2F. Condition of the Economy using the Production Possibilities Curve Points A, B, and C represent full employment (4 to 6% unemployment/ the “Natural Rate of Unemployment”). Point D inside the curve represents high unemployment (not operating at full output). Point E represents an unattainable point in the short-run. Point E can be reached in the long-run through economic growth. Moving from one on the curve to another on the curve necessitates that you give up the production of some capital goods or consumer goods to gain more of the other. (What you give up is your opportunity costs). All of the possible points you can produce at on the curve represents trade-offs. 2G. Three part AS Model (with Keynesian and Classical Thinking) Note: Keynes believed that and prices are sticky downward, and the economy would be slow to self correct because of it. If AD intersects AS in the Keynesian Range we could be stuck in a recession for a long period of time, unless government took action to increase AD by government spending. The Intermediate Range is the standard SRAS Curve in the ADAS Model where wages and prices are more responsive. The Classical Range is the LRAS curve in the ADAS Model indicating full employment.
The Classical View is that the economy will self-correct to full employment, just at a higher price level. SRAS will shift to the left due to higher wages. No government action is required. “P-WAS”… In Classical Thinking, the theory is that the government should do nothing, and the economy will correct itself, but how does this happen? Through wages adjusting to prices. “P-WAS”… If prices rise, WAGES will rise which causes AS to shift toward LRAS, Or “P-WAS” If prices fall, WAGES will fall which causes AS to shift toward LRAS. 4C. Cost Push Inflation ( also has higher than normal unemployment) Note: This is mainly an Aggregate Supply problem, like high resource prices (oil). Fiscal Policy is less effective in this situation. The goal is to slow inflation first. The “FED” would raise interest rates to slow inflation. Classically speaking, workers would take lower wages to save their jobs and help move the AS from AS2 back to AS1 and QY as illustrated below.
1. Income....... If we earn more, we will buy more foreign 2. Relative price levels of similar goods (Inflation)....... If their prices are cheaper, we will buy more foreign 3. Tastes… peoples preferences 4. Changes in interest rates.......If their interest rates are higher, we will put our savings in their banks 1... Changes in Income : If AD increases, for any reason, incomes are increasing and we will purchase more of everything including imports. More imports that Aggregate Demand and GDP will decrease somewhat. (GDP = C+ I + G + X - M ) Remember “M” is a minus to AD / GDP. This is the "net export effect". If government pursues an expansionary fiscal policy of more spending and/or lower taxes, there will not be the full impact that we hoped for, because of this foreign pull back on Aggregate Demand. This, however, will not negate or offset the expansionary fiscal policy, just not allow it to have the full impact. 2... Relative levels of similar goods (Inflation) : Obviously, if foreign goods are cheaper, we will have more demand for them, and the foreign currency. Conversely, if foreign goods are more expensive, we will have less demand for them and their currency. 3. Tastes… peoples preferences. The do or don’t prefer California wine, etc. 4. Changes in interest rates : If U.S.A. interest rates are higher relative to foreign countries, there will be a flow of money to the U.S.A. for savings, and / or interest earning CD's etc. This will appreciate the value of the $, as there will be more demand for the $. After the $ appreciates foreign goods and services will be cheaper for us, and we will import more. 10…How to setup the FOREX graphs Setup the FOREX “For the $”. This means the $ goes on the horizontal or “X”
the government $10,000). Now assume that today the Treasury is issuing new bonds at 10%. Will anyone buy your bond from you for $10,000 ? Absolutely not ! They can buy a new bond from the Treasury that will pay $ 1000 per interest. They would lose $500 a year in interest income. If you sell your bond, you will have to sell it for less than the $10,000 that you originally paid for it. Note: prices move in the opposite direction of interest rates. Their prices fall when new bonds are paying a higher rate of interest, and vice versa. 14... Balance of Payments. A trade deficit is where a country imports more than it exports. The U.S. Balance of Payments is made up two