g. A 10 percent reduction in personal income tax rates.

h. A sizable increase in labor productivity (with no change in nominal wages).

i. A 12 percent increase in nominal wages (with no change in productivity).

j. Depreciation in the international value of the dollar.

ANSWERS

(a) AD curve left, output down and price level down (assuming no ratchet effect).

(b) AS curve left, output down and price level up.

(d) AD curve right, output and price level up (any real improvements in health care resulting from the spending would eventually increase productivity and shift AS right).

(e) AD curve right, output and price level up.

(f) AS curve right, output up and price level down.

(g) AD curve right, output and price level up.

(h) AS curve right, output up and price level down.

(i) AS curve left, output down and price level up.

(j) AD curve right (increased net exports); AS curve left (higher input prices)

sangriawildebeest451

1. Explain how the real balance effect works?

2. How will either the AD curve or SRAS curve shift as a result of each of the following changes:

A rise in the interest rate

An adverse supply shock

A rise in wealth

3. Explain what happens to U.S. net exports and U.S. aggregate demand as the dollar depreciates

4. Explain what happens to aggregate demand in each of the following cases: (a) The interest rate rises; (b) Wealth falls; (c) The dollar depreciates relative to foreign currencies; (d) Households expect lower prices in the future; (e) Business taxes rise.

5. Explain how expectations about future sales will affect investment.

6. Explain how each of the following can affect short-run aggregate supply: (a) An increase in wage rates; (b) A beneficial supply shock; (c) An increase in the productivity of labor; (d) A decrease in the price of a nonlabor resource (such as oil).

(a) An increase in SRAS that is greater than the increase in AD will lead to an increase in Real GDP and a fall in the price level.

(b) A decrease in AD that is greater than the increase in SRAS will lead to a fall in both the Real GDP and the price level.

roseshark361

Part 1

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale.

a.The short-run aggregate supply (SAS) curve slopes upward because households spend more as their incomes increase.

b.The long-run aggregate supply curve can never shift.

c.Either a decrease in the nominal money supply by the Federal Reserve, all else held constant or an increase in the price level, all else held constant, will shift the aggregate demand (AD) curve to the left.

d.The Keynesian portion of the short-run aggregate supply (SAS) curve would be relevant during a recessionary situation.

e.Stagflation occurs when the aggregate demand (AD) curve shifts out on the upward sloping portion of the short-run aggregate supply (SAS) curve.

Part 2

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale, using graphs to support your answer. You can create graphs by hand and take pictures and upload them with your answers, or you may use Word or Excel, and upload the file created by these software packages.

a.If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money.

b.The federal government's control of the money supply, which influences interest rates, is the primary tool that policymakers use to impact the macroeconomy.

c.A decrease in the reserve requirement decreases the money supply because banks have fewer reserves.

d.The real money demand curve shows how households and businesses change their spending in response to changes in the interest rate.

e.Both an increase in the nominal money supply by the Federal Reserve and an increase in the price level will cause the real money supply curve to shift to the right.

yellowseal739

ECO-2013 Lecture Notes - Lecture 10: Permanent Income Hypothesis, Business Cycle, Real Interest Rate

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