macroeconomic theories ap macroeconomics. where did we come from? in the previous lesson we learned...

17
Macroeconomic Theories AP Macroeconomics

Upload: alan-walton

Post on 13-Jan-2016

214 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Macroeconomic Theories

AP Macroeconomics

Page 2: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Where did we come from?

In the previous lesson we learned about the levers of economic growth, and how the government can stimulate these levers.

http://www.extirpated.org/3.html

The “levers”: 1) The supply of labor 2) The supply of capital 3) The supply of

technology Ways to stimulate these

levers: 1) Savings 2) Research 3) International Trade 4) Education/training

Page 3: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Where are we going?

In this lesson, we’ll discuss the current issues and sources of disagreement among economists.

Most economists hold views that cannot be categorized into a particular school of thought.

Page 4: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

In this lesson…

We will discuss the lags associated with policy-making.

What is a lag?

Page 5: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

What are the lags in policy making?• Inside lag

• Outside lag

• Recognition lag

• Decision (or response) lag

• Transmission (or impact) lag

Page 6: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Defining the “Inside Lag”

The inside lag consists of the time it take for the following to occur: Data to be collected Policy makers to recognize that policy

action is necessary Policy makers to make the decision about

which policy should be taken, and the implementation of that policy

Page 7: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Defining the “Outside Lag”…

The outside lag is the time it takes the economy to respond to a new policy.

Page 8: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Defining the “Recognition Lag”… The recognition lag is the time it

takes for policy makers to see that there is a problem with the economy. In general, this is 3-6 months.

Page 9: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Defining the “Decision (response) Lag”… The decision (or response) lag the

times it takes for policy makers to decide and implement the policy response to the current economic problem.

This is part of the inside lag!

Page 10: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Defining the “Transmission (or impact) Lag”… The transmission (or impact) lag is the

time it takes the change in policy to actually have an effect of the economy. This lag is very short for fiscal policy because of

the media—by the time it is implemented, people are ready to adjust.

This lag is long for monetary policy because the change in the MS affects interest rates, which affect interest-rate sensitive components of AD.

Page 11: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Recognize Decide Transmit

Where do these fit?Outside lag

Inside lag

Page 12: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Inside lagOutside Lag

Recognize Decide

Transmit

Page 13: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Impact of government borrowing to finance increases in government expenditure, aka crowding out!

Visual 5.3 Unit 5 Macroeconomics

Page 14: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Why don’t prices & wages adjust quickly? First, take a guess… Next, let’s discuss…

Menu Costs: it costs firms money to change their prices—for example, to issue new catalogs or change price tags.

Labor contracts: multiyear contracts prohibit rapid changes in wages and may mandate cost-of-living adjustments (increases to match inflation).

Firms worry about changes prices and getting into price wars with their competitors. Hence, firms might delay adjusting prices to changes in costs or demand.

Page 15: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Let’s Review…• Initially the economy is at Y*, potential GDP and P.Aggregate demand increases from AD to AD1 and the economy moves to Y1 and P1.The final equilibrium is Y* and P2.

•If the economy is already at full employment but policy makers think the unemployment rate is too high and carry out expansionary monetary policy, inflation will result.

• This demonstrates the conflict between the full-employment goal and the price stability goal.

Visual 3.13 Unit 3 Macroeconomics

Page 16: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

And now…

Some resources:

Reffonomics:

http://www.reffonomics.com/

Morton workbook: Activity 48

Krugman: Module 36

Page 17: Macroeconomic Theories AP Macroeconomics. Where did we come from? In the previous lesson we learned about the levers of economic growth, and how the government

Works Cited

Economics of Seinfeld. http://yadayadayadaecon.com/

Krugman, Paul, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers.

Morton, John S. and Rae Jean B. Goodman. Advanced Placement Economics: Teacher Resource Manual. 3rd ed. New York: National Council on Economic Education, 2003. Print.

Reffonomics. www.reffonomics.com.